Bajaj steals pricing thunder from Hero Honda

Bajaj Auto, gradually gaining market share to close in on its chief rival, Hero Honda, is playing the pricing game, which affects its rival more heavily than the Pune-based motorcycle maker.

This is mainly because, while Hero Honda has to pay a hefty royalty to its Japanese partner, Bajaj depends on in-house technology for its motorcyles and spends only a fraction on research and development. So any reduction in price for Hero Honda means a squeeze in its margins, more than that of Bajaj.

"Hero Honda has to fork out Rs 700 on an average, for sale of every unit for brand and technology royalty to its Japanese joint-venture partner, Honda Motor Company (while) Bajaj spends a much lesser amount on R&D and has no or very little royalty payments to make," said Religare auto analyst Arvind Jain, on the apparent margin pinch for Hero Honda.

Hero Honda executives admit the royalty burden "affects us financially, as we cannot increase prices and have to absorb the royalty costs".

"We negotiate royalty for each model separately and try to minimise costs by initially keeping them low and increase it as we built volumes. However, the impact of royalty cost is reduced considerably by improving volumes, productivity and efficiency," Ravi Sud, vice-president, finance, Hero Honda said.

Adds Piush Parag an analyst with Brics Consultancy: "Hero Honda spent 2.4 per cent of its net sales (Rs 212 crore) on royalty payments, in the last fiscal, while Bajaj spent only 1.2 per cent of its net sales on a similar arrangement for technology development."

This is reflected in the financials. Bajaj maintained a steady comparative advantage with 15 per cent net profit margins for the second quarter, ended September 2006. Bajaj's margins for the the quarter ended December 2006 also remains the same.

While Hero Honda's third-quarter results are yet to be out, its margins are around 12.4 per cent. Even Bajaj's market share in the two-wheeler market improved by three per cent at 34 per cent, selling 1.86 million units against 2.4 million of Hero Honda till December 2006.

Sanjiv Bajaj, ED, Bajaj Auto Ltd, said: "Bajaj enjoys the highest margins in the industry and uses this (margins) to invest continuously in better products, backed by our own R&D. It will result in more sustainable customer base driven by performance and new features rather than price, while delivering superior returns to the stock holders."

The saving made by Bajaj on low or no royalty helped it to reduce the price of its Platina 100cc motorcycle by Rs 3,000 during Diwali last year. The company sold over 1 lakh Platina bikes in October alone. Hero Honda matched it with an alternative plan "" It did not drop prices but gave buyers freebies worth over Rs 5,000, including mobile handsets with free talk time.

According to analysts, Bajaj seems to be in an advantageous position as its spending on R&D is very low, compared with Hero Honda. Besides the regular royalty payment for each unit, Hero Honda also pays a one-time product development fee (royalty) to Honda for every new launch, which, according to analysts tracking the company, comes to around Rs 20- 30 crore per annum, depending upon the number of launches.

"There is a sizeable cost differential for product development in both the companies," Religare's Jain adds.

Hero Honda pays Honda for every bit of technology, while Bajaj backed by its strong in-house R&D, develops the same product in almost one-third cost makes it more competitive."