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JANUARY 28, 2007
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Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 14, 2007
Snapping At Hero's Heels
Bajaj Auto is going full throttle after market leader Hero Honda, but can it become Numero Uno? Not if Honda has its way.
Rajiv Bajaj: He
would rather make bikes with fatter margins like the Pulsar or Avenger than produce 100cc bikes, where profit margins are
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).

2006 was a busy year for Hero Honda and Bajaj, with both flooding the market with new products.

Pleasure/100cc Scooter: Launched in January, Pleasure is Hero Honda's first foray into scooters aimed at 18-25 year old women. Has grabbed 10.5 per cent of the scooter market.

Glamour FI/125cc Motorcycle: Rolled out in June, it was the first mass-market motorcycle with fuel injection. But a price premium of Rs 6,000 over regular Glamour has meant few buyers.

Passion Plus Limited Edition/100cc Motorcycle: Launched in October, Passion plus, with its extra stickers and colour choices, has kept the brand going.

'New' Glamour/ 125cc Motorcycle: Introduced in October, the entire Glamour range got a do-over acquiring alloy wheels among other features, and competes with Bajaj's range, which offer alloys as standard.

CBZ X-Treme/ 155cc Motorcycle: Launched in November to compete with the Bajaj Pulsar, it is a revamp of the tired CBZ line, complete with alloys and LED tail-lights. Too early to judge sales success, but this is the Pulsar's bastion.

TWO new launches planned for the first three months of 2007-one rumoured to be of a big-engined motorcycle.


Discover 'Exhaus-TEC'/110cc Motorcycle: Launched in January to capitalise on the Discover brand, but quickly withdrawn when sales were sluggish.

Platina/100cc Motorcycle: Major sales success. Has allowed Bajaj to make a big dent in the 'executive commuter' segment.

Pulsar (4th Generation) 150/180cc Motorcycles: New competition from TVS and Hero Honda? No problem. Bajaj upped the ante with the next-generation Pulsar with digital instrumentation, LED tail-lights, among others. Still the market leader.

TWO new launches planned for early 2007-First a 220cc Fuel-Injected Pulsar (trial production has begun) and second the Kristal, a 100/110cc scooter that Bajaj hopes will allow it to come back from the doldrums in that market.

The going may be harder for the others.
Between them, Hero Honda and Bajaj auto account for almost four-fifths of the Indian motorcycle market. Even though that seems like a massive share, given the size of the market, expected to exceed 6.5 million units this year, there is enough volumes to go around. The question however is, how profitably? While analysts fret over Bajaj and Hero Honda's declining margins, EBITDA margins at the third largest player TVS Motor, which has a 13.39 per cent share of the market, have declined precariously to 4.7 per cent in part due to a product mix skewed towards low-margin entry-level products like the Star City. Margins of smaller players have declined even more. "No doubt, it is a large enough market for everybody, but because of their sheer size, volumes and inherent economies of scale, the big two (Hero Honda and Bajaj) will always have better realisations," says Huzaifa Suratwala, an automotive analyst with brokerage Emkay.

"Unfortunately the two-wheeler market is getting commoditised, but it isn't as if we did not know that," says Satya Sheel, Managing Director, Suzuki Motorcycles India. Suzuki has a share of under 1 per cent of the domestic market currently, but Sheel says that margin pressure will remain until companies grow. "Once we get economies of scale and make a dent in the market, we will see better financial performance." The good news: annual volumes are expected to touch 10 million by 2008-09.

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.

It's scooters for Hero & four-wheelers for Bajaj.

Pride of place in the product display at Hero Honda's Gurgaon plant goes to the new CBZ-Xtreme, but sitting alongside the bike is the company's most surprising new launch of 2006-the Pleasure scooter. "We are on target to sell 100,000 of these this fiscal," Pawan Munjal says quite proudly. "We can sell more than just motorcycles, you know." But it is Bajaj that has been making a ton of money from products other than motorcycles. The quintessential Indian scooter company barely makes any scooters any more, but has seen three-wheeler volumes climb 32 per cent for the first nine months of the fiscal. And the company is keen on the small commercial vehicle segment, "I think the progression from two wheels to three and then four is only natural," says Rajiv Bajaj.

Any four-wheeler that Bajaj makes won't hit the markets before 2008-09. And before he rolls out one, Rajiv is promising a complete revamp of his scooter and three-wheeler line-up. "We do not have the engineering bandwidth to focus on so many different segments all at once. We will move from one product to another." While Hero Honda might not be entering all-new segments thanks to its JV agreement with Honda, other Munjal-controlled Hero Group companies are scouting for opportunities. Hero Cycles recently launched an electric two-wheeler. And Pawan Munjal admits that other family firms had explored the possibility of making a small four-wheeler as well.

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.

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