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Is Bajaj Auto losing out by ignoring scooter segment?

Scooter sales have been growing at a brisk clip of late, beating motorcycle sales, prompting more companies to look at the segment closely. But Bajaj Auto, which stopped making scooters couple of years ago, maintains it will stick to selling motorcycles.

June 06, 2012 / 08:17 PM IST
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Nachiket Kelkar

Scooter sales have been growing at a brisk clip of late, beating motorcycle sales, prompting more companies to look at the segment closely. But Bajaj Auto, which stopped making scooters couple of years ago, maintains it will stick to selling motorcycles. Will this strategy pay off in the long-run or will Bajaj loose out to competition for not being in the fast growing automatic scooters segment?

Bajaj Auto is banking on the highly successful sports bike Pulsar followed by the Discover range of motorcycles in the commuter segment to drive profitable growth. Its last two scooter models Kristal and Wave failed to enthuse customers few years ago and then it exited scooters all together.

But demand for scooters has surged in recent times, even as overall two-wheeler sales have hit the brakes in the last several months.  In the second, third and fourth quarters of last financial year, scooter sales jumped 29%, 22% and 29% respectively, while motorcycle sales rose at a much slower 15%, 9% and 6% respectively, according to Society of Indian Automobile Manufacturers.

The revival in scooter segment started with the launch of the Activa by India's third largest two-wheeler maker Honda Motorcycle and Scooter India, which has subsequently added the Dio and Aviator scooters to its portfolio.

To be sure, motorcycles still account for the bulk of two-wheelers sold in India. But their share has slipped to 75.2% last year from 83.6% in 2006-07. Scooter volume shares has risen to 19.2% from 12% over the same period.

"Although domestic motorcycle volumes grew at 9.0% CAGR during the last five years, both the scooters segment as well as the mopeds segment grew at a much faster CAGR of 22.2% and 17.0%, respectively; contributing to reduction in the motorcycle segment's volume share," according to a recent report by ICRA.

It expects the scooters segment will maintain its pace of growth faster than that of the two-wheeler industry as a whole and its share will grow to 27% by 2016-17.

"The faster volume growth of the scooters segment is expected to be driven by (a) growing acceptability of gearless scooters, particularly by women; (b) rising urbanization and increasing proportion of working women; (c) expanding product offerings in the scooters segment; and (d) comparatively lower base," ICRA said.

Honda sells one of every two scooters sold in India but more and more two-wheeler companies are launching scooters to cash in on this growth potential.  India's top two-wheeler maker Hero MotoCorp, which makes the hugely popular Splendor range of motorcycles, recently launched the Maestro scooter, apart from the Pleasure it was already selling.

Suzuki has launched  the Swish over and above the Access scooter its been selling for a few years. TVS Motor, which for long sold the Scooty, now also produces the Wego and has plans to launch at least one more scooter later this year. Even Yamaha, known for its sports bikes, will enter the scooter segment this year.

Helped by strong sales of scooters, Honda saw its sales jump 52% year-on-year last month. Even Hero MotoCorp's sales grew 11%.  Bajaj Auto, meanwhile, saw its sales slip 2%, mainly due to decline in three-wheeler commercial vehicle sales, but also as motorcycle sales growth crawled to just 1%.  A dip in exports to Srilanka, where it typically sells around 10,000 motorcycles per month and 12,000 CVs, due to a sharp hike in import duty is also a reason for the sluggish growth. But can it ignore scooter segment for long?

Bajaj Auto's MD Rajiv Bajaj, still maintains the company will remain focussed on selling profitable motorcycles, just like Burger giant McDonalds has refrained from making other popular fast foods like Pizzas for instance. 

"Let me start by saying that in the fast-food industry, there are people who make burgers and there are people who make pizzas. If I were McDonalds, and if I were to observe that a lot of consumers have started going to Pizza Hut, I have two choices - either I also make pizzas, which, in my view, would be wrong. Or, I make more interesting burgers. So I think we would choose the second option," Bajaj said in a recent interaction with Antique Stock Broking.

"We are not saying to ourselves that we will never make scooters. All we can say is that, at this point of time, when the overall market is of 35 million motorcycles, we are only making 3.5 million motorcycles. When you have 10% share of something, it is silly to look at something else," he added.

Many analysts as well as the company point out to the fact that its profitability that ultimately matters and Bajaj Auto's margins at around 20% are much ahead of the industry. Many still advise investors "buy" Bajaj Auto. But some are cautious.

"Bajaj is battling headwinds on numerous fronts: First, the industry is seeing two-wheeler buyers downgrading to the economy segment from the executive segment. This is adversely impacting the realization of two-wheeler companies, particularly Bajaj. Second, scooters are growing faster than the overall two-wheeler market, where Bajaj has no presence. And lastly, not only is the overall two-wheeler market slowing down, but competitive intensity has resulted in Bajaj's market share decline in both the premium as well as executive segment," says a recent report by HSBC.

However, most analysts maintain that its the motorcycles that will continue to drive the two-wheeler industry in India.

"Scooters have grown on a low base. Also last year there were new scooter launches from Hero, Suzuki etc. This year there are a lot of motorcycle launches happening. Bajaj has already launched the Discover 100 and 125, the new Pulsar... So bike sales will pick up in the next few months," said Ronak Sarda of Institutional Business Group, MSFL.

Honda has raced to the number third spot due to the highly successful Activa. But it too is focussing on motorcycles to power itself ahead of competition, points out Sarda. It recently launched the Dream Yuga in the commuter bike segment, to take on the Splendor.

Bajaj has lost 140 bps market share in the domestic motorcycle market, analysts point out. But it is expected to recover lost ground with the new launches.

"We are now banking on the upgrade of the entire Pulsar and Discover range over the next two quarters. These upgrades coincide with a low base in the domestic market, which, in our view, should ensure some market share recovery next year where we expect some reversal in the recent down-trading witnessed in domestic two-wheelers," said Antique's Ashish Nigam and Kunal Jhaveri.

They also feel the RE60 four-wheeler, which Bajaj unveiled few months ago as a proactive launch as it targets the existing three-wheeler customers who might want to upgrade to a four-wheeler in the future. The RE60 is expected to be launched towards the end of the year according to Bajaj Auto.

"RE60's margins are expected to remain as astronomical as those of three-wheelers, which should protect the company's coveted 20% margins as well," they add.

Both Antique and MSFL have a "buy" rating on Bajaj Auto.

Bajaj Auto shares were up 0.8% at Rs 1,504.70 on NSE on Wednesday. The stock is down 6% since Dec-end, underperforming the broader Nifty index, which has gained 5% over the same period.

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