Price war takes toll on bike firms

NEW DELHI: The robust sales over the last month and a half have helped India’s two-wheeler big daddies to make sharp volume recoveries. But whether the sales spurt has helped Hero Honda, Bajaj Auto and TVS Motor to achieve a similar improvement in profitability remains doubtful.

Over much of the “festival” period under review, the bike manufacturers have been in a race to outdo each other with discounts and this was leading to a dent in their profitability. Not only discounts, but also the rising raw material prices and currency appreciation have pinched the two-wheeler makers hard.

Noting the rise in input costs and declining margins due to discounts, Balaji Jayaraman and Anosh Koppikar at Morgan Stanley said in a recent report that improvement in profitability will lag sales recovery, given commodity headwinds and intense competition.

“Profitability will likely be depressed in the near term,” they said. Also, the ongoing price war between Hero Honda and Bajaj could also prove counter-productive since consumers could postpone purchases in anticipation of a better deal.

“The ongoing price war would also have a severe impact on the residual values of vehicles, resulting in a decline in brand equity of products from both companies.”

Over the past two months, Bajaj has offered the largest —12% discount — on the Platina at Rs 4,000 whereas Hero Honda has attracted customers with a 6% discount on Splendour NXG and CD Deluxe at a little below Rs 2,500.

However, Amit Kasat and Rohan Korde at Motilal Oswal have a different take. Pointing to factors such as lower-than-usual raw material costs in the December quarter, improving product mix , higher DEPB benefit due to the appreciating rupee and increased productivity in manufacturing, Kasat and Korde have said “the scenario is improving for the two-wheeler industry and expect better performance, both on the operating and the volume front for Hero Honda and Bajaj”. The duo has predicted positive Ebitda margins trends for the current quarter.

Bajaj Auto officials say despite its competitive cost structure, the XCD is still a profit-generating model. The Rs 4,000 cut on Platina has largely been done to prop up sales and take on Hero Honda directly, but Bajaj is not too concerned about this since 100cc bikes account for barely 40% of its product portfolio now. The big bucks come from Pulsar, Discover and, to an extent, XCD.

TVS Motor, officials say, has steered clear of the discount game and is happy with a modest tally of 65,000 bikes a month since conserving the bottomline takes priority. The company admits it could have lost a little market share to the Platina (for its Star City) in the process, but is not unduly concerned.

Analysts say it is Hero Honda that is taking a big hit in margins because of the kind of discounting being done on its bread and butter model, Splendor.

With inputs from Murali Gopalan at Mumbai