Hero Honda’s wrong and Bajaj’s right

What is Hero Honda Motors not doing right?

Analysts said while the country’s largest two-wheeler company is losing its share of motorcycle profits and market share, arch rival Bajaj Auto is gaining spoils and, more importantly, profitably.

Has the rift between the Hero Group and Honda Motor Company (HMC) — which led to Honda walking out of the 26-year-old partnership in December — also contributedto Hero Honda’s profitability loss this fiscal?

Pramod Kumar, analyst with JM Financial, points towards lower growth for Passion and relatively lower margins for Passion Pro, besides a higher marketing spend to deduce that Hero Honda’s profit margins have been eroding.

“For Hero Honda, erosion in profit share has been much higher compared to marginal loss in market share. From a high of 74% of total operating profits (cumulative, top 4) in financial year 2009, its share declined to 51% in the nine months of the current fiscal. We expect domestic motorcycle operating margins in the nine months of this fiscal to be about 13% versus 17% peak in the last fiscal,” Kumar said in a note to clients.

The only bright spot, according to him, is that Hero Honda’s market share has improved to 45% from 41% in the lower-margin, entry segment bikes during the first nine months of this fiscal.

The company also continues to dominate the executive segment.
Another analyst, who declined to be identified, said Hero Honda has been unable to match the success of Bajaj Discover.

“In the first nine months of this fiscal, Bajaj’s motorcycle topline has grown by about 30% against Hero Honda’s 15%. True, Hero Honda’s growth is coming on a larger base but then, the rift between Hero and Honda did take a toll last year … I think Hero Honda should be back on the growth path next year,” the analyst said.

The same analyst said that not only is Bajaj growing profitably, even companies such as TVS Motor have done well this fiscal; also, smaller players such as India Yamaha Motor and Suzuki Motorcycle India are also gradually launching more mass products.

However, a third analyst pointed out that Bajaj’s profitability was much better not only because of its improved margins on two-wheelers but also because almost 40% of its revenues accrue from exports, where the margin profile is better, and another 15-20% from 3-wheelers where the margins are robust.

“Yes, Bajaj brands have scored better than Hero Honda because they are newer brands. I have some concern on the split between Hero and Honda, but it is not significant. The split will not alter business for Hero products, it will mean different branding but also a different cost structure. What I want to se is how much R&D Hero is able to do on its own,” he said.

JM’s Kumar wrote that Bajaj has improved sales mix through Pulsar and Discover brands and the company accounted for 41% of cumulative operating profit of the top 4 players in the first nine months of this fiscal, an 11% improvement since financial year 2008.

During this period, revenue share of the company improved by just 1%, while market share declined by 2%.