India’s largest two-wheeler makers had a sparkling September quarter. Rising raw material costs could play spoilsport on the road ahead.
Improvement in macroeconomic fundamentals, new product launches and the festival season have helped Hero Honda and Bajaj Auto, the country’s largest two-wheeler makers to post superlative results for the September quarter. While increasing raw material costs and lack of festival-based sales are a major worry going ahead, if demand continues to be strong it could help these companies gain from higher operational leverage, better realisations and boost profitability.
Strong volumes
The September quarter saw two-wheeler makers register strong growth both on a year-on-year (y-o-y) and on sequential basis. While the country’s largest player, Hero Honda had been growing at double the industry rates, Bajaj Auto has been a laggard during the second half of 2008-09. For Bajaj which was impacted severely due to the lack of credit availability in urban markets where it has higher exposure, the turnaround in sentiment and economic activity couldn’t have come at a better time. Such has been the slowdown in its sales that despite an improvement in recent months both in the domestic and export fronts, sales for the first six months of the current fiscal are down 2 per cent over the same period last year. A recovery in its volumes backed up new launches will help the Pune-based manufacturer to end the fiscal with a 22 per cent growth in volumes to an estimated 26.7 lakh units.
In comparison, its bigger rival Hero Honda has no such issues on the volumes front. While Bajaj Auto managed a 7 per cent increase in sales volume in the September quarter, Hero Honda achieved a 21 per cent growth y-o-y to 11.8 lakh units. This is the second quarter in a row that Hero Honda has managed to breach the 10 lakh mark. What has helped Hero Honda improve its volumes and market share over the last one year is its rural reach, higher cash-to-credit purchases and weak competition. Both the auto majors have introduced new models in a bid to improve volumes and realisations.
Competitive pressures
Bajaj Auto takes the cake on this parameter as its plan to strengthen its presence in the 75-125cc, which is dominated by Hero Honda with a 75 per cent market share, paid off. Its new 100cc bike the Discover DTS-Si launched in July has so far found 1.6 lakh buyers and is eating into Hero Honda’s share. Thanks largely to Discover, which competes with Hero Honda’s Passion and Splendor in the executive segment, Bajaj Auto has increased its share in the sub-125cc segment significantly in this quarter.
With consumers shifting their preference away from sub-125 cc segment to more bigger and powerful bikes and the share of the 125cc and above bikes increasing from 26.6 per cent in 2007-08 to 29.1 per cent of overall motorcycle sales in 2008-09, both companies are eyeing the premium segment. Bajaj continues to dominate the segment with 45 per cent share and has launched upgrades for Pulsar 150cc and 180cc which along with the latest entrant the 220cc forms the core of its premium segment stable. To add to its existing premium segment range comprising the Hunk, CBZ Xtreme, Achiever, Karizma, Hero Honda recently launched the Karizma ZMR priced at about Rs 91,000. Bajaj too launched the Kawasaki Ninja 250R in October which will be imported in CKD form and will retail at Rs 2.7 lakh.
Thus, while Bajaj will focus on its two key brands Discover and Pulsar aimed at the executive and premium segments respectively, Hero Honda is expected to try to increase its share of the rural market/executive segment while at the same time increasing its focus on the 150 cc plus segment.
| SCORCHING PACE | ||||
| Q2 FY10 | FY10E | |||
| Bajaj Auto | Hero Honda | Bajaj Auto | Hero Honda | |
| Volumes (units) | 686,727 | 1,183,235 | 2,673,300 | 4,268,704 |
| % change y-o-y | 7.3 | 22.0 | 21.0 | 14.7 |
| Realisations/vehicle (Rs) | 40,674 | 34,145 | 41,843 | 34,224 |
| % change y-o-y | 7.6 | 4.0 | 8.8 | 2.6 |
| Sales (Rs cr) | 2,793 | 4,040 | 11,186 | 146,072 |
| % change y-o-y | 15.4 | 27.0 | 32.6 | 17.6 |
| OPM (%) | 22.0 | 18.3 | 20.0 | 17.0 |
| Change (in bps) | 840 | 475 | 640 | 300 |
| Net Profit (Rs cr) | 403 | 597 | 1,404 | 1,969 |
| % change y-o-y | 117 | 95 | 107 | 43 |
| PE (x) | – | – | 15.1 | 16.1 |
| PE FY11E (x) | – | – | 13.3 | 14.4 |
Aiding margins
Helped by an increase in volumes, Hero Honda reported a 475 bps jump y-o-y in operating profit margins to 18.3 per cent for the September quarter. In addition to better operating leverage (lower per unit costs), margins were up on lower ad spends (it had incurred higher other expenditure in the June quarter due to IPL). Bajaj Auto’s margins which were up 840 bps y-o-y at 22 per cent for the quarter were even more impressive. While higher volumes helped, Pulsars and three wheelers which fetch highest margins in its products stable also aided in the margin push. Both companies, Hero Honda and Bajaj Auto, are benefitting from setting up their plants in tax free havens (Haridwar, Pantnagar) which has significantly brought down their tax charge pushing up net profit by 95 per cent and 117 per cent respectively.
Outlook
Both, Hero Honda and Bajaj Auto, have had a smooth ride in the September quarter. But the road ahead might be a bit bumpy. First, the festival sales lift to volumes will be missing in the following quarters. Second, raw material costs are expected to move up anywhere between 10-25 per cent and eat into their respective margins. Both companies plan to overcome this by improving volumes and share of the bikes in the premium segment. However, that may not be easy considering the increasing competition from the likes of Honda and Yamaha.
On the valuation front, there is little to differentiate the two with Bajaj valued by the market at a slight discount to Hero Honda for obvious reasons. Considering the challenge on the margins front and the fact that the recent performance has already been priced into the stock prices of Bajaj Auto (Rs 1,468) and Hero Honda (Rs 1,586), there is little upside from these levels over the short-term.