Two-wheeler major, Bajaj Auto, discovers 'bigger is better' to drive growth

Bajaj Auto reported a growth in volumes in August 2009 after a gap of 10 months. What are the factors?

Till about two years ago, our domestic market share was pretty high in the 30s and our overall motorcycle share at 36% had put us very close to the market leaders. But, in the past year-and-half, we have slipped back. This is mainly due to our shift in the strategy of moving away from typically 100cc bikes. All that we have done in the past 18 months, including the launch of the Discover, is true to that strategy. Discover succeeded because it is perceived to be bigger and sportier than the average 100cc bikes. The main reason for the change in strategy was profitability. The April-June quarter of this financial year was the best ever in the history of Bajaj Auto, in terms of profitability at about Rs 455 crore and an EBITDA margin of 19.5%. The move away from the small and cheap motorcycles to bigger bikes is to have this kind of profit structure going forward. The change of strategy has undoubtedly led to us losing some ground... But our profitability recovered from Q1 itself and sales will recover from this quarter which is why I am confident. Barring something really unforeseen, we should be able to maintain a 19.5% EBITDA margin for the rest of the year.

With Discover you plan to target the executive segment where Hero Honda is the market leader. Won't this put pressure on your margins?

This is exactly what I am trying to explain. If our corporate EBITDA was 19.5% for the first quarter, the newly-launched Discover by itself does not clock a margin of 19.5%. We are confident that we can maintain something like 19.5% because we are now aligning our portfolio to rest on only two products - Discover for those who want bigger commuters and Pulsar for those who want sporty bikes. Also, in our cost structure, 20% is EBITDA and if we take that out we are left with 80%, and out of that 70% is raw material cost or component cost. The balance 10% of conversion cost is too small. So, when I have only two brands, I am trying to have the best possible price at the front-end because it's either a Discover or a Pulsar that commands a good price in the market place, and second, I don't have the huge expenses normally associated with ads and sales promotion as I don't have seven brands to support.

What do you plan to do with the other brands like XCD and Platina?

We have consciously chosen Discover and Pulsar as our lead brands in the commuting and the sporty segments. Ideally, if Bajaj Auto sells two lakh motorcycles a month in the domestic market, about one lakh should come from both. In the transition period, we will continue to make Platina or XCD as long as there are some buyers for them. But in the future, in terms of product development, capacity expansion and all downstream action at the retail point, focus will be on the two big brands.

Unlike Hero Honda, exports are a very critical component for you. Will you be able to sustain the momentum in exports?

During the past 7-8 years, our exports have grown from virtually nothing to around 70,000 units a month. That is around Rs 3,500 crore per year. I think the growth momentum in exports will continue. We are not on a Japanese leash. We are free to export our products to all markets that find them suitable. Our exports in August at 75,000 units are the highest ever. In September, we hope to do better than that at close to 80,000.

Do you expect deficient monsoon to impact sales? Also, is Hero Honda likely to be hit more because it is so well entrenched in the rural market?

There's no escaping the fact that the deficient monsoon is going to have some effect. I am not competent to say how much. For Bajaj Auto, I don't expect any effect at all. Our domestic market share, which was at around 32%, had fallen to about 16-18%. It has now risen to mid 20s. So, monsoon or no monsoon, Bajaj Auto will grow because it will gain market share at the expense of the leader. Regarding Hero Honda, I would suspect that the market leader, which has a 60% share, will definitely be the one to be affected if the monsoon is deficient.