Bajaj Auto: Sticking to what it does best
The past twelve years have been a roller coaster ride for Bajaj Auto. From being a market leader in the two-wheeler space, the company's delayed focus on motorcycles led it be overtaken by Hero Motocorp.
The past twelve years have been a roller coaster ride for Bajaj Auto. From being a market leader in the two-wheeler space, the company's delayed focus on motorcycles led it be overtaken by Hero Motocorp. However, with renewed focus on the motorcycle segment, the company has come a long way since, recording strong growth levels.
Mr. Rajiv Bajaj, the company's Managing Director, has pretty much been responsible for steering the ship back on the path of high growth to form (it is believed) one of the most profitable auto companies in the world. A while ago, Mr. Bajaj shared some of his insights in an interview with a leading daily as to how he was able to overhaul the company. We will discuss some of the key management takeaways from the same:
Have a good strategy; stick to it and focus
Bajaj Auto's brand led growth strategy which was implemented in 2008-09 helped the company record strong sales numbers since then. In fact, the company's 'Discover' - the relatively low-end brand - overtook volumes of the Splendor (in the month of September 2012) to become the world's largest selling motorcycle in the world. This is where the aspect of focus comes in as well. The company believes in every brand within the portfolio to have three aspects: continuity in appearance, certain aspects of performance to be met and that every brand should stick to its price band. Also, the idea of having limited brands catering to the wide market came about in the process of development of the new strategy. This is the reason why the company focuses on select brands only. In fact, when Bajaj Auto entered the 100 cc bike segment - the large volume entry level bike segment - very recently, it chose to not launch any new brand. Instead it stuck to its popular brand name 'Discover' in order to further leverage it.
Lean cost structures
For followers of the company, it would not be new to them that Mr. Bajaj is known for his focus on margins - as he time and again passes on any increase in costs to customers. In fact, the company is believed to have set up a plant in a relatively smaller area as compared to the competitors. By setting up a plant of only about 60 acres and investing about Rs 1.5 bn towards the same, the plant, land, and machinery were paid off within six months as per Mr Bajaj. Apart from cost cutting measures by cutting the excess flab out, the company has focused on outsourcing, thereby leading to the process of lean manufacturing.
Data source: ACE Equity; SGD&A - Selling, general, distribution & administration
Even in the development stage, it is believed that for instance if a prototype of a particular model didn't meet the operating margin or performance criteria, it would be considered as a no go. The company has also been able to keep its costs low by keeping the engine platforms common for certain brands, thereby helping it to achieve economies of scale.
Data Source: ACE Equity; Standalone data
Individualization and specialization
The Economic Times had mentioned a quote by Mr. Bajaj which states "Al Ries says if it was left to us, all our ancestors would still be alive. It's the same with human nature. We don't want our brands to die. But when the market evolves, the old brands must die and new ones must grow,". This quote is in reference the company's strategy of closing down its scooters segment, which as is widely known, was close to Mr. Rahul Bajaj. But given that the markets were adapting and the tastes were changing, in hindsight it does seem is it was a good decision given that while being relatively higher margin products, the volumes were declining sharply as the demand for motorcycles - the relatively more stylish and powerful vehicles - was increasing.
Offer quality products at all times
The company launched its Pulsar brand of products way back in the early 2000s, at a time when the entry level bike segment was the dominant segment. Flash forward to today, Bajaj Auto has nearly 40% to 45% market in the premium bike segment.
Conclusion: We like companies (and managements) who remain focused on their businesses. This is because such managements understand their businesses well, leading to allocation of resources in a proper and profitable manner - eventually leading to overall higher returns for the stake holders. Further, this also allows companies to build their reputation and brands in the markets they operate, which once established successfully, are difficult to break.
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