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Two – wheelers: Riding strong - Views on News from Equitymaster
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Two – wheelers: Riding strong
Sep 2, 2005

The Indian two-wheeler industry has witnessed good times in the first four months of the current fiscal. This has been when other segments in the auto industry have registered a mixed performance. To put things in perspective, while the medium and heavy commercial vehicles (M&HCV) segment registered an 18% YoY decline, the domestic demand for passenger cars grew by a mere 3% YoY. In this backdrop, a 13% YoY growth in volumes of two-wheelers is decent. In this article, we analyse the reasons for this performance by the two-wheeler industry and how have the leaders performed here. Before we go ahead, kindly note that since Hero Honda, Bajaj Auto and TVS Motor together account for more than 90% of the volumes sold and more than 100% of the profits of the two-wheeler sector (some others being loss-making), we have considered only these companies in this article.

The demand drivers
While the industry has grown by 13% YoY in the April to July 2005 period, the combined volume sales of these three players have increased by 19% YoY. This has resulted in an increase in the market share of these three players from 92% in FY05 to 94% currently. What has led to the demand growth? Some of the key reasons are as follows:

  • Improving demographic profile with greater populace in the age group 15 years to 34 years

  • Increase in the target household i.e. those households having a total income above Rs 40,000 per annum

  • Improving road connectivity and thus the penetration consequently leading to greater mobility

  • Average cost of commuting by a two-wheeler is significantly lower as compared to public transport

Dissecting the sector

Sectoral picture
  Apr-Jul04 Apr-Jul05
Motorcyles 86.2% 88.4%
Geared scooter 2.4% 1.3%
Ungeared scooters 5.6% 5.3%
Mopeds 5.8% 4.9%
  100.0% 100.0%
The demand for two wheelers has been driven by a 22% YoY growth in motorcycles followed by a 13% YoY increase in un-geared scooter sales. The decline in the sales of mopeds (marginal fall) and geared scooters (down 35% YoY) continued, which restricted the consolidated growth of the three players to 19% YoY. This led to the share of the former two segments increasing in the two-wheeler segment matrix (see table below).

How the leaders have performed?
Of the three players, Bajaj has been the star performer in the period under consideration. The company achieved an impressive 42% YoY increase in its motorcycle sales, as compared to 20% YoY and 12% YoY growth of TVS and Hero Honda respectively. It should noted that the month of July 2005 is not strictly comparable with July 2004 due to flood like situation in Maharashtra and Gujarat, as this has affected all the three companies (in different ways) thereby negatively affecting the overall performance (see chart below).

Even in the ungeared scooter segment, Bajaj has comprehensively outperformed the industry and its peers (TVS). However, one should note that the performance has been on a low base as the company had been losing market share in the scooters segment during the last three years. This was due to a conscious shift in the strategy of the company to concentrate on the motorcycles segment. Recently, Bajaj launched ‘Wave’ in the ungeared scooter segment, which has enabled the company to achieve significant YoY growth.

What is in store?
Going forward, in the motorcycles segment, we expect the YoY growth of Bajaj to slow down due to the high base effect of last year (from September 2004 onwards). As far as TVS is concerned, we feel that the company can surprise the markets by reporting good numbers after an elongated period of struggle in maintaining its market share. We expect the performance of Hero Honda to be relatively weak primarily due to the high base effect and lack of new models (except for re-modeling of its existing offerings). In the ungeared scooter segment, we expect TVS to continue its leadership position, as it is the only significant player in the 100cc scooters segment. Having said that, we expect Bajaj to increase its share in this segment as the management has realised that ungeared scooters can be the next growth driver.

Considering all of the above and converting it into numbers, while Bajaj Auto (Rs 1,481) is trading at a price to earnings multiple of 13.1 times our estimated FY08 earnings (P/CF of 11x), Hero Honda (Rs 680) and TVS Motor (Rs 82) are trading at P/E multiples of 12.2x and 8.9x respectively (P/CF of 10.5x and 5.6x respectively).

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