Two wheelers: Gains are short-lived - Views on News from Equitymaster

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Two wheelers: Gains are short-lived

Mar 9, 2001

The two wheeler majors were pleasantly surprised with an excise duty rate cut from 24% to 16% in the recent budget. Besides the reduction in corporate, individual tax rates and reduction in dividend tax too will have a positive effect on this sector. However, the threat of cheap imports continues to loom large on this sector. The budget has made way for second hand imports at a high basic import duty rate of 105% from April 2001 onwards. However, there has been no change on the basic duty for new vehicle imports which currently stands at 35%. This will result in higher competition especially from China in the two wheeler sector in FY02.

The domestic industry will face threat from cheaper imports. Chinese motorcycle companies have started offering 125 cc bikes for Rs 25,000 - Rs 30,000. This is inclusive of an import duty of 35%, 4% special additional duty and a 16% countervailing duty. Comparatively, the leading Indian motorcycle manufacturers offer their 100 cc motorcycles at around Rs 45,000 plus. China is likely to flood the Indian market in 2002 with atleast a range of 30 to 40 models. Hopefully, the government will impose an anti-dumping duty on vehicle imports like some other Asian countries to counter this.

The only respite for the industry at this point is the fact these Chinese manufacturers do not have a distribution network like Bajaj Auto or Hero Honda, and are hence unable to offer an after sales service to customers.

The reduction in excise duty is bound to have a short term beneficial impact on the two wheeler sector as demand should rise as a result of this measure. Though the budget has been positive for this sector, the sector continues to see a slowdown in sales due to decline in agricultural production in the current year.

In the current financial year, the initial drought like conditions and then the unevenly spread out monsoons, has had a negative impact on agriculture. As a result agricultural sector growth is expected to be less than 1% in FY01. This will have a negative impact on rural demand, which accounts for a large chunk of the total two wheeler demand currently. Besides the gains of reduction in individual tax rates may not provide a boost for increasing consumption as the agricultural sector continues to remain out of the purview of taxation anyway.

Demand of two wheeler companies have reported a slowdown in the last couple of months like other sectors of the automobile sector. Scooters have faced a decline as a result of a change in consumption patterns, however motorcycles too are also now slowing down due to the rural demand conditions.

Feb-01 Feb-00 Jan-01 % change YoY % change MoM
Bajaj Auto 89,000 127,359 89,921 -30% -1%
Hero Honda 87,614 68,043 90,371 29% -3%
TVS Suzuki 63,652 74,114 71,533 -14% -11%
Total 240,266 269,516 251,825 -11% -5%

Higher competition in the domestic motorcycle industry is also going to slowdown the volumes of existing motorcycle manufacturers. Bajaj Auto, LML, TVS Suzuki and Kinetic are planning to come out with new models in the 4 stroke 100 cc segment, which is market leader Hero Honda's forte. Currently there are around 10-12 models in this segment and we could easily see this figure double over the next one year.

As most of the two wheeler manufacturers have passed on the reduction in excise duty to consumers and reduced prices by Rs 2,500 - Rs 3,000 per model, demand in the short term is expected to rise. However the slowdown in agriculture, and cheap imports continues to pull the sector down.

Hopefully the government's positive efforts towards rural infrastructure and agricultural sector will result in higher demand for this sector in the longer term.

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