"I think we have to use our resources and capability in conquering markets outside India..." - Views on News from Equitymaster

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  • Feb 15, 2002 - "I think we have to use our resources and capability in conquering markets outside India..."

"I think we have to use our resources and capability in conquering markets outside India..."

Feb 15, 2002

Mr. R L Ravichandran is the Vice President (Business Development and Marketing) at Bajaj Auto Limited. He is a key player in Bajaj Auto's continuous brand building efforts. Not surprisingly, his favourite quote is: You don't get a second chance to make a first impression. In an interview with Equitymaster, Mr. Ravichandran shared his thoughts on the two-wheeler industry and how Bajaj is positioning itself to accelerate growth. He also shared his views on the forthcoming budget. Imports in the two-wheeler segment, he says, is not a cause of concern.

EQM: Given the rise in agricultural output in the current fiscal, has rural demand picked up?

Mr. Ravichandran: There is definitely a very good revival. If there is a general view that the economy might grow at about 5% in the current year, I am definitely attributing it to the performance of the agricultural sector. Motorcycle sales have been happening significantly in rural region now days.

EQM: How do you see the Indian two-wheeler industry performing in the coming years, in terms of volumes and realisation? What level of growth do you think is achievable in the longer term?

Mr. Ravichandran: The industry is in a position to achieve a growth at a minimum level of 15% for the coming years also. Of course, the variations of the industry assessment are ranging from a lowest level of 8% to the highest level of 15%. So, it seems that any range between 10%-12% is very practical and sustainable.

EQM: It is known to everyone that there is a shift in buying interest from scooters, notably geared scooters to motorcycles. Do you see a similar trend emerging in the bottom half of the two-wheeler segment, like say from mopeds to ungeared scooters?

Mr. Ravichandran: It is very likely to happen. We have already seen that moped segment as a percentage of two-wheeler industry has come down from 13% last year to almost 8% this year. The ungeared scooter as a segment will not show any drastic reduction. I think the ungeared scooter market will remain at around 10% of the total industry because this segment deals with quite a lot of movement within the city. These are used particularly by working women, housewives and college girls and their numbers are growing.

But moped is definitely going down in all aspects because in terms of value, image, price that is one is paying for, it is not a 'happening' two-wheeler. Its share has been drastically reducing. I am projecting a further reduction of around 2% in the total segment's share itself. In the ungeared segment, which is called scootterettes, I expect the share to be maintained at around 10% with a potential to reach 15% in the next 3 years, if more product excitements can be brought in.

EQM: Despite the recent slowdown, the motorcycle segment has bucked the trend. What are the factors that have led to this doubling of market size? Do you expect the robustness that we have witnessed over the last five years to continue in the coming years also?

Mr. Ravichandran: We have no second thoughts about the growth prospects of this segment. The growth of the segment is definitely in the range of 30%-40%. You see, today almost everybody's capacity is fully utilised and we are seeing that this segment is the only segment, which is growing in the country. Also, motorcycles account for almost 70% of the two-wheeler market. We expect this segment to continue to grow at this rate. Moderately, we are assuming this year's growth at 25%.

EQM: Where is the demand coming from? Is it in the higher cc segment because most players seem to be concentrating on 110 cc and 150 cc? You have recently launched a bike in the 180 cc category.

Mr. Ravichandran: For Bajaj, higher cc vehicles volumes are around 5,000 to 8,000 units per month. But when we launched 'Pulsar', the objective was not to make a big looking vehicle, but a very enjoyable street sport vehicle with higher power delivery plus a variant that gives a very good mileage. This kind of offering other industry players have not done so far. I am not looking at 'Eliminator' because that is not a volume brand. But I am looking at a product like Pulsar, a new initiative and also a pioneering effort in making a product, which offers style, performance and value. In this segment, we would like to watch and see whether the consumers are shifting.

EQM: Last year Caliber and Boxer accounted for a key portion of your motorcycle sales. This year you have launched a number of products. How have they performed?

Mr. Ravichandran: 'Aspire' has not done well as per our expectations because we introduced products at one go. We have 'Boxer CT' and 'Caliber Croma'. What happened was that Aspire fell in between these two brands and consumers preferred either Boxer CT or Caliber Croma. Probably they were waiting to catch up with a new brand name called Aspire. So I think it is not doing well in terms of sales volumes but in terms of customer satisfaction, it is faring well. So we have to wait for sometime to guage the results. Otherwise, we may have to decide whether we need this product at all.

EQM: You have managed to corner a 25% market share and have been growing at a faster clip. What is the strategy going forward? Though your aggressive pricing strategy seems to have worked well till now, it has had an impact profitability of the company. Could you share with us your view on this strategy?

Mr. Ravichandran: In the last year or so, the objective was to first give a product, which functionally satisfies the needs of a consumer. See, the consumer needs of a motorcycle are based on some fundamental parameters. One, they must have an undoubtedly great fuel efficiency in view of the prevailing petrol prices in the country. Secondly, the vehicle should have functional usage with acceptable quality levels on the basic parameters like long term reliability. These are all the rational reasons to buy the bike. When we made product strategy of Boxer, our objective was to offer a product, which had all these fundamental characters. Beyond that we needed to provide these at a price, which are actually speaking, shocking. So, the strategy of the company has paid off in offering reliability at a price, which was not expected. We will continue to use this strategy in the entry level, when we want to create a new segment or when we are fighting with a leader on price and performance. Then we will shift them up towards products, which will make them feel better and they will be prepared to pay extra rupee for that. In the process, we will protect our contribution also.

EQM: What are your strategies on the geared scooters front?

Mr. Ravichandran: As for as geared scooters are concerned, during this year the major slide has been arrested. During the current financial year, I still expect the geared segment to show a negative growth of 10%-11% as compared to a 40% decline in volumes in the previous year. Next year or further, we are not expecting any robust growth. We expect this segment to stabilise around 500,000 units. We are now doing some value offerings here to boost volume growth.

EQM: Competition has increased manifold with a number of players entering the fray. How do you plan to differentiate yourself?

Mr. Ravichandran: We feel that the product initiatives and the consumer insights on what will make him to buy a brand are reasonably well founded in the company's team today. So the knowledge of the product, the consumer, competition and transferring them into an engineering requirement is reasonably well internalised. As a result, the product offering that we will make will always be done based on differentiated positioning. We will always maintain the traditional expectations of a Bajaj price, which will be a landmark. Our strategy will be to constantly upgrade and add value, but not necessarily in terms of adding price.

EQM: Kawasaki, through its relationship with Bajaj, has plans to utilise India as the global exporting base. What is the progress on this front?

Mr. Ravichandran: Kawasaki is known for vehicles with a higher capacity (500cc), power and speed. May be India is the only country where we are selling Kawasaki bikes of 110cc category in such high volumes. So it makes sense for them to use ours as a base for markets that are still demanding these kinds of vehicles. They are primarily South America and some Far East countries. Establishing one more factory in these countries will not be profitable for them because they are mostly into the business of big bikes. So, the strategy is well thought of. We have done initial explorations in one or two countries. The acceptance levels have been very good of both Boxer and Caliber. If it works out well, they might consider this option with more focus.

EQM: Through vendor development programmes, Bajaj Auto is aiming at lowering raw material costs and improving end-product quality? What steps have you taken and what has been the result till now?

Mr. Ravichandran: There are two or three initiatives that are being taken with the primary objective of offering a great product at a great price. The areas that have been taken up for that are as follows. Firstly, we have to work on concerted cost cutting at every level, which we have done. From our side we have definitely worked on reducing the manpower. Value engineering is a constant process of any manufacturing organisation particularly in the current situation, where we cannot add a feature and charge for it. We have targets for each vehicle as to what should be the contribution of the value engineering team. All these, in our opinion, are helping us primarily for achieving higher volumes at a good price and still improve margins. I think this year's result validates this. But there is still a long way to go, but we will not spare our efforts.

EQM: One of the key challenges before the Indian two-wheeler manufacturers is the threat of cheaper imports. What is your view on imports? Given the fact that imports are going to be cheaper as we move along, how is Bajaj Auto planning to address such a situation?

Mr. Ravichandran: I want to differentiate one single point on the imports front. We should not go by what is happening in the car industry and assume that the same thing will happen in the two-wheeler segment. In the car industry, the Indian consumer is able to get a car from the best brands and there is more to come. All this is happening in the period of just two years. But in case of the two-wheeler segment, the best international brands have been in the country for more than 15 years. We have Honda, Suzuki, Yamaha, Kawasaki and Piaggio. All these companies have a manufacturing base here and India has got an evolved state of consumer understanding of two-wheelers.

Consumers understanding of investment on a two-wheeler is not just based on the initial price but on long-term reliability and to a certain extent, the resale value of the product. Given this backdrop, I would probably eliminate advanced models coming into India because they are not competent on costs. That leaves us with just China, which everybody is talking about now. We saw some of the Chinese products displayed recently. Much has been talked about the cost of such a product versus the quality of such a product. Looking at this, we find that if somebody can offer a product like Boxer from China at a price, which is 50% of Boxer, they might succeed. But the same product with a difference of just Rs 2,000-Rs 3,000, I think it is too difficult to succeed in India.

Secondly, the Indian manufacturers are exploring a possibility of setting up a base in China either for manufacturing or for component development. It is very much articulated in our company. It is a better move in terms of understanding the way they make the product at that price. I think that is what is positive in our thinking and approach.

EQM: How does Bajaj Auto plan to utilise the surplus cash in the coming years? Are you planning to increase capacity?

Mr. Ravichandran: Currently we have a capacity to produce 2 m vehicles and we are likely to end the year with sales volumes of around 1.4 m units. We have capacity expansion plans and that is happening every year. We have added a new factory at Chaukan. During the initial period, we manufactured only 'Saffire'. Today we are in a position to add the entire ungeared scooter portfolio into that factory. Now Pulsar has been aligned within the same factory and will have the capacity to make 10,000 vehicles per month in the next quarter of the financial year. So, as far as Bajaj is concerned, we don't forsee any major factory to be set up. What else do you do with the surplus money is a big question in everybody's mind and our Chairman has been answering it for quite sometime.

EQM: Your exposure to equities and stock markets was close to Rs 6 bn in FY01. Do you intend to reduce the exposure to the capital markets?

Mr. Ravichandran: See equity markets exposure definitely has been reduced and there is no point investing in very lacklustre markets. So anything that will give long-term gains is what we will be always doing. Currently any speculation on making quick money is not on the cards at all and it has not been our practice also.

EQM: How well developed are your research and development facilities and what sum do you expect to spend on R&D in the coming years?

Mr. Ravichandran: Our R&D has been rated as one of the best in the country. We have lots of product offerings through new initiatives. These initiatives are a result of years and years of investment on product, people, testing, stimulation and evaluation, which is an ongoing process in the company. We have been spending Rs 400 million per annum on an average on R&D. This is primarily on equipments and software development. We have introduced 17 new models in a span of 18 months. So it is almost a 10 on 10 on new products delivery versus schedule. These are good points in terms of capability of the company supported by a team of around 200 people.

Going forward, our focus would continue to be on the high growth segments. We would be certainly focusing on fuel efficiency as the single-minded platform for our future offerings. And we are also trying to create a larger capacity payload goods carrier in the three-wheeler segment, where we are absent today. In scooters, after Chetak four stroke, we will be looking at completely new styling, probably bigger and powerful vehicles. Our investments on vehicle design have always been favorable and we would continue to do so in an effort to make our products bold and beautiful.

EQM: Apart from two-wheelers and three wheelers, what are the other segments that you are looking at to boost growth? Mr. Rahul Bajaj had evinced interest in Maruti quite sometime back. Would you like share your views on that?

Mr. Ravichandran: Whatever was talked about Maruti, our Chairman had mentioned it clearly that he was not very keen about it. He also said who should actually buy the company. There was a definite positive approach of the organisation sometime back when there was a plan to introduce a small car in the country. It was not during Maruti, but much earlier than that. Subsequently, it was dropped and they wanted to remain focused only on two and three wheelers. Atleast to my mind, I don't think that there are going to be any investments on cars in the near future. I think we have to use our resources and our capability in conquering markets outside India now. It definitely requires investment on understanding, establishment and expansion. That is where we will be focusing.

EQM: What is your vision for Bajaj Auto? Where do you see Bajaj Auto three years down the line?

Mr. Ravichandran: To answer that, first and foremost it is important to know where are we today. Actually, we currently control about 30% of the market. For the next two years, we are looking at increasing market share by another 5%. Secondly, if the market continues to grow at 15% per annum, we have the capability to attain a sales volume of 2 m in 2003-04. Beyond that I think it is not practical to guess now.

EQM: Can you share with us the personalities and books that have influenced you the most?

Mr. Ravichandran: I will not be able to single out a specific book. I have been reading lots of books and every book has provided me with some knowledge. But I am very keen on reading books on practical consumer insights and brands.

In terms of personalities, I have a role model. I worked for an organisation in the past called Usha International. I worked directly under the CEO of the company called Mr. N. R. Dongre. He has tremendously influenced me and I still regard him as one of my best role models.

EQM: Lastly, what is your wish list for the budget?

Mr. Ravichandran: There are few things to watch out during budget. One major thing to watch for is excise duty. Last year, the Finance Minister did a rationalisation of excise duty. I feel it will remain as it is. The other major factor that could affect our industry is a possible rise in petrol and diesel prices. Today it does not seem to be so. Third thing would be a rise in level of personal income tax. Since our industry is primarily focused on huge middle-income group, the rise in tax levels could have a negative impact.

I am expecting the budget to be favorable for increasing the disposable income at the hands of the middle class. I am actually looking for some good positive sops there. I expect that there will be some definite incentives for higher savings by people because there is more money in current account and less in savings account.

From the overall economy point of view, I think our deficits are a cause of concern. I think there should be a larger focus on investments and generating funds for infrastructure development. I feel that national level infrastructure on roads and rails are very critical for any economy. Besides this, I don't think any major populist policy will happen in the current budget. It has to be a very realistic budget.

A very practical approach to environment protection would be to provide "zero" duty on imports of components for manufacturing "zero" emission vehicles in India and a very tempting offer to manufacturers for investments related to mass production of 'commercial vehicles with clean fuel'.

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