Rajiv Bajaj: He would rather make bikes with fatter margins like the Pulsar or Avenger than produce 100cc bikes, where profit margins are wafer-thin	Pawan Kant Munjal: Hero Honda has the most aggressive launch schedule of any motorcycle manufacturer in India, says the Managing Director of Hero Honda

Back in 2001, Rajiv Bajaj had his sight set on two things: Wrest back the #1 slot that his company Bajaj Auto had just ceded to Delhi-based rival Hero Honda and, two, change the price equation in the 100-cc motorbike segment by launching cheaper models. Early 2007, Rajiv is talking a completely different language: "Market share is a game played by journalists, I want to be the best bike maker in India," says the Managing Director of the Pune-based Bajaj Auto.

So what has changed over the last six years? For one, Bajaj Auto has almost gotten out of scooters (according to SIAM data, it produced eight scooters in November 2006); two, it hasn't managed to regain the #1 position but has become the clear #2 with a market share of 32.6 per cent (April-November, 2006) compared to Hero Honda's 46.8 per cent. Then, Hero's joint venture with Honda that was to end in 2004 got renewed for another 10 years, and that lifted the uncertainty over the joint venture's product pipeline and capacity expansion, even though Honda also has a fully-owned scooter-and-motorcycle subsidiary in the country. (The two companies combined, Honda's motorcycle market share adds up to 48.9 per cent.)

Not the least, Rajiv is six years older and almost certainly realises that his long-term battle isn't really with Hero but Honda. And outwitting the world's largest two-wheeler manufacturer, which has a cast-in-stone policy of controlling 45-50 per cent of any market it operates in, won't be easy. After all, at Rs 19,000 crore, Honda's R&D spend alone is more than double of what Bajaj clocks in revenues annually. Yet, here's the interesting bit: Investors actually find Bajaj more profitable than Hero Honda, and give the former's stock a higher price-to-earnings (PE) multiple of 24.7 compared to Hero Honda's 15.9 (based on December 1 share price).

Not surprisingly, therefore, the young Rajiv wants to shift Bajaj to a higher gear once again. "I will stop producing 100cc bikes, I've said that before but nobody believes me," he says. "I would rather make more bikes with fatter margins like the Pulsar or Avenger than continue to produce products like the ct100 that make pennies." To be sure, Bajaj won't vacate the 100cc segment starting tomorrow. It can't. The 75-to-125cc segment accounts for a staggering 80 per cent of the motorbike market, and will continue to be the entry segment for millions of first-time buyers. But what Bajaj would like to do is shift its product mix in favour of 125cc-plus bikes, which are more profitable. Says an analyst with a foreign investment bank: "I think Bajaj has realised that it can't outdo Hero Honda, or at least do that very profitably, and concentrating on its core competence of engineering great products higher up the product spectrum is a sound idea."

TVS Motors' Venu Srinivasan: His company's market share has dipped sharply and profit margins are thin	Suzuki's Satya Sheel: He says profits will improve once volumes go up over the next few years

The Expanding Top

Top-end bikes (125cc and above) may account for just a fifth of the market but they are growing rapidly in numbers. In the first eight months of 2006-07, such motorbikes accounted for 8,70,135 of the 44,67,576 bikes sold, but that was a 33 per cent growth over the same period in 2005-06 (motorcycles overall are growing at 17 per cent). Even better for Bajaj, the segment is dominated by its best-selling Pulsar, with a 62 per cent share. In stark contrast, Hero Honda comes way behind almost every other player, including TVS Motors, Honda Motorcycle and Scooters India (HMSI) and Suzuki. To consolidate its hold on the segment, Bajaj launched early this month a 220-cc, fuel-injected version of the Pulsar, starting with Pune. "Every time the competition thinks they have us outfoxed, we have an ace up our sleeve," chuckles Bajaj.

Hero Honda isn't twiddling thumbs either. In fact, it launched five different models in 2006, and Managing Director Pawan Kant Munjal says that 2007 will be busier still. "Product lifecycles are shortening, but we have the most aggressive launch schedule of any motorcycle manufacturer in India. We are reinventing ourselves." In the first three months of 2007, Hero Honda is expected to launch a slew of models, including one "big-engined" bike. By Munjal's own assertion, though, Hero Honda isn't contemplating a Bajaj-like move-that is, moving out of the 100cc segment. "I agree that there will a significant number of consumers upgrading their motorcycles, but the 100cc will remain the most affordable mode of personal transport," says Munjal, pointing out that his company is seeing a pick-up in sales in parts of the country that were traditionally underdeveloped-Orissa, for instance. "The margin in 100cc motorcycles will be tight and might become tighter, therefore, we will have to enhance our product mix to include high-margin, high-power bikes and that is exactly what we are doing," points out Munjal.

Part of the reason why profit margins are under pressure for everyone in the industry is rising raw material costs. Bajaj, which enjoys the highest margins among all listed auto manufacturers in the country, saw its gross profits (EBITDA) slide to 15.6 per cent in the first half of 2006-07 compared to 16.4 per cent in the same period the previous year. Hero Honda, which has lower margins, fared worse, reporting a drop to 13.1 per cent from 15.1 per cent. Munjal says that most global players have single-digit margins so he's not really complaining. "Will we continue to enjoy the margins that we have had in the past? I've said it before, I don't think so. But with the volumes we generate, it should not adversely affect us," he says. One way the two companies are trying to protect their margins is by opening plants in excise-free locations such as Uttaranchal.

Bajaj Beyond India

"You know how many bikes we sell in India every year?" asks Rajiv. "We will sell around six-and-a-half million bikes this year," he answers himself before popping the next question. "Do you know the size of the global market? 32 million," he answers again. "That is the market I want Bajaj Auto to be in, and thanks to Sanjiv (his younger brother and executive director of finance), we have made a start."

Bajaj Auto has seen motorcycle exports climb by a massive 95.5 per cent in the first eight months of 2006-07 to 1,98,492 units (including three-wheelers exports are 2,86,344 units). In November last year, it started its own dealer network in Indonesia. Rajiv points out that globally 80 per cent of the motorcycles sold are under 250cc and that is where Bajaj has both engineering and sales expertise. Indeed, some months ago a Pulsar knock-off surfaced in China, much to Bajaj's dismay. "What can I say? I guess it is a testament to our engineering skills," quips Rajiv. Unlike Hero, Bajaj is not hamstrung by any joint venture restrictions on exports (globally, regional Honda heads decide which company within the system they will buy from). So, in all probability, the competition between Bajaj and (Hero) Honda will go beyond the shores of India. Some day, but for sure.