Bajaj Auto Ltd has made a heroic comeback in the domestic motorcycle market. The company has steadily increased its market share to 20% in the fourth quarter of FY19, after sliding to a low of 14% seven quarters ago. In doing so, it has given incumbents such as Hero Motocorp Ltd and Honda Motorcycle and Scooters India Pvt. Ltd a run for their money. Market share of the two companies fell by 100 basis points (bps) and 550 bps, respectively, during the period.
Bajaj Auto’s two-wheeler sales rose by 4.8% year-on-year in April. To be sure, it had grown in double digits for several months in FY2018. Sales of Hero and Honda contracted by 17% and 33%, respectively, in April, continuing the decelerating trend in sales.
What has kept Bajaj Auto ticking through such turbulent times? It seems the firm’s aggressive pricing strategy in the entry-level commuter category, which it adopted about 18-20 months back, has done the trick. It launched variants of existing products at not just affordable prices, but also with additional features that swung customers in its favour. Analysts say its share zoomed by 500 bps in this segment that now earns a fifth of its revenue.
While there is normally many a slip between the cup and the lip, it’s worth noting that the management has met its targeted 20% market share in motorcycles for FY19.
That’s not all. Analysts say Bajaj’s strategy to flood the dealer pipeline with the relatively cheaper non-ABS (anti-braking system) variants in March fuelled wholesale numbers. Note that from April, ABS variants are mandatory.
To add to this, Bajaj’s absence in the scooter segment, which analysts always took a jibe at, turned out to be a boon. For the first time in 10 years, growth rates in the scooters segment has underperformed that of motorcycles. Also, one cannot ignore the presence of a captive auto finance company in the group that gives a leg-up to Bajaj’s sales when the economy is in the grip of a liquidity crunch.
Be that as it may, there is some apprehension setting in on the street even as Bajaj’s management is confident of scaling 24% share of the motorcycle market soon. “We don’t expect Bajaj’s outperformance to continue as base effect catches up and its discounting strategy is unlikely to work in the long run," says Arya Sen, an analyst at Jefferies India Pvt. Ltd. Further, some of the entry-level variants are margin-dilutive, which could weigh on profit growth ahead.
As such, the strategy has taken the juice out of its profits. Ebitda (earnings before interest, tax, depreciation and amortization) margin is down to 16% in the December 2018 quarter from around 21% eight quarters ago. This is despite the higher-margin exports business comprising nearly half of its revenue. But note that the problem of margin erosion has trickled down to rivals such as Hero and Eicher Motors too, albeit to a lesser degree.
Bajaj’s success in garnering share also needs to be seen against the backdrop of intense competition in the two-wheeler market. A CLSA note says the measure of market concentration, Herfindahl-Hirschman Index, shows that the highest competition in the auto universe is among two-wheelers. This is despite the fact that there are more incumbents in the four-wheeler passenger vehicle segment.
Having said all this, analysts fear that rivals will do relatively better if there is a demand reversal due to a relatively low base. Against this backdrop, the Bajaj stock’s outperformance needs to be considered carefully by investors. Shares of two-wheeler firms Hero, Eicher Motors Ltd (representing Royal Enfield motorcycles) and TVS have fallen by 13-17% since January. Only Bajaj’s stock has been an outlier, rising 13% since January. If Bajaj can’t continue its upward climb in terms of market share, its shares could be on a fast downhill journey.
"Against this backdrop, the Bajaj stock’s outperformance needs to be considered carefully by investors. In spite of sales growth, margins may stay range bound, leading to slower earnings growth," says Bharat Gianani, analyst at Sharekhan