Riding On Economy

Hero Honda has intensified the battle for market share by entering the economy segment of motorcycles

Another dawn, and another day of war begins.Indeed, the battle has been on for sometime now. Only this one has got fiercer with time.

Just when rival Bajaj Auto thought that it had delivered the knock-out punch (with "Pulsar") in its attempts to break the stranglehold of Hero Honda over the economy segment -- it is a leader with almosttwo-thirds of that market --, the "king" retaliated with its own, almost-lethal blow. And, the strike has been canny, aimed at hitting where it will hurt Bajaj the most.

 

With the launch of the 100cc "Dawn", a knocked-down version of the "Splendor', Hero Honda has launched a massive attack on the entry-level motorcycle market, a segment that continues to be the mainstay of Bajaj's volumes (the "Boxer" commands almost 46 per cent of the economy-bike market).

Hero Honda seems like it's in no mood to wait before it launches its next attack. While it remains to be seen how Bajaj will shield itself from the offensive, Hero Honda is busy stepping up on its aggression with the launch of a 125cc bike by the end of the first quarter, this fiscal.

Hero Honda is quite convinced of the benefits these assaults will yield. Little surprise then, the company forecasts volumes to grow over 27 per cent in the current fiscal -- a much higher rate than the estimated 16-18 per cent for the industry. "Considering that there are opportunities to be capitalised on, the last thing we want to get into is a conservative mode," says Atul Sobti, senior vice- president, marketing and sales. He adds, "We are looking at improving market share by a couple of a 100 basis points this year."

The action couldn't have been better for the stock markets, either. Certainly, even as the overall industry remained sulky, -- a mood brought on by the all-too-familiar economic slump -- stocks of local motorcycle manufacturers have soared.

While the BSE Sensex has dipped over the past one year, Hero Honda's shares have zipped ahead, handing out returns of almost 185 per cent over the past twelve months. Ditto for other two-wheeler stocks. "Dawn" of a new beginning?

The entry-level segment, dominated by Bajaj Auto (Boxer) and TVS Motor (the Max series), constitutes roughly one-third of total motorcycle sales volumes. It has been one of the more fastest-growing segments in recent times.

With the absence of a model that could take on the Boxer and Max series in this segment, Hero Honda has been losing out on potential volumes. Thus, with a view to making its presence felt in this category, the company launched, last week, the knocked-down version of the Splendor.

Christened "Dawn", the 100cc bike, is being sold at a premium of around Rs 2,000 (in most places) against rival models such as the Boxer and Max. The Dawn is expected to replace the company's existing 100 cc bike, "Joy", and is expected to touch an average volume of around 10,000 units a month.

In fact, company officials are so upbeat about the product that they are confident that sales will outstrip the targeted 60,000 units in the first six months of its launch.

While it's all right to set targets, the larger issue is whether the same can be achieved. Especially in the entry level segment, where pricing plays a pivotal role. So, will the premium pricing strategy adopted in the entry level segment help Hero Honda achieve targeted numbers? (the company's models in other categories like the executive and premium segment also maintain a premium against competing models.) Notes a confident Sobti: "Hero Honda certainly does enjoy an equity when it comes to bikes."

Ostensibly, the two-year comprehensive warranty (up from the one-year engine warranty) made available on all the models, including the Dawn, should prove to be a major pull factor, at least initially.

Following Hero Honda's decision to up its warranty period, rival Bajaj Auto has also extended the warranty period on all its models, except Boxer, to two years. "Once numbers begin to pick up on Dawn, it can safely be assumed that Bajaj Auto will also bring the Boxer under the two-year warranty scheme," notes an analyst. Once that happens, Hero Honda will lose the "warranty" edge. Nonetheless, certain features such as the addition of a multi-reflector head light, could continue to be plus points.

An eye on the customer

In an effort to enhance value for customers, the company has initiated the "Rs 1001 customer price" benefit program across all its models. In addition, the passport program -- which entitles a customer to a Rs 1 lakh accident insurance, lucky draws, gifts against redeemable points, cash discount on consumer durables, free tickets to company sponsored events, etc. -- has met with an encouraging response (it has attracted around five lakh members to date), and is expected to continue its success into the future as well. Points out an analyst: "Considering the overall value proposition, the company should continue to draw in the numbers even at a slight premium over competing models".

Filling the gaps

Hero Honda, in its effort to augment its product portfolio, has firmed up plans to launch a 125cc motorcycle midway through the current fiscal. While the pricing strategy is still being worked out, the model is expected to be positioned as a "genuine upgrade" for 100cc bikers. Analysts figure that the model is likely to fill the gap between the "Passion" and "CBZ", and priced at a premium to the "Passion".

Moreover, the company is also foraying into the lifestyle bike segment -- a segment that hasn't yet caught the fancy of the fuel-conscious, economical Indian yet. The company is expected to launch a 200cc bike early next year.

Developed jointly with Honda Motor, Japan, the bike will be positioned as a sports bike, and is expected to be the costliest Indian motorcycle, with a price tag of a little under Rs 1 lakh. Furthermore, Hero Honda is in the process of assessing the feasibility of introducing high-powered models from the parent's stable as fully-built imported bikes.

The company is confident that it will achieve the targeted volumes for the current fiscal. In fact, according to a company source, Hero Honda is expected to notch volumes of over 1.35 lakh units in the first month of the current fiscal itself. That number, coupled with the 10,000 units of Dawn per month, and volumes from the 125cc bike, are all expected to add up to the company's targeted volumes for FY03.

Cannibal instinct

Based on the same chassis as the Splendor, the launch of Dawn has evoked fears of the latter cannibalising on the former's volumes. This has given rise to some concern that margins could get squeezed.

While the company does not rule out the possibility of a marginal cannibalisation of the Splendor volumes, it does not foresee margins to be impacted. "The pricing of the Dawn and the Rs 1001 customer price benefit scheme has been worked out keeping in mind the entire value chain" notes Sobti. He adds "On volumes of 75,000 - 80,000 Splendors a month, we won't be worried if volumes of up to 5,000 units, shift to Dawn".

The cost reduction at the ancillary and vendors end, coupled with the spreading of costs on an increasing base, are expected to hold margins steady at the current level, if not improve further. Points out Kalpesh Parekh, analyst at Sushil Finance Consultants: "We expect Hero Honda to reduce raw material costs to the tune of Rs 500 per vehicle. This will offset incremental royalty and ad spent costs, and discounts."

Financials

On the back of a 45.31 per cent rise in volumes, the company has registered a 47 per cent topline growth for the quarter ended March 31, 2002.

Earnings before tax have surged145.19 per cent, while operating margins have expanded 317 basis points to16.02 per cent. Annual performance (FY02) is a reflection of the good performance of previous quarters. While topline has risen 40.82 per cent, earnings before tax has jumped 84.21 per cent.

Operatingmargins, too, have continued their upward march with a 190 basis points jump. Moreover, the company's RoNW has risen from 39.24 per cent in FY01 to 67.51 per cent in FY02.

Valuations

According to consensus estimates of analysts, the company is expected to register a 29 per cent earnings growth in the current fiscal. At the current price of Rs 370, forward earnings (Rs 30.13) are discounted by 12.28 times, while current earnings (Rs 23.18) are discounted 15.96 times. Clearly, considering the long-term earnings potential of the company, current valuations appear attractive and the stock merits investment.