A thousand rupee price cut did not indicate a price war, said Bajaj Auto managing director Rajiv Bajaj.
Bajaj Auto, in an analyst call, had expressed its intentions to go for aggressive pricing, compromising margins in order to dominate the market, Economic Times had reported.
Stocks of motorcycle makers Hero MotoCorp, Bajaj Auto and TVS Motor dropped to 52-week lows on Monday amid the predictions that a cut-throat price war would be seen in the two-wheeler market.
"We will go after the market with whatever it takes in terms of product, price and promotions," said Rajiv Bajaj, in an exclusive interview with CNBC-TV18.
Watch Here: Rajiv Bajaj clarifies a thousand rupee cut does not indicate price war with Hero MotoCorp Edited Excerpt: Q: The market is worried that you are going hammer and tongs at the entry segment and you are going to sacrifice a lot of margin for that? A: I must say, I am surprised, I don’t know where it is coming from and to begin with, I would say it was all there in our annual report over a month ago and more specifically on Friday, I myself said at the AGM that we will go after the market with whatever it takes in terms of product, price, promotion and people, this is exactly what I said.
It is on the record. So, I don’t know from where it had come down to one dimension of price and perhaps as they say we don’t see things as they are, we see things as we are. So maybe that is how the market thinks, it is not how Bajaj Auto thinks.
Q: How does Bajaj Auto think that you will go after market share but not at the expense of margins? Is that how we should understand it? A: Let me start by saying that what you do with the combination of product and price not one of the other - since March, we have had six interventions in the market, which have helped us to improve our domestic volume and share and of those six, three have been in the commuter space and three have been in the sport segment.
First and foremost, I make the point that year-on-year (Y-o-Y), our commuter growth is 38 percent whereas our sport segment growth is 45 percent. So, I hope the market understands that we have actually grown the more profitable end of our business more than we have the less profitable end of the business.
Q: In the call you did mention that even if the CT 100 volumes increased significantly from the present levels, it would still be margin negative for you, right? A: I was not on that call. But if you like, I can share with you what we have done both on the commuter and the sport segment.
Let us start with the sport segment. Until March, we had just one stock keeping unit (SKU) of the Pulsar 150, which forms the bulk of our sales in that segment. This clocks the sale of about 28,000 a month at a price point of Rs 77,000. The first initiative we put in place was to reprice this down at Rs 74,000 and we did this in response to Honda Motorcycle and Scooter India Pvt. Ltd’s (HMSI) Unicorn which is actually priced at Rs 71,000. The result has been that the volume has remained the same. We are still selling the same 28,000 at the price point of Rs 74,000.
Now, there is no doubt that when you price down by Rs 3,000, you lose about Rs 2,000 worth of EBITDA but I want to tell you how that is more than compensated because the overall volume of the Pulsar 150 has gone up from 28,000 to 50,000 because we have had second initiative in place, the new SKU called the Pulsar 150 Twin Disc, which is now clocking for the last two months, 18,000 a month which is 100 percent increment and this is priced at a higher price of Rs 78,500, which is higher than that of even the TVS Apache at Rs 78,000, which was the highest priced 150 in that segment over there. So, if you can quickly do the math, what it tells you is we may have lost Rs 2,000 of EBITDA per Pulsar 150 but we have gained full EBITDA on another 18,000 numbers of the 150 Twin Disc.
The third initiative we have had is that of an SKU called the Pulsar 150 Classic, which we have introduced at a slightly lower price than the Unicorn at Rs 68,000. Undoubtedly, there is a further sacrifice of EBITDA there but at a 5 percent lower price, I don’t think this qualifies as being called a price war. In fact, a corporate addition like that is not uncommon for any brand.
So the overall story on the sport segment if I can just finish that is the Pulsar EBITDA percentage slightly lower? Yes. Is the volume up? Yes, by70 percent. Is share up? Yes. Is revenue up? Yes. Is absolute EBITDA up? Yes, and I would like to believe this because we have 18,000 of new Pulsars sitting on top.
Q: What about market share, why are you confident that this time the price cuts will work because last time around it didn’t mean? In the month of March you cut prices of the CT 100 but despite that, your peers like Hero Motocorp etc have continued to report 24-25 percent year-on-year (Y-o-Y) growth in Q1. So how are you confident that this time around the price cuts would work because the strategy of the company for many years has been to hold on to 20 percent margins and now the strategy is being changed so that is a bit of a concern that shareholders have? A: We are not changing strategy for the company. As far as the sport segment in the domestic market is concerned, as far as three-wheelers are concerned, exports are concerned, spare parts are concerned - that will remain in the 20 percent plus zone. Where we are growing more aggressively after the market is only in the commuter space. That is one.
Second you said, what about market share? Market share has gone up. It is a fact. We have increased market share by 250-300 basis points. So while others have grown as I just explained a little earlier, we have grown at 45-38 percent, far higher than the market.
Let me now come to the commuter space where there seems to be the greater concern. Now in the commuter space also, as with the sport segment, we have had three initiatives in place since March. The first is our brand called the Platina, which is clocking 35,000 units a month on an average at exactly the same price of Rs 47,000 as Hero’s corresponding model, which is HF Deluxe (ES). Recently, both Hero and us, increased the price on this model I believe around July 1. So there is no price discount on this. In fact, there is a price increase.
The second model is a CT ES, which is priced exactly at the same price as HF KS, which is a kick-start model. It is true that when you sell an electric-start model at the price of a kick-start model of the competition, you are absorbing perhaps around Rs 1,000 worth of cost but whether this is called discounting or this is called the differentiation in the world of marketing, I am not sure but I would only suggest that Rs 1,000 again is not a price war.
The real impetus to our volume at the lower end - at the higher end, it has come from the new Pulsar - at the lower end, it has come from a CT kick-start model at a price of Rs 32,000 and I am very surprised by this reaction to this because this price has been in place for at least 12 months maybe even 24 months. I don’t know exactly, how long. All we have done over here at this price point is to add Rs 300 worth of cost to invest in features that improve the style of these SKUs.
And as a result, the volumes of this SKU has shot up from about 5,000 a month to 50,000 a month. This is proved that people don’t react to price, they react to style for example or to features. As a result, if the sales have moved up and taken us by surprise, from 5,000 to 50,000 by addition of cost, we have already increased the price of this model on July 1 by Rs 500 and we believe we have enough elbow room to increase price because the next model is only at Rs 40,000 as I explained.
Q: In the economy segment what are you targeting in terms of market share because there was a bit of confusion on that as well? Currently the economy segment market share – what does it stand at and how do you hope to grow it over the next one year? A: I do not know as of now what the share was last year but I right now it is pretty much at a high of the last 12 month at least, it is up to about 34 percent for the first quarter and we will certainly like to grow this further and as I have explained, two of our three main brands there are priced on power with competition. There is only one that is priced below and I am sure that we have enough elasticity to move that price. Q: You have made a decision that you exited the scooter segment. I have asked you in the past but is there any rethink on that because Yamaha for example, making really good strides in that market – Fascino and that is a high margin product. Is there any rethink on perhaps making an entry back into that? You still have a lot of goodwill about that segment? A: No. I have said this very often, Hero or TVS or Yamaha who follow Honda into that segment, all miss out on very large chunks of the motorcycle segment which are actually larger in terms of volume per month in the scooter segment.
Yamaha misses out completely for example, on as much as 700,000 motorcycles a month in pursuing 500,000 scooters a month. So I do not see any company that can address all segments, but let me make a point on profitability; there are five other factors which have hurt EBITDA which I think perhaps have not been together given the importance vis-à-vis price.
The first factor has been commodities. I think you will see the impact on that on the results of competition as that rolls out from tomorrow. The second is marketing and sales cost. I think we should see evidence of that as well. The third is, although in the first quarter of this year our three-wheelers grew by 80 percent year-on-year, it is still a lower mix for three-wheelers in this quarter than was in Q4 that needs to be accounted well. Fourth, our exports have really taken off especially to Nigeria and in general to Africa.
These are low EBITDA products, the Boxer and the three-wheelers that we sell over there and about 30 percent of our exports is hedged at 67/USD. So we have not realized 68.5 across the entire export revenue. These things need to be kept in mind and not that we attribute EBITDA being lower entirely to a one product like CT.
Q: What are the margins you make in the commuter segment and how much are you willing to sacrifice margins over there and how much might that impact your overall margins of 20 percent? A: I will not be very specific for obvious reasons but I will say it in two parts. One, these are single digit margins compared to what the make in all other segments of our business.
Second, there is no doubt that on CT and CT alone, we have a negative EBITDA but I would also submit at the same time that without having the ability to verify, there is a negative EBITDA brand or SKU in every car maker, truck maker and two-wheeler maker’s portfolio, there is nothing unusual about that.
Q: Will you still be very sure of your overall 20 percent margins? A: The overall 20 percent has to be recalibrated for the five factors that I mentioned. So that 20 percent in these times of commodities and exports to Africa and the way the rupee behaves for the rest of the year, I am just guessing, would have been 18.5 – that 18.5 should be seen against what we actually delivered in the first quarter. Q: This time in this quarter the domestic realizations fell about 10-11 percent on a quarter-on-quarter basis. Should we expect some more pressure on domestic realisations because of the pricing strategy in the next few quarters? A: I would not have the numbers to be able to immediately respond but I would say this is exactly what I tried to explain about quarter-on-quarter that a part of it is definitely due to higher volume of a particular SKU of the CT in the mix but a part of it is also because the three-wheelers are significantly lower quarter-on-quarter even though they are higher 80 percent year-on-year -- that has to be factored in as also the higher exports to Africa specifically Nigeria. Q: We have seen some examples of failures of product in the past where the brand has tried to attract customers with low prices, for example, if you look at the GM Beat, Tata Nano, doesn’t that tell you something about how the consumers perhaps getting more aspirational and looking at more premium products to buy perhaps and would this be a wrong time to go in for a strategy that you have? A: Let me just run through the list of six again. Starting from the top, the Pulsar 150 Twin Disc is equal to higher price in the Apache. The Pulsar Standard is Rs 2,000 higher than the Honda Motorcycle and Scooter India (HMSI). The Nano was the third of the price of Maruti; there is no comparison. The Platina is at par with Hero’s HF. The CT es is at par with Hero’s HF. We have one SKU at the bottom which is at 32,000 hitch being at 20 percent discount to Hero is certainly at a significant discount but I would only submit. Just as one swallow doesn’t make a summer; one price point doesn’t make a price war.