Feb 1, 2003|
Two-wheelers: A snapshot
The dynamics of the Indian two-wheeler industry has changed significantly over the last five years. While everyone knows the continuation of shift in demand towards motorcycles from geared scooters, the question is whether the robustness will continue in the future?
The answer to this is a sum of various parts. But before going into the future growth-prospects, a historical perspective is of significance. The two-wheeler industry comprising of motorcycles, geared scooters, ungeared scooters, mopeds and step-thrus has grown at a CAGR of 7.8% over the last six years. In absolute terms, total industry volumes in FY02 were 4.3 m units. As is evident from the graph below, motorcycles have got a lion’s share in a matter of just six years (66% of total two-wheeler sector volumes or 2.9 m units in FY02).
What prompted this change is a combination of various factors. The first is affordability. This comes in two forms. In 1996, the top selling models were Hero Honda’s ‘CD 100’ and ‘Splendor’, ‘Kawasaki Bajaj’ and TVS’s Max-100 R with an average entry-level model starting with prices above Rs 36,000 per unit. But with the advent of competition, this has declined with entry-level of Bajaj’s ‘Boxer’ now available at less than Rs 30,000 per unit. Eventually, the price difference between a ‘boxy’ geared scooter and a ‘sleek-cum-trendier’ motorcycle has narrowed. This has also aided the shift in demand.
Besides, the consistent fall in interest rates has also benefited the industry immensely. In an analyst meet of TVS Motors in mid 2002, the company said that, as much as 40% of its motorcycle sales are financed. It will be safe to assume higher numbers for the industry as well. Just to put things in perspective, in absolute terms, two-wheelers bought through vehicle financing stands at around 1.7 m units.
Secondly, rising double income families and urbanisation have also led the change in consumer preference. For quantification purpose, the NCAER estimate suggests that the consuming class as a percentage of total households in India in FY95 was 29 m (17%). NCAER expects the mix to change considerably with the consuming class expected to touch 91 m households in FY07 (46%). This has also been a driving factor for the industry in the last few years.
Having looked at the historicals, the road ahead in the near term of 1-2 years is going to be tough for all players. Poor monsoon in the first half of the current fiscal is likely to have an impact on agricultural sector. Since demand in the country is largely agriculture sector driven, two-wheeler volume prospects thus, do not look promising. The graph below, which shows the correlation between GDP and the two-wheeler sector, highlights this significance. But over the longer-term horizon of 3-5 years, we remain positive on the sector. Increasing contribution from the services sector, urbanisation, double income families, favorable interest rates and improving road connectivity, which could unlock significant value from the rural markets, will boost volume growth.
We expect the two-wheeler industry to post around 7.8% CAGR growth in volumes over the next five years. Apart from motorcycle segment, ungeared scooter manufacturers will also see a sustained rise in volumes. In the last one year, not even a single new model has been launched targeted at the geared scooter segment. Honda’s launch of ‘Dio’ and Kinetic’s ‘Nova’, are both launches in the ungeared scooter segment. Though Bajaj Auto and TVS expect the decline in geared scooter and moped sales to stabilise in the near future, we however, expect a continuation of the weakening trend going forward.
Which company will benefit in the future? As far as the motorcycle segment is concerned, Hero Honda and Bajaj Auto seem to be well poised to capitalise on the growth opportunity purely due to a wider distribution network and an impressive new model launch. Hero Honda’s legacy of a solid after sales service and brand equity will continue to drive volume growth. TVS’s heavy reliance on few models like ‘Victor’, ‘Fiero’ and ‘Scooty’ for growth and absence of models in the entry level segment would mean a slower growth in its market share in the medium-term. Apart from domestic markets, these three players are also targeting South East Asian markets for future growth. Kawasaki, for instance, has plans to utilise Bajaj’s manufacturing facility in Pune as a global outsourcing base for select markets. This will keep volumes ticking for Bajaj. While we remain positive on volumes for all three companies, barring TVS, operating margins will remain under pressure for the other two.
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