Hero Honda: Unicorn sighted

Honda's offering turns the heat on Bajaj Auto

Honda has priced the 'Unicorn' aggressively, unlike market expectations. The 150cc bike is cheaper than the 150cc version of Bajaj's "Pulsar", which is the current market leader in the premium category. Pulsar has a 75 per cent share of the premium category, and Honda's entry into the segment will hurt it the most.

First, Pulsar sales could take a hit and secondly, Honda's aggressive pricing could necessitate a price cut, which would lower margins. This is important as Pulsar currently accounts for around 22 per cent of Bajaj's motorcycle sales, and given its premium pricing it would have a higher share in terms of revenue and profit.

Having said that, the Unicorn's national rollout will take about two months, which means there may not be a significant impact on Bajaj's FY05 numbers.

And even if Pulsar's monthly sales do take a hit from the current levels of 22,000-23,000, it is expected that the company's new launch, 'Discover' would more than make up for it.

The real problem for Bajaj would be if Honda (as suggested by news reports) also enters the three-wheeler segment. For Bajaj, the three-wheeler segment accounts for around 27 per cent of revenues and is considered a cash cow for the company.

For now, the market doesn't look too bothered about the possible entry of Honda in the three-wheeler segment "" Bajaj Auto's share price was steady at Rs 916. One reason for this could be that its valuation is currently not too demanding at around 11.5 times estimated FY04 earnings.

More importantly, the markets expect the launch of 'Discover' to give the company a foothold in the high-volume executive segment in which it has a low market share.

Power project pricing

Reliance Energy has bagged a turnkey EPC contract for the 600 MW Yamunanargar power project in Haryana, worth approximately Rs 2200 crore.

According to reports, Reliance will source generators and turbines for the power plant from China based Dongfang Electricity, which enabled it to emerge as the lowest bidder.

Reliance's bid was at Rs 3.67 crore per MW, while that of BHEL was at Rs 3.92 crore per MW. Analysts point out that the cheaper Chinese equipment could be either due to export incentives or via aggressive pricing techniques such as marginal cost pricing.

Nevertheless, this latest bid from Reliance is expected to have far reaching consequences in the domestic power industry, as the lower bid price could emerge as a benchmark for future projects.

As a result, it may force other large players like Bhel, ABB and Siemens to take a relook at their pricing strategies. It is anticipated that cheaper equipment would help lower project costs and this in turn could lead to a lower per unit cost for consumers.

Also, lower projects costs are expected to encourage more players to set up their own captive facilities in a bid to ensure uninterrupted power supply for their facilities. And with the UPA government emphasising rural power projects, lower power project costs would certainly be key.

Steel companies & iron ore ban

According to reports, the government is considering a ban on the exports of high grade iron ore in a bid to control the rise in the price of this input. Even if it's implemented, this policy is not expected to impact long term contracts.

A ban on the exports of high grade iron ore on short term or spot contracts would increase its domestic availability and lead to a fall in domestic prices of iron ore.

Large players such as Tata Steel and Steel Authority of India Ltd (SAIL), however, are not expected to be affected by this move of the government as they source their iron ore requirements from captive sources.

But a fall in iron ore prices would obviously benefit small and medium sized steel manufacturers who do not have their own captive iron ore supplies.

According to analysts, smaller players in the sector have been buying iron ore in the spot market at prices that are almost double the price offered to customers who enter into long term contracts. Smaller players are unable to enter into long term contracts due to inadequate financing arrangements.

Costs relating to iron ore constitute approximately 15-17 per cent of total production costs for smaller companies, point out analysts. Since steel companies recently reducing their prices by Rs 500-Rs 1,000 per tonne, the drop in iron ore prices would come as a sort of compensation.

With contributions from Mobis Philipose and Amriteshwar Mathur