Analysts expressed concerns that Bajaj Auto’s strategy to gain a more significant share of the low-cost two-wheeler market would heighten competition and hurt the profit margins of both companies.
A possible price war between Bajaj Auto and Hero MotoCorp sent their stocks sharply lower on Monday. Analysts expressed concerns that Bajaj Auto’s strategy to gain a more significant share of the low-cost two-wheeler market would heighten competition and hurt the profit margins of both companies.
“With Bajaj indicating an intention to gain market share in domestic two-wheelers, including in low margin products and through aggressive pricing, margins will remain under pressure. The volume gains are unlikely to sustain either, in the long run in our view,” analysts at Jefferies observed.
Hero MotoCorp is scheduled to announce quarterly earnings for Q1FY19 on July 25.
Bajaj Auto told analysts on the post-results earnings call that it aims to increase its market share in 100 cc bikes segment from 35% to about 45-50%.
The Pune-headquartered motorcycle manufacturer said it would be taking an aggressive stance on price points to gain market share and that this strategy would be pursued for the next several quarters.
Bajaj’s popular models in the entry segment include CT100, Platina and Discover 110; these motorcycles are all priced within a range of Rs 33,000-52,000. Hero’s popular models in this segment are HF Dawn, Splendour and Passion Pro and are priced between Rs 37,000-52,000.
Bajaj Auto posted a net profit of Rs 1,115 crore in Q1FY19 against a Bloomberg consensus estimate of Rs 1,249 crore. Analysts at Jefferies wrote the company had disappointed the street in Q1FY19 as realisations were 4% below estimate and Ebitda margin missed the estimate by 150 basis points. The company posted an Ebitda margin of 17.3% in Q1FY19. “The entry segment accounted for 65% of the higher year-on-year volume in Q1FY19, helped by aggressive discounting which raises questions on sustainability and quality of growth, analysts observed.
HeroMotoCorp’s operating margins rose to 16% in Q4FY18 from 13.8% in Q4FY18. The management indicated after the results it would try to maintain gross margins in FY19 by taking adequate price increases to compensate for a hike in commodity costs. The company makes both scooters and motorcycles.
Analysts at Kotak Institutional Equities had noted that Ebitda margins would remain stable over the next two years because price increases and cost control will help offset the impact of higher commodity prices and increase in competitive intensity.
Bajaj Auto’s shares dropped 5.35% ending Monday’s session at Rs 2,689.10. Hero MotoCorp’s shares fell by a sharper 6.20% and ended the session at Rs 3,163.90. Although consumer demand is seen to be fairly strong, even in rural India, the Bajaj Auto stock has given up 19.08% since January while Hero Motocorp has lost 16.4%.
Analysts at Motilal Oswal were concerned at the change in Bajaj’s strategy. “Typically Bajaj has been more focussed on profitability but now there is a shift in the strategy. Investors are concerned about how this strategy will pan out,” they observed.
AK Prabhakar, head of research at IDBI Capital, said Bajaj Auto’s aggressive pricing stance would hurt Hero Motors which is the market leader lower price segment. “If Bajaj Auto wants to gain in that segment that could result in a price war. So margins for both the companies will shrink. Hero’s stock has corrected because of this fear amongst investors.”
SUNDAR SETHURAMAN & ARUN NAYAL