Is it Time for Hero MotoCorp's Underperformance to End?

"The most important person in my company is not the MD or the watchman but the salesman".

This was one among the many punchlines which Mr Rajeev Bajaj, MD of Bajaj Auto said in an interview.

His point stemmed from the fact, that when a customer goes to the Bajaj Auto showroom, it is the salesman and only the salesman who is the face of the company.

It is his job to convince and not confuse the customer. That can only happen if the salesman is clear about the product and has confidence in it.

Why would a salesman confuse the customer?

Let me take you to 2015.

The 100-cc segment accounted for 60% of all motorcycles sales in India back then.

That was probably the reason why Hero MotoCorp during those days sold way more 100 cc bikes than Bajaj Autos total domestic sales.

If the commuter 100 cc bike was what sold, why did Bajaj Auto not capitalise on it. After all, it had everything, right from the brand to distribution prowess.

The problem was in its strategy and that's how Bajaj Auto failed.

The problem was never with the product but the positioning.

Below, I've highlighted the 10 year history of Bajaj Auto's flagship brand 'Discover'.

2004 - Bajaj launched the Discover with a 125cc engine.

2005 - Bajaj launched the Discover with a 112cc engine, discontinuing the Discover 125.

2006 - Bajaj pulled out from the 100cc segment, stating it wasn't as profitable as higher capacity bikes.

It also marketed its 125cc bikes as a bike with the mileage of a 100cc and performance of a 125cc. At this time, Bajaj was the number two in the 100cc segment.

2007 - Bajaj launched the Discover with a 135cc engine.

2009 - Bajaj launched the Discover 100 DTS-Si, coming back to the 100cc segment after having failed to convince consumers about buying a higher cc bike with similar efficiency. The 112cc Discover was discontinued.

2010 - Bajaj introduced the Discover 150, discontinuing the Discover 135.

2011 - Bajaj re-launched the Discover 125. It also updated the Discover 100 and discontinued the Discover 125.

2012 - Bajaj launched the Discover 100 4G and next generation Discover in the form of the Discover 125 ST, replacing the old model.

2013 - Bajaj launched the Discover 100T. It also introduced the Discover 125T and 100M.

2014 - Bajaj discontinued the Discover 125 ST, Discover 125T and Discover 100T, and launched the Discover 125 M.

2014 - Bajaj launched the Discover 150S and 150F, bringing back the Discover 150.

New Launches and Discontinuances of the Discover Brand

Bajaj Auto Discover	Launch	Discontinued
125cc	2004	2005
112cc	2005	2009
135cc	2007	2010
100DTSi	2009	Rebranded
150cc	2010
Relaunch 125cc	2011
Relaunch Discover 100 4G	2012
Relaunched Discover 100T, Discover 125T, Discover 100M	2013
Relaunched Discover 150S,150F	2014

Source: Motorbeam.com

During the 2004-08 period, while Bajaj introduced new models, it made sure it discontinued previous models.

I believe, this was a strategic error, as no model was given time to perform. The severity of problems only increased going forward.

In 2014, Bajaj Auto had 5 Discovers on sale with very little product differentiation.

The problem was clear... no strategy, not enough time given to any model to evolve, the focus on new launches without any meaningful product positioning.

As a customer, when you went to buy a motorcycle at a Bajaj Auto showroom, even the salesman was confused about what to sell you.

That led to a 6% drop in market share of Bajaj Auto in 2015.

A 6% market share is huge as competitors like Hero capitalised on the blunder.

The stock price stagnated over this period leading to a lean patch for Bajaj Auto.

However, post 2015, the company realigned its strategy leading to clawing back its lost market share.

Fast forward to 2022...

Hero MotoCorp is saddled with the same strategy issues which Bajaj Auto was facing 8-10 years ago.

There were two main issues with Hero MotoCorp till 2022.

1. Product Portfolio Gaps
   
   It’s absence in the high margin premium segment. With a growing share of the premium segment, Hero had limited offerings. The current portfolio has a miniscule market share.
2. Change in Consumer Preferences towards Scooters and Premium Bikes
   
   Ten years ago, the commuter segment accounted for 60% of total motorcycles sales in the country.
   
   However, with a shift in consumer preferences towards premium motorcycles, the mid segment 125cc -150 cc is getting squeezed.
   
   Scooters have replaced the 125cc motorcycles, while Hero’s mid-size offerings, Splendor and Passion have tough competition from the low-end premium segment.

The broader issue for Hero MotoCorp till date was its inability to fill the white spaces along with shrinking of the category (the mid-size segment) where it was a market leader with over 75% market share.

Hero MotoCorp had high reliance on 'Bharat'- Rural India rather than 'India'- Urban India.

However, over the past 5-7 years, with rise in disposable incomes and increased product offerings by competitors, the distribution moat of Hero MotoCorp isn't really an added advantage.

Sales in the premium segment, in the rural market, is catching up.

As a result, the stock of Hero has stagnated since 2017.

What is Changing Now?

In the 2005 era, Hero Honda was at its prime when it came to product portfolio.

Hero's reach and Honda's technology and design was an unbeatable combination.

Hero Honda along with Bajaj Auto, ruled the premium segment.

The Hero Honda Karizma beat its rival Pulsar in the early 2000s.

Post the end of the product lifecycle of the Karizma, Hero never in the real sense made a comeback in the premium segment until now.

The company last week launched the new Karizma ready to expand its premium offering.

Apart from that, the tie up with Harley Davidson has started to yield tangible offerings.

Hero in partnership with Harley has launched a 440-cc luxury motorcycle - Harley Davidson X440.

While this caters to the niche luxury segment, it is expected to add visibility to the premium segment.

The point I am trying to make is every company has a period in its business life cycle where its product portfolio stagnates.

Bajaj Auto had issues with its positioning with Discover while Hero had issues with the failure of its models in the premium segment.

As an investor, it is important to find out when the downside and stagnation in the product life cycle reverses.

It is during such turbulent times, good quality stocks like Hero and Bajaj Auto could trade at an attractive discount.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)