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This article is more than 2 year old.

Adoption of safety norms would lead to spike in cost for manufacturers, says Rajiv Bajaj

Adoption of safety norms would lead to spike in cost for manufacturers, says Rajiv Bajaj
Rajiv Bajaj is the managing director of Bajaj Auto since 2005. He introduced the Pulsar range of motorcycles credited with reviving the fortunes of the ailing company. Bajaj, 52, said the adoption of safety norms in 2019 and emission norms in 2020 would lead to a spike in cost for manufacturers.
He also said more than reducing Goods and Services Tax (GST) rates, there is a need to improve technology and products.
In an interview to CNBC-TV18, Bajaj also spoke about the recent fall in two-wheeler sales, his company's expectation in 2019, among a wide range of other topics.
Watch the video here:
Edited Excerpts:
Do you think this is what is needed to alleviate what looks like lower demand for two-wheelers?
First of all, I have been listening to your commentary and I would like to make the point that as far as Bajaj Auto is concerned, for the month of December in terms of our domestic motorcycle sales, we have grown at almost 40 percent. The weighted average is closer to what you mentioned because of the lower growth in three-wheelers and exports.
Coming back to what you have just said, my view is that a) I was listening to what you said about currency – two-wheeler makers do not import very much. So I do not see why currency was such a big factor. In fact, for those of us who export, a weaker rupee is a better thing. Secondly, commodities if at all can hit the bottomline, but they do not explain the lack of growth because we have not been able to pass on cost to customers entirely. So that is also not a big issue.
As far as the cut in GST is concerned, I would only make two points. One, as I shared with you when we spoke towards the end of December, even within the domestic motorcycle segment, the sport segment where we lead with the Pulsar has grown by 25 percent whereas the mid segment of the motorcycle has grown by only 3 percent. I do not understand that when the products that we sell in sport segment are 50 percent more expensive than what sells in the mid-segment, commuter segment, what will be achieved by reducing 28 percent to 18 percent. I am not quite sure. So I think the answer lies elsewhere.
Somebody might say that may be the mid-segment is not growing because those consumers are moving to scooters, but I would say even if you put the scooter growth into that, you are going to probably get a single digit growth. So, I think the issue is more of technology and product excitement than anything else.
That is an interesting point you are making that your domestic sales are up 40 percent in December, are you making this point that finally the changes that you were making to the design, to the technology, they are working because initially there was a bit of inertia. I want to compare that to Eicher Motors Royal Enfield and this time there was absolutely no issue with their production. It is clearly a case of demand. So, finally, are you seeing some kind of demand shift?
Every company goes through its own cycle. Definitely the last few months, there has been more stress for companies like Eicher and Hero, the numbers say that, I do not have to say it, whereas somewhere Bajaj has got its strategy right and is growing much stronger year-on-year (YoY).
Coming back to the GST point, you may remember when we last spoke, I did make the point that the cost structure of the industry is going to be a big challenge going forward because we have two very important interventions in terms of norms, one for safety from April 1, 2019 and the other for emission on April 1, 2020. In order to comply with these norms, costs are going to go up significantly. I had indicated that for motorcycles above 125cc, the price increase to customers will be between Rs 4,000 and Rs 10,000 and about a few thousand rupees for the emission related norms next year.
So my suggestion, in fact, I would urge some caution to be exercised when it comes to cutting back on GST because just imagine at a time when demand is soft and the industry has high stocks, if the consumers were to be told today that GST is coming down let us say on March 1 or April 1 by 10 percent, demand will fall by 50 percent I can guarantee you.
The question on pricing, if this is indeed more about consumer choices and preferences changing which is working in Bajaj’s favour right, what about pricing? Do you have price elasticity to carry on these increases and what about competition in the market, how are the competitive trends now playing out?
I would say that there is adequate price elasticity in the market and ultimately it is a market of a million motorcycles a month. So I do not think we should worry too much about a little up and down month-to-month or even quarter-to-quarter. What is important is to keep providing the excitement in terms of new technology, new products.
The two wheelers as we sell in India, the smaller cc vehicle from 100-250cc are definitely not luxury items at least in my own personal view. Therefore, again 28 percent to 18 percent in that sense is logical. However, I would urge that it should be linked either to the safety norms of April 1 this year or the emission norms of April 1 next year so that then consumers have an incentive to buy a ‘superior’ product which is better for safety and the environment and thus cost increase of those products is then more or less going to be offset by this sop or subsidy if we can call it that. So that would be then perfect. So that is what I would say.
How serious is the demand issue at all because there is slightly slower growth even in your case, but for the others, it is a steep contraction, even for Eicher. So is there a demand issue in the market?
The short answer is yes. The longer answer would be we should see it in two parts. One, manufacturers, and I would say we did not make that mistake thankfully, manufacturers did step up production quite a bit in anticipation of the festive season which did not pan out as it should have. So, part of this as Goenka (Pawan Goenka, managing director, M&M) was also explaining in the morning on your channel is definitely inventory correction. However, part of it is definitely a softness in retail. I do not think there is any significant growth right now in the market Y-o-Y.
Could some part of this softness be ascribed to perhaps a hope that at some point there would be some kind of GST cut and perhaps postponing the purchases a bit, could there be some pent-up demand in the system and I am just saying that now that we are in January and the interim budget would happen February?
I don’t think so because I don’t think consumers have such a clear signal from elsewhere. Also, we can see that till this whole business of IL&FS happen, the trajectory of the industry was very different. Secondly, in more specific terms what you can see or rather my understanding from market data that I have is the most affected two-wheeler company is Honda Motorcycle and Scooter India (HMSI), it is not Eicher Motors or Hero Motocorp. I think you will get HMSI numbers closer to 320,000 for domestic, which is way below the more than 500,000 that they used to do.
I think the reason is two-fold. One - the credit squeeze affects them more than anyone else because they don’t give credit to their dealers. The dealers have to get it from banks. Unlike in the case of Hero, Bajaj or TVS where we do extend working capital credit to dealers. The second is HMSI, unlike any of us, does not have its own captive financing arm. So credit squeeze has hit them the hardest. So I think it is basically about liquidity or credit squeeze in the market place.
Is that easing out – I am just coming back to trends, since you were sounding very confident even on December. January, February onwards what is the realistic number that we can expect? The magic figure of 5 lakhs that you guys hit in September-October, is there such elasticity that you will perhaps get back to those numbers in February-March?
Yes, I watched Rakesh (Rakesh Sharma, executive director, Bajaj Auto) squirm when you asked him that. I will tell you, like he said, we have been more than 400,000 all year and 500,000 only for the two obvious months. I can share with you our plan for January is about 415,000 or 420,000 so a little above 400,000 – we are seeing good demand for exports about 170,000. In domestic motorcycles, we see further growth because our brands and our products are doing well right now.
So for us, to be in excess of 400,000 is a reality to inch towards 450,000, I would say, is not too far-fetched but yes 500,000 as Rakesh explained maybe a few months down in the calendar year 2019.
To sum up, what you are saying, there could be a case for cutting the GST for the entry level segment but probably well telescoped and dove-tailed to safety and BS-VI norms, that would be a better way to introduce lower GST?
I absolutely agree. Don’t do it wrong is what I would say to the government.
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