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In conversation with the owner of Hero cycles - The cycle king

Pankaj Munjal is the world’s largest maker of cycles and supplies gearboxes for BMW bikes. Bhupesh Bhandari & Sharmistha Mukherjee meet the lesser known Munjal.

Every Sunday morning, Pankaj Munjal packs his sporty Hero cycle in the trunk of his BMW and heads for Rashtrapati Bhawan. A group of friends, all cycling enthusiasts, awaits him outside the sandstone palace which was originally built to house the Viceroy. Once there, Munjal hands over his mobile phone to the driver, and along with his group cycles down Raisina Hill at a brisk speed on the broad road up to India Gate. At the police barricade about 100 metres short of the monument, they turn around and cycle up the hill back to Rashtrapati Bhawan. Fifteen trips later, after covering almost 20 km and burning hundreds of calories, the group breaks and Munjal heads home.

The ritual is about fitness. This is also when Munjal bonds with his son whenever he is on vacation from the United States of America where he is studying. And it is a way for Munjal to live his business. His company, Hero Cycles, is the world’s largest cycle producer — it makes 5.6 million cycles every year. Legend has it that a Chinese cycle maker denied patriarch O P Munjal entry into his factory some ten years ago because he feared him.

The cycle business has made Munjal fabulously rich. Look at the worth of closely-held Hero Cycles. On every cycle, the company makes a profit of Rs 400. Over 5.6 million cycles, that’s an annual profit of Rs 224 crore. With the components business and other income, the net profit adds up to Rs 400 crore. With a price-earnings multiple of 20 (not unreasonable for an undisputed market leader), the company’s valuation comes to Rs 8,000 crore. As Munjal owns the company fully, this is good enough to catapult him to a respectable position on any list of billionaires. In addition, Munjal supplies gearboxes to BMW for its performance bikes, is the largest maker of disc brakes for cars, owns high-end retail chain Oma, and is setting up a luxury hotel in Gurgaon for denied Rs 1,000 crore. He had bought land from Punjab National Bank for Rs 400 crore in an auction and has tied up with Marriott to set up India’s first Edition.

Meet the other Munjal, the cousin of Pawan Kant and Sunil of Hero Motocorp: lesser known and low-profile but big in business.

The Munjals, who hail from Ludhiana in Punjab, were one big family till last year with every branch owning shares in all companies, though the managerial responsibilities were divided. Then the family elders got together and sorted out the shareholding also. “It couldn’t have been more amicable,” says Munjal as we lunch at his Auma restaurant in a south Delhi luxury mall. “Somebody would say you take so much. The other person would fold his hands and say ‘I don’t deserve so much’. That’s how it was done.” The restaurant has an open kitchen and offers Italian, Thai and Continental fare. We are seated in low chairs on a table outside. The chef, brought over from The Imperial, Delhi’s most high-brow hotel, offers to put together a special ensemble for us — a mix of European and Thai cuisine. Munjal is dressed in casuals. There’s a Harry Winston store next to Auma and Porsche Design bang opposite. Louis Vuitton is downstairs.

In spite of the parting of ways, Munjal says he calls his uncle, Hero Motocorp Chairman Brij Mohan Lall, at least twice a day for guidance. And he still picks people freely from companies that belong to his uncle and cousins. The same team at JWT handles the Hero Motocorp and Hero Cycles accounts. Their advertising budgets of Rs 200 crore and Rs 60 crore, respectively, are clubbed together to get the best rates from the media. And the two companies share a lot of the dealers. “Many dealers of Hero Cycles dream of becoming a Hero Motocorp dealer one day,” says he. In fact, dealers have been the core strength of the Munjals. Brij Mohan Lall, for instance, is on first-name terms with every dealer of Hero Motocorp. It’s no different at Hero Cycles. Munjal screens each application for dealership and interviews the applicant. “I look at the proposed location,” says he. “The man should smile and be resilient because there will always be problems.” In a city like Bangalore, Munjal says, it takes an investment of Rs 50 lakh to become a Hero Cycles dealer, and “the return on investment is excellent”.

On another day, in the banquet hall of a Noida hotel, Munjal can be seen encouraging his dealers to go all out to sell the new range of Urban Trail cycles (these cost from Rs 40,000 to Rs 150,000; the frame of one of these weighs as little as 2 kg). This time he is dressed in a business suit and meets all dealers personally. Loud cheers (hip, hip hurray) can be heard from a distance. Munjal is more than half an hour late for the interview, but this is a ritual he cannot cut short. He wants to sell up to 100,000 Urban Trail cycles by September. The dealers hold the key. Next month, he is flying 1,800 of his dealers and their spouse to Dubai on a three-day junket. Three jets are being chartered.

Cycles are a low-tech business. Indians buy over 10 million cycles every year. Most of these are very basic black machines. Munjal is aware of the need to move up the value chain. A partnership (most probably with a foreign company) for cycle technology is in the works, the Hero brand has been given a complete makeover by JWT, and Urban Trail will be sold in Europe and America. Munjal has set up a company in Denver to market his cycles there. Kevin Lamar, president of Schwinn, the oldest cycle company in the US, runs that office. “I have manufacturing competence, cost leadership and automotive experience. We will manufacturing here and have [a] marketing [team] and warehouses in the US,” says Munjal.

For the bread-and-butter black cycles, Munjal is eyeing Africa — countries like Mozambique, Nigeria, Algeria, Kenya and Tunisia — and will set up a small factory there. But the main market will remain India. Large orders come from state governments which give free cycles to young girls and boys. These orders now constitute over 10 per cent of the market. The beauty of such freebies is that they cannot be rolled back for electoral reasons. But Munjal says there is enough evidence to suggest that the ownership of a cycle improves household income and employability of people, and brings down the crime rate, especially amongst school-going girls. Such is the magnitude of orders that Munjal was contemplating a factory in Bihar — one of the first states to start the scheme. “We sell about 4,000 cycles there every day,” says he. “That is why we were looking at setting up a factory there. But we are not even able to get land. We wanted something in the vicinity of Patna, but the land we are getting is very remote.”

Munjal is irked by the taxes on cycles — these add up to 12 per cent of the cost — and the unwillingness of banks to give loans to buy cycles. He has met Finance Minister Pranab Mukherjee and asked him to reduce the taxes, which will make cycles more affordable. “Half of India walks 10 km to buy basic provisions. They don’t have a voice. I met Mukherjee recently and asked him to give the common man mobility. It’s your national duty,” says he. Munjal has also tied up with microfinance institutions in Azamgarh and Banaras in eastern Uttar Pradesh so that villagers can buy cycles on installments of Rs 100 a week.

Some engagement could also happen with urban consumers who want high-end cycles. Munjal knows all the top cycling enthusiasts in the country: PepsiCo and Adidas honchos, film star Anil Kapoor (his make-up van follows him all over the place), Madhya Pradesh principal secretary (industries) Satya Prakash et al. The most famous of them all, Robert Vadra, is yet to buy a Hero cycle, though he is a friend of Munjal. Still, Munjal is aiming high. “We are very ambitious. In the bicycle business we will go up from 5.6 million a year to 10 million units a year by 2015,” says he. “What fascinates us in bicycles is the 130-million global market. This market is valued at $31 billion. Hero Cycles aspires for a share of this.”

The other stuff Munjal does is no less interesting: gear boxes for BMW, for example. BMW has actually placed the order with Canadian company Bombardier Recreational Products which, in turn, has decided to source it from Munjal’s Hero Motors. India exports equipment worth $5 billion every year; so what’s the big deal about the BMW order? Till now, the exports from India have been at the bottom end of the spectrum — low-tech products, in which labour is the primary cost. Never before has an Indian company sold a gear box in mature markets. The gear box is crucial to the functioning of an automobile. So, most automobile makers like to do it inhouse. According to Munjal, his men had been working on the gear box for almost seven years. For him, this order could be a springboard for even bigger things. The 1,300 cc and 1,400 cc gear boxes that will be sold to BMW, are not very different from the ones used in cars in India.

With BMW’s seal of approval it won’t be difficult to sell similar transmission equipment to car-makers in India. Munjal feels Hero Motors has the wherewithal to produce the transmission equipment that is used by up to 85 per cent of the cars that get sold in India — a large market indeed.

“Its manufacturing engineering that I excel in,” says Munjal. “The challenge I face is new product development.” At the moment, most of the research and development into automobile components is happening in Germany. So Munjal is looking at a design company in Germany. “New product development will happen there; that has to be local. The supply chain will be fed from India. That will take my gears business to the next level. We have allocated Rs 100 crore for an acquisition.”

Munjal also wants to come out with environment-friendly two-wheelers that run on alternate energy, such as electric bikes. Munjal has tried his hand at mopeds and step-thrus with Majestic, at scooters with Aprilia and at motorcycles with BMW. The mopeds got devoured by inexpensive motorcycles, while the scooters and motorcycles failed to take off. Whatever Munjal does, he will need a clearly differentiated strategy.

At the moment, the focus is on cycles. Hero Cycles’ main plant is in Ludhiana. Isn’t commuting from Delhi by road or rail cumbersome? “I am meeting somebody at 4:30 [pm] to buy a Cessna aircraft,” Munjal says. The watch says it is 2:00 pm right now.