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Last Updated : Mar 15, 2017 02:27 PM IST | Source: Moneycontrol.com

Rajiv Bajaj on demonetisation and why 100cc bikes don't have a future

Rajiv Bajaj tells Moneycontrol why Bajaj Auto will continue to focus on premium bikes and outlines the impact of demonetisation.

 
 
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Following the 2012-13 economic slowdown, Bajaj Auto saw its market share come off steeply as demand for its premium bikes, especially the Pulsar, took a hit.

The company's strategy came in for criticism but MD Rajiv Bajaj made it clear: its high-margin, premium two-wheeler segment would continue to remain its core focus.

Of the 16 models that Bajaj Auto currently produces for the domestic market, only two models – Platina and CT100 – are in the budget segment while the rest have engines of 125cc and above. Two of its bikes, Dominar 400 and RS200, are priced above Rs 1 lakh.

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In an exclusive interview with Moneycontrol's Swaraj Baggonkar, Bajaj talked about how the company's market share made a comeback during the past few years as the premium bike market recovered and why he believes focusing on the 100cc motorcycle -- currently the bread-and-butter for many of Bajaj's rivals -- does not make long-term sense ("it is the bicycle of the future").

The outspoken industrialist has also been one of the few to have voiced his opinion against the government's demonetisation move.

In the interview, he discussed its impact.

Bajaj has had a very busy year so far. Will that momentum continue in FY18?

If you look at January 2015 our domestic market share was around 14 percent and if see where it stands now particularly at the retail level it is a shade above 20 percent. Unfortunately, in the last few months, all this confusion about demonetization and BS-III stocks has queered the pitch a little.

So, this is extremely significant. Before demonetization the size of the domestic motorcycle industry was a little over 900,000 a month. And, therefore, 6 percent of that would be about 55,000 motorcycles a month. So when we consider we have gained 6 percent share it is double the market share of global players like Yamaha who has been here for almost 35 years. The 55,000 volume [figure] is also the monthly volume of a TVS Motors or a Royal Enfield. So, I would say that what we have gained in terms of share or volume is equal to the absolute share of volume of a secondary player in the market place. In that sense I would say it is a very significant gain.

There were plenty of new launches this year from Bajaj. What will be the guidance for FY18?

In terms of product development one does not talk of months. We talk of at least a two-year time-frame. It takes that much lead time to create something even if that is not totally new in terms of changing an existing product. If I take a two-year perspective I would say our aim would be to do more of the same. In the next two years we can gain another 5-6 percentage points. There are several new launches; some of them will be in FY18 and some are scheduled after that. But yes the short answer would be that whatever we have achieved in the last two years in terms of incremental share and volume -- we would like to grow them.

Tackling demonetization was undoubtedly the most challenging part of the business this year. Has this impacted the psyche of the two-wheeler buyer?

Definitely, there is an impact [of demonetization] on the industry. I explained how the industry from being in a positive area has gone into a distinctly negative [zone] after November 8. I had tried to make a point that somebody like Bajaj may feel less affected, down only 5 percent year-on-year. But the reality is that by October we were growing 20 percent year-on-year in the domestic market. So being in a position where you were plus 20 percent and suddenly become minus 5 percent -- it is a very dramatic loss of momentum.

Obviously, this affects people both materially and also in sentiment. One can see that the rural places are more affected; the cheaper 100cc bikes were more affected than premium motorcycles. We have been able to put some colour on numbers and see the qualitative impact along with the quantitative impact. In terms of recovery there is no doubt, I have already said that after mid-December or let’s say from January things have been improving but definitely our view is that it is still not normalised.

Exports have been a cause of concern for Bajaj?

Exports had started coming under pressure once oil got into trouble and it has troubled several of our markets in Africa and Columbia. While those places continue to be under pressure we are not in a position to say that suddenly everything looks hunky-dory there. But definitely things have been improving in the last two months. In February our exports were 85,000 last year but this year they are 105,000. On the other hand three-wheelers have yet to recover. Soon we are going to Malaysia and Thailand and definitely Dominar will be one of the brands that we would like to introduce there.

How are the new launches doing?

We sold close to 3,300 units of Dominar 400. As far as I know everything that is going to dealers is sold out. I hope we are going to achieve the target of over 5,000 this month. The other important thing is that the bike has a lot of interest in our export market. So far we have not started with exports. From this month or perhaps from next month, depending on production capacity, we will start exports and I am hopeful that we will get a good reception in the export market. We had indicated that by September this year we will like to hit 10,000 and we feel we are on track for that.

How are we doing on production capacity utilization? And, is the existing capacity good enough to last long?

Right now we are fine. Our capacity is around 5 million vehicles; it depends on the product mix. We have started at the rate of 4 million vehicles a year. So, I don’t think there is any immediate need to expand capacity. We don’t need to take the decision too much in advance because it does not take more than a few months to up the capacity.

Will there be adjustments to the product mix?

One of the things we as a team have come to a conclusion is that even if we start filling capacity to 100 percent a lot of capacity would be filled by cheaper and less profitable 100cc motorcycles. That would be by the Boxer brand which is primarily exported. Now, it is very less than earlier because of collapse of Nigeria. Otherwise, Nigeria itself would have been alone 40,000 Boxers. But even now Boxer is doing 50,000 units a month. And CT100 is another 40,000-50,000 and Platina is 30,000-35,000 a month. We are talking of something like 1.3 lakh a month and 1.5 million a year. As a company we have always said that technology, quality, profitability, for us is far more important than just simple volumes and markets share and scale. So brands like Boxer, CT100, Platina are having a lower single digit EBITDA margin compared to some of the other brands we have. What we have decided as a company is that even if tomorrow we are making 5 million from the current 4 million vehicles and instead of one and half million vehicles we make may be 2 million 100cc motorcycles, let’s say rural markets come back, Nigeria comes back but we will not then increase capacity beyond 5 million.

The 100cc segment has been falling consistently. What is its future?

In five years hopefully when people look back they will say we did the right thing. I think the 100cc of today is the bicycle of the future. And, it will always be popular, serve the purpose, but they will be so far down at the bottom of the pyramid. A company like ours is not trying to make a little bit of everything and participate in all segments - scooter, motorcycle, cheap, expensive. We are very clear. We want to do one thing and we want to be the best in that. I think we cannot reach to the bottom of the barrel because in terms of technology, quality and margins these motorcycles become very unattractive.

The 100cc has been shrinking. It has been more or less 50 percent of the industry or less than that. So I don’t think 100cc has much of a future going forward. Now that does not mean it will be gone in five years. It (also) does not mean we are exiting the segment. All I am saying is that when the time comes I have two options – should I increase capacity from 5 million to 6 million or should I prune the 100cc a bit and the way to prune it is not to discontinue a model but raising the price a little bit and improve profitability. And that (freed) capacity we will put for bigger bikes, three-wheelers or quadricycles. This will make our production mix even richer. A lot of carmakers are already doing this. The rat race of 100cc, living on month-to-month, I don’t think that is the way for business in the future. I am forecasting that this is how we will respond to a situation that demands a capacity increase.
First Published on Mar 15, 2017 02:05 pm
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