Scooters: How 'Hamara Bajaj' lost the plot to Honda

**New Delhi: ‘**Hamara Bajaj’, the ubiquitous slogan for everything middle class and aspirational in the eighties and even the nineties revolved around Bajaj scooters.

Bajaj Auto continued to make scooters and motorcycles till 2009, when it decided to leave the scooter market and concentrate exclusively on motorcycles. By late 2009, scooter volumes for Bajaj, once a clear market leader, had dropped to a trickle and it made little sense to keep running production lines for a product which was selling a few hundred units a month. Instead, Bajaj chose to concentrate on the growing motorcycle market with an aim of overtaking world leader Honda Motor Company in the global market.

No one has really disputed the logic of this decision till now. But two things have changed since 2009 - Honda has continued to gain exponentially in the scooter business in India where people have increasingly begun to buy the easy-to-ride gearless (variomatic) scooters. Then, after its split with the Hero Group in 2010, Honda began giving unprecedented and fierce competition to every motorcycle maker, including Bajaj, in the domestic motorcycle business. So not only is it the numero uno in scooters and growing, Honda is changing the market dynamics of bikes as well.

In this context, it is interesting to see that at least two leading brokerages have made a mention of Bajaj’s decision to exit scooters in the context of its lower than expected margin and volume realisations the fourth quarter results of FY13. Abhijeet Kundu and Nupur Parik of Anqtiue Stockbroking have said in a note to clients this morning that in the overall two wheeler market, scooters continue to gain share over motorcycles.

Share of scooters in the two wheeler pie have increased from about 19% a year back to 21% currently. “We understand from dealers that most buyers purchasing a second two-wheeler for the household are opting for a scooter, given that it can be used by not only the lady of the house, but also the elderly man. In our view, this trend is here to stay. In our recent dealer interactions Bajaj dealers reckoned that sales would be at least 25% higher if they had a scooter to offer at their dealership.”

To put things in perspective, Bajaj alone is not dealing with falling sales. Hero MotoCorp has seen unprecedented decline in market share and sales in the motorcycle segment though it is a small player in the scooter segment where growth has been encouraging. Despite multiple launches last fiscal, Bajaj lost 110 basis points (1.1%) share in the domestic motorcycle market in FY13.

Analysts are worried because Bajaj vacated market share in its core segments of 110-125cc and in the above 125 cc bikes even though it gained market share in the below 110 cc segment.

“Continued absence from the scooter market is hurting further. In FY14, we expect Bajaj to once again face issues as (a) scooters will likely grow faster than motorcycles. Also, Hero MotoCorp is making a strong comeback after having gone through a brand transition in FY13; incremental competition in the premium segment and because of too many launches from Bajaj under the Discover brand. We forecast overall market growth of 5% in FY14 and 2% growth for Bajaj in the domestic market,” said Govindarajan Chellappa and Rajasa Kakulavarapu of Jefferies in a note this morning.

For the March quarter of FY13, Bajaj’s net sales declined 4.5% to Rs 4,750 crore led by volume decline of 3.5% year on year which was a steep 13% if compared to the December quarter of 2013. Year-on-year EBIDTA margins declined 80 basis points to 17.6% driven by higher other expenditure. Bajaj’s margins are the highest in the two wheeler industry though they include earnings from three wheelers also. So the most profitable bike maker has reported lower EBIDTA margins in the March quarter.

Bajaj has already said it will launch six new products under the Discover platform in FY14 in the domestic market priced between Rs 40,000-50,000. This should help volumes; besides its export growth expectations in the current fiscal are 10-12% and revenue growth expectations even higher from exports because of favourable currency fluctuations.

But the dependence on the Discover family is expected to bring down Bajaj Auto’s margins. Jinesh Gandhi and Chirag Jain of Motilal Oswal point out in a note to clients that Discover bikes typically earn 16% EBIDTA margins which are lower than the 19-20% blended margins. “thus margins for FY14 could be marginally impacted as the share of Discover motorcycles increases”.

Also, though industry wide, bike demand has picked up in April and it is even stronger in May because of marriage season in North India, but dispatches would remain limited because of high channel inventory and a need for stock correction.

So would it make sense for Bajaj to once again think of launching scooters to improve the overall product mix and generate footfalls at dealerships? Given the muscle and aggression of Honda, perhaps that route may not be open any longer for Bajaj. It would make sense for the company to continue training its guns on the global marketing and waging a quiet war against Honda in the larger scheme of things, at a global level.