The greatest rivalry in the Indian auto space? - Views on News from Equitymaster

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The greatest rivalry in the Indian auto space?

Jun 25, 2010

Corporate rivalries are always interesting tales. Whether its back home in India or around the world. In this article, we will be focusing on the rivalry between the two heavyweights in the Indian two-wheeler space - Bajaj Auto and Hero Honda. Till about a decade ago, Bajaj Auto was the undisputed king of the two-wheeler industry. This, we say, in terms of the total sales volumes. Then came along Hero Honda, the joint venture between the Hero Group and Honda Motors, and changed the game completely in its favour.

With the launch of motorcycles, the demand for less efficient, less stylish and less powerful - scooters and mopeds - deteriorated substantially over the years. This is what gave Hero Honda an edge over Bajaj Auto, which primarily focused on scooters. Hero Honda, on the other hand was a one segment focused company. That segment was of motorcycles.

Below we can see a chart of the total two-wheeler sales of both the companies and how things have played out since then. Hero Honda caught up to Bajaj Auto in terms of overall volumes in FY01, and since then there was no looking back for the company.

Data Source: Companies, Equitymaster Research

Flash back to 1999 - Bajaj Auto sold nearly 1.2 m two-wheelers during FY98. Of this, motorcycles formed nearly 16% of the volumes. This translates to about 200,000 units. The balance was mainly contributed from scooter sales. During the same year, Hero Honda sold about 530,000 units.

Below we can see a chart of how motorcycles sales volumes have changed for both the companies. And the scenario thereafter is for you to see.

Data Source: companies, Equitymaster Research.

New launches, wide distribution network and a good amount of focus on rural and semi-urban markets is what led Hero Honda to strengthen its position. Not that Bajaj Auto did not launch and offer good vehicles. But since it also focused on two-wheelers other than bikes and whose demand was reducing over the years, it saw a relatively slower increase in sales volumes.

If we take a look at what has been happening in recent times, the gap in sales volumes between the two companies widened during the year FY08. A key reason for the same was Baja Auto's focus on urban markets. The company launched bikes with more powerful engines and reduced focus on the entry level, which is mainly aimed towards the rural sections of the market.

On the other hand, Hero Honda continued its rural and semi-urban play. Indeed, a wise move by the company.

However, realising its lost opportunities as well as the huge scope, Bajaj Auto renewed its focus on the entry level segment in recent times. This helped the company boost sales volumes. FY10 has been a strong year for both the companies, which recorded their highest ever sales.

Now that we have discussed the key revenues drivers for the two companies, let us have a look at their operating performance.

Automobile companies increase profitability by selling more units. As number of units sold increases, average cost of selling an incremental unit comes down. This is because the industry does have a substantial fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

In the following chart, we have shown the operating margins of both the companies over the past decade. As compared to Bajaj Auto's volatile operating margins, Hero Honda's operating performance has been relatively quite stable. One key reason for this could be better management of product mix by Hero Honda and superior economies of scale. Bajaj Auto's margins have come in higher than Hero Honda in FY10 but whether it manages to keep that edge is anybody's guess.

Data Source: companies, Equitymaster Research.

On all comparative parameters, Hero Honda seems like a much more stable company. However, with Bajaj Auto's renewed interest in the entry level segment and the huge success of its recent launches, the company has done well to grow its sales volumes in FY10. Motorcycle volumes for the company surged by a massive 40% YoY during FY10! On the other hand, Hero Honda's sales volumes grew by 19% YoY during the year.

All said and done, for Bajaj Auto to regain its pole position in the two-wheeler sector, it seems though that the company would require more than a miracle.

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