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Two wheelers: The best bet is...

Mar 31, 2004

On account of availability of cheaper finance, buoyant rural demand and a rapid growth in the number of youngsters clamouring for their first set of wheels, the two wheelers market in India has grown at a CAGR of 10% in the past five years and has emerged as the second biggest market in the world. Moreover, there has been a shift in preferences towards motorcycles and ungeared scooters as these segments have been able to increase their share in the total two-wheelers pie. While motorcycles sales have grown at a CAGR of around 30%, and accounted for 74% of the total two wheeler market in the country in FY03, ungeared scooters have grown at a rate of 22% and accounted for 11% of the total two wheeler market during the same period.

Going forward, it is expected that the motorcycles sales will grow in the region of 15% in the next 2-3 years and push its percentage contribution in the overall two-wheeler pie to 80%. Thus it is clear that the growth and the profitability of a two wheeler company is critically dependent upon its standing in the motorcycles segment of the industry. It is no coincidence that the three largest players in the industry viz. Hero Honda, Bajaj Auto and TVS, are the ones who occupy the top three slots in this segment.

The P/E multiples...
  Face value Current price 9mFY04 (annualised)
Bajaj Auto 10.0 884.0 12.5
Hero Honda 2.0 476.0 13.8
TVS Motors 1.0 84.5 15.1

Therefore if an investor wants to participate in the sector growth story, he perhaps need not look beyond these three players. As far as the valuations are concerned, Hero Honda, the largest motorcycles manufacturer in the country and predominantly a bike manufacturer is trading at a discount to its peers. While the company had a sedate first half of the year, sales picked up post September and the company is likely to close the current year with sales in excess of 2 m units, the first for any auto company in India. Besides despite growing competition in the segment, the company commanded a market share of 44%. While the next 2-3 years are going to be crucial from the industry's point of view, we believe Hero Honda has some upside potential on the basis of its strong product portfolio and access to world-class technology, courtesy its tie up with Honda Motors.

The company's major rivals, Bajaj Auto and TVS Motors are not purely motorbike manufacturers and have products in other segments such as mopeds and scooters as well. Post its split with Suzuki, TVS Motors invested heavily in R&D and came out with a offering called 'Victor' in the executive segment, which met with a favorable response, especially in the Southern markets. Recently, the company has rolled out a new model called 'Centra' and the initial response to it has also been favorable. Besides, the company's offering in the ungeared scooter segment called the 'Scooty' is also doing well and had cornered a market share of 29% in FY03 the ungeared scooter segment. Thus, despite having a third best market share of 19% in motorcycles and presence in non-growth segments like mopeds; the company is trading at a premium to its deep pocketed and bigger rivals like Bajaj Auto and Hero Honda. Optimism could be due to the company's inherent R&D strengths and its growing clout in the ungeared scooter segment.

Bajaj Auto on the other hand trades at a discount to TVS Motors mainly on account of the fact that the company has presence in geared scooters, which is fast waning in popularity owing to emergence of ungeared scooters. Moreover, while TVS launched 'Centra' and thus was able to counter the low volumes growth, Bajaj Auto has failed to meet market expectations, as the volumes have seen a marginal 4% YoY growth in December 2003 and the performance in the next month has also not been encouraging. Although the three-wheeler market, where the company is a market leader is likely to grow at a good pace, in the near term, the risk seem to outweigh the positives.

It should be noted that Bajaj Auto and TVS were late to capitalize on the growth in the motorcycles segment and as a result, Hero Honda walked away with most of the gains. However, of late, new product launches have enabled both the companies to increase their market share and thus narrow down the gap between them and Hero Honda. While Bajaj Auto has increased its market share from 16% in FY00 to 23% in FY03, the same for TVS has improved from 16% in FY02 to 19% in FY03. Meanwhile Hero Honda's share has come down from a peak of 51% in FY01 to 44% in FY03. Therefore, while launch of one model can bring about a perceptible shift in market share, the company that will come out winners is the one that consistently launches cost competitive and fuel-efficient models.

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