By Deepti Chaudhary| Oct 18, 2016
Pankaj Munjal is dreaming big and taking the world's largest bicycle maker, Hero Cycles, into areas that it has never ventured into
It’s a little over a year since Pankaj Munjal became the chairman of the OP Munjal Group and its flagship company, Hero Cycles, is already making smart moves and showing promising results. The world’s largest bicycle maker by volumes sold over 1.2 million units in the first quarter of this financial year. That apart, it made three acquisitions to strengthen its brand positioning in India as well as its global reach.
In March 2016, it acquired a 60 percent stake in BSH Ventures, a Sri Lankan bicycle maker. Prior to that, in September 2015, it took over Firefox Bikes for Rs 150 crore to fortify its position in India’s premium cycling space. This came on the back of its August 2015 acquisition of a majority stake in UK-based Avocet Sports to enter the high-end bicycle market of Europe—its first overseas acquisition. Hero Cycles plans to close three more acquisitions this year.
In another significant move, the group engaged with consulting firm Boston Consulting Group (BCG) to chalk out an aggressive growth strategy, which includes investments in its hospitality arm and acquisitions of established brands to enter new, global markets. The group will also launch a new vehicle for urban mobility this year.
Besides Hero Cycles, the OP Munjal Group has an auto parts manufacturing business under Hero Motors Ltd, ZF Hero Chassis Systems Pvt Ltd and Munjal Kiriu Industries Pvt Ltd; a hospitality arm, Munjal Hospitality Pvt Ltd, and a luxury home decor brand Oma.
The group had a topline of Rs 2,591 crore for the year ended March 31, 2016, and is eyeing revenues of Rs 8,000 crore by 2019 with investments of Rs 1,000 crore across its various businesses. Munjal, 53, tells Forbes India that he is visibly excited about the growth prospects of Hero Cycles given India’s and the world’s love for cycles. Edited excerpts:
Q. What makes you bullish about the cycles business?
There are four social issues that concern all of us today: Congestion on roads, India being the diabetes capital of the world, burning fossil fuels and [degradation of] the environment. Bicycles eliminate all four problems. Stockholm, for instance, has become a car-free city. Cars are not efficient for going from point A to B; you burn fuel, you occupy space and the vehicle emits carbon monoxide. Urban mobility is going to see a change. The way we have known cycles and their shapes are constantly evolving. We have cycles ranging from Rs 3,000 to Rs 4 lakh. We have grown by 23 percent in the last quarter and it’s not on a small base. The market saw a growth rate of 7 percent.
Q. How are you breaking into rural markets where many people cannot afford a cycle?
A few years ago, we had to go to a village from Azamgarh, Uttar Pradesh. We had to get off the car because there were no motorable roads. There, we met a man who used to milk cows and sell the milk; his wife would knit and sell yarn. That’s how life was for the 1,000 people living in the village. There was no cinema hall, no paanwala, no cycle repair shop. This is the Bharat that’s untapped. There are 400 million people who cannot afford a bicycle [in the country]. But last year, we sold 1 lakh bicycles [in such rural markets] and we expect to sell 1 million (10 lakh) of them this year. The growth rate from zero to 1 lakh is huge, but it’s even steeper from 1 lakh to 1 million.
We approached microfinance institutions (MFIs), but they said it’s unviable for them to follow up on a Rs 3,000 loan. The processing fee for a Rs 5 lakh loan is the same, but the EMIs for the two are different. So, these MFIs have started bundling products. A villager buys a solar torch, his wife a sewing machine, and a cycle apart from that… so the bundling would be a loan of Rs 15,000. The business is very lucrative now and our rural penetration is rock solid. We are moving Bharat… we are moving the bottom of the pyramid.
__PAGEBREAK__Q. Tell us about your urban and global market strategies. How is BCG helping you?
On a Saturday or Sunday morning, you can now see cyclists on the roads of Gurugram or Delhi. This wasn’t the case two years ago. They are riding cycles worth Rs 50,000. Their clothes are worth Rs 20,000. The clothes and shoes have to match… it’s a fashion statement. Cycling is a fashion statement. They say they are getting fitter… over the last year, I have lost 10 kg due to cycling. It’s health, it’s passion… what is happening to this industry is growth. That’s the domestic part of the business.
Then we looked at the world market, a $50 billion market. We are a market leader, we have the brand, we have the cost leadership, and we have technology leadership. Why should we not be a part of the $50 billion market and take 5 percent of this pie? Why can’t we aspire to be a Rs 25,000 crore company? So we hired BCG and they have been working with us for a year now.
The group is doing an expansion of about Rs 1,000 crore. Of this, Rs 550 crore goes into Munjal Hospitality—a Rs 3,000 crore asset —and another Rs 400-450 crore into the bicycle, bicycle components and auto components businesses. With these investments, the OP Munjal Group should touch revenues of about Rs 8,000 crore by 2019.
BCG has drawn a very scientific plan for us—which market to target? Which country to go to? We were very weak in the high-end segment, so we bought Firefox and got a 70 percent market share in the category. As a result, Hero’s perception became that of a tech savvy, customer-oriented brand. We were not present in the UK, so we picked up a majority [51 percent] stake in Avocet Sports; we kept the entrepreneurship English and the ownership Hero’s. We started supplying to them and last month, they did peak sales of 10,000 bicycles, their highest ever. They were buying from Sri Lanka’s BSH Ventures, so we acquired 60 percent of that company. Today, Hero owns the entire supply chain; we make components in India and assemble them in Sri Lanka.
Q. How does owning the entire supply chain help?
We have plants in Ludhiana, Ghaziabad, Patna and Sri Lanka, and will soon have an asset in Eastern Europe [he declined to disclose details, saying it will be an acquisition]. You cannot make a Porsche in a Skoda factory. Hence, all our factories are brand-specific. You cannot manufacture a Rs 3,000 cycle and a Rs 15,000 cycle in the same factory. It requires a different ecosystem. With BSH, we supply to the UK, and at the Europe plant, we sell high-end cycles. In the last 2-3 years, we created the back-end, now it is about growth for us. We are acquiring brands in Europe, in each geography [within the continent]. We are gunning for growth at the front-end.
Q. Are acquisitions your main strategy for entering new markets?
Acquisitions will play an important role in our growth strategy. Nurturing a new brand can take a lot of time, but if you acquire an already-established brand, it gives you market access right away. For example, with Avocet, we are already the fifth largest player in the UK. From the outside, Europe looks like one homogenous region, but countries are brand specific. Bicycle brand Orbea has a 70 percent market share in Spain, but it’s negligible in Germany. German brand STEVENS Bikes doesn’t sell in Italy. In Europe, country-specific brands are deep. We want to go deep in all these countries. Currently, our revenue share from overseas is only about 20 percent, but by 2018, we expect it to touch 60 percent. We are getting into the top-end segment and competing with global giants. Our automotive experience helps us in this. We supply to the likes of Suzuki, Honda, Toyota and the best practices that we have there are being replicated in our bicycle units.
__PAGEBREAK__Q. How do you look at competition? What gives you the edge over others?
We don’t see much competition in India. Our competition is with global [bicycle] giants such as SCOTT Sports, Cannondale and Trek. We are mapping them on pricing; we want to see what they are offering. Competition is tough for us. They have a legacy. And we don’t have the time, so we will buy time by acquiring a brand with a legacy. If we acquire a brand in Europe, B2C [business to customer] is the same. It doesn’t matter to the customer who is making the component. Our acquisition strategy is very simple: We will put the money, offer a sound supply chain, but the genetic code of the company, the DNA, and the face remains the same.
Q. Do you see consumer behaviour evolving?
The consumer is becoming very knowledgeable. If one buys a Rs 20,000 or Rs 30,000 bicycle, they want to know what alloy was used and the gear shifting options that are available. To maintain that level of proficiency, we need superb manufacturing capabilities. Today, components like gear shifters and front forks are strong IPRs (intellectual property rights) and are sold by brands. People now demand things. People are paying a lot for a bicycle because it’s personalised; it’s like a watch, it’s like jewellery for them.
Q. Is India a saturated market for cycle manufacturers?
India can never be saturated. There are 400 million people who cannot afford a bicycle. Companies in North America are looking at India. There cannot be any saturation in the rural market. Last year, rural markets contributed about Rs 40 crore [to our revenues]; this year, they will give us sales of about Rs 400 crore. In urban markets, if you go to Dwarka or Noida, there are cycle tracks coming up. You will find that car density is going down. If you have to go to work 5 km away, you prefer to cycle. We have noted that 30 percent of motorcycles sold are used for travelling distances between 5 km and 15 km. That’s my target customer base. We want to ask them, why a motorcycle? Become fitter, it will save your gym membership fees. The government is also supportive and every smart city has a cycling track. We are in talks with four MFIs and one is already on board to extend loans that bundle many products, including Hero cycles.
Q. How important is the auto components and OEM (original equipment manufacturer) business?
Hero Motors specialises in gears and transmission assemblies and over 90 percent of production is OEM exports, primarily to Bombardier, Rotax and BMW. We make transmission for BMW in Berlin. We have a warehouse in Berlin and we supply to them. This is a 10-year-old business and growing steadily. About 70 percent of all BMW motorcycles built in Germany have some component of Hero. Ducati is a new client. Munjal Kiriu is a six-year-old business and 60 percent of Suzuki cars have Kiriu components.
With ZF Hero Chassis Systems, we have clients like BMW and Audi. These are rapidly growing businesses. These are safety components with strong IPRs and no competition. I expect one factory to come up every year for these ventures. We are looking at acquiring an English firm and a German company for these pillars.
Q. What can your customers expect from you next?
We will surprise our customers very soon. We have expertise from cycles to larger vehicles. It is too early to reveal our plans. One thing that is clear to us is that it will not be an internal combustion engine. It will be electric. It is about urban mobility, difficult to pinpoint right now. I cannot divulge if it will be a two wheeler.