Discover the Passion

Competition is set to hot up further in the two-wheeler market with the entry of Suzuki and Honda Motors later this year. Are Bajaj Auto and Hero Honda poised to guard their position?

"Now every second motorcycle sold in the country is a Hero Honda." That's how the country's largest motorcycle maker pushes its brand. No mean achievement that. But with successful launches of CT 100 and Discover, Bajaj Auto managed to up its share of the motorcycle market to 28 per cent last year.

Hero Honda has fought back with Super Splendour and Glamour. The competition promises to get keener with the likes of Honda and Suzuki tipped to roll out executive segment bikes by November.

The motorcycle turf could see a re-arrangement of market-shares this year. The stock markets have lauded Bajaj's come-back "� in the past one year, it has done better than HH. But, it's not as though the market is giving

HH a thumbs down either. Today, both trade at similar multiples of around 15 on FY06 earnings.

The market
Demand up but no pricing power

There seems to be little doubt that the motorcycle market will grow at around 15 per cent per year in the next few years, though fuel prices are of concern. Most players seem to have acceptable technology whether its foreign or in-house.

However, with aspirations driving sales, manufacturers need to continuously roll out good-looking bikes. Emphasises S Sridhar, vice-president (marketing and sales), Bajaj Auto, "Consumers are ostensibly looking for mileage and are apparently price sensitive, but today, looks move the business." And the bikes need to be priced right.

Says Pawan Munjal, managing director, HH, "Manufacturers are bound to make aggressive moves to grow and gain market-share. As a consequence, the overall 'offerings' to the market, including the price, can be expected to be competitive. "New entrants Honda Motorcycles and Scooters India (HMSI) and Suzuki Motors could make life difficult for incumbents, especially since they are world leaders.

Observes Sridhar, "Suzuki could have some initial impact, because they have a small but definite following in the North. It will also be interesting to watch Honda because Honda's interaction with the customer is very strong."

Market-shares: No major shifts

Bajaj Auto posted a strong 42 per cent y-o-y volume growth in FY05. It managed a 50 per cent market-share in the entry segment and analysts believe it should be able to hang on to that.

Hero Honda, on the other hand, has lost share in the entry segment, but has an enviable 66 per cent share in the executive segment. Bajaj, which has struggled to make headway in this category, is way behind with a 10 per cent share.

And unless the Discover grows spectacularly, this share may not grow too much. Bajaj Auto claims it will be selling 40,000-50,000 Discovers by Diwali from the current levels of 22,000, though analysts believe that may be difficult given that its own 150cc vehicle Pulsar is beleived to be cannibalising the Discover.

However, in the premium segment, Bajaj should continue to do well "� it currently has around 47 per cent, which may even go up. Sridhar believes that the upgraded 150 cc Pulsar, which is selling around 30,000 vehicles, will consolidate its position. "We have successfully taken on the Unicorn," he says.

Market watchers believe that it's vendor problems that's preventing HMSI from selling more Unicorns. Nonetheless, Bajaj's share of motorcycles should go up just marginally to 29-30 per cent from 28 per cent in FY05.

HH is confident that it will sell three million units this year compared with 2.62 million in FY05. Says Pawan Munjal, managing director, "Our priority has always been to exceed customer expectations by constantly innovating and bringing in newer models with superior technology. We believe market share is a by-product of that. In a highly competitive market, market-share will keep fluctuating."

In FY06, analysts expect HH to grow at around 17-20 per cent while for Bajaj the growth could be slightly higher at around 18-19 per cent from 1.45 million in FY05.

Portfolio: Launches galore

With customers constantly demanding something new, continuous innovation is a must. And FY06 will probably be a record year for new launches. Honda has just launched Super Splendour which has a current run rate of about 38,000 per month and Glamour in the 125 cc segment.

According to Munjal, Glamour, which has been launched selectively in southern and western India, is meant to cater to a new segment called the Super Deluxe. The bike will go national by end-August. "We hope to sell 40,000-50,000 bikes progressively in the first six months and that would be ramped up subsequently."

As for the CT 100, Sridhar says the steady state levels would be around 85,000 numbers though over 1,00,000 vehicles have been sold in some months. Bajaj is also readying another bike for January 2006.

HH's Splendour continues to be the largest selling brand and together with Super Splendour sells over 1,00,000 numbers a month. The CD Deluxe, priced around Rs 6,000 less than the Splendour, sells 30,000 numbers per month. Both players are eyeing the scooter space: Bajaj's Wave, targeted at women is just out, while Munjal says HH will launch sometime this fiscal.

Concerns: The Honda factor

The market has always been concerned about relations between HH and Honda and more so in recent times with HMSI entering the Indian market on its own. Munjal is confident that with the technology agreement having been renewed for 10 years, HH would continue to receive support from Honda.

"Both the recent launches are equipped with the next generation 'Quantum Core' engine developed by Honda Motors," he says. However, industry analysts feel that "customers might want to buy a Honda product directly from Honda".

The counter-argument to that is that "both players may not launch very similar products for a while" but that remains to be seen. Says Munjal, "We have built a strong brand equity. HMSI has been in India for so many years, during this time HH has only gained market-share."

Adds an analyst, "being the market leader and having a substantial presence in the rural markets will help it to compete." Honda has also answered critics who felt that its products were old, by coming up with new models.

Value addition: Supporting businesses

Bajaj's exports of two-wheelers should grow by about 20 per cent this year. It might even set up a manufacturing base in an ASEAN country to take advantage of the duty structure.

Exports would help Bajaj hedge any cyclicality in the domestic industry. Its three-wheeler volumes, which declined about 3 per cent in FY05, should do better this year and it should be able to hold on to its market-share of 60 per cent with a 7-8 per cent growth. Its insurance ventures, in collaboration with Allianz, add value to the company, approximately Rs 150 per share.

Operating margins: Under pressure

Hero Honda's margins have been under pressure, falling by 110 basis points to 15.7 per cent in FY05. Says Munjal, "The overall ad and marketing spend for FY06 may not be more than the actuals of FY05. So even in spite of new launches due to efficiencies in other areas we would be able to manage the spend. With economies of scale and an appropriate product mix, the impact on operating margins should be minimal. In fact, despite rising input costs, we were able to sustain margins in Q1FY06." 

Hero Honda
Year to March (Rs crore)	FY04	FY05
Net sales	7421	8657
Operating profit	1170	1330
OPM (%)	15.7	15.3
PAT	810	917
EPS (Rs)	40.6	47
P/E@690	16.9	14.6

While Bajaj Autos' margins have been stable, analysts worry that 70-80 per cent of the company's volumes are coming from one bike "� CT 100. Sridhar , however, claims that at a price point of Rs 34,000, the company is comfortably placed and margins should not suffer. 

Bajaj Auto
Year to March (Rs crore)	FY04	FY05
Net sales	5927	7430
Operating profit	894	1250
OPM (%)	15.08	15.1
PAT	766.8	917
EPS (Rs)	75.6	93
P/E @ Rs 1400	18.5	15

Valuations

Says Ramnath Subramaniam, SSKI Securities, "We believe that valuations of HH reflect the volume growth of around 14-15 per cent for FY06. However, Amit Kasat of Motilal Oswal, believes that Hero Honda's efficiency ratios and cash on the balance-sheet make the stock an attractive investment. Analysts feel that new Uttaranchal plant for one million motorcycles will drive the stock and believe that the new launches should boost volumes. The market appears more confident about Bajaj.

Says Kasat, "Bajaj Auto's improved product mix, better volumes and a strong focus on exports, make the stock an outperformer."

Adds Subramaniam, "Bajaj Auto, should grow at 17-18 per cent, we feel that valuations do not fully reflect the upside from the insurance business. So, the stock should outperform."