Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Motorcycles: An oversold story? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 15, 2004

    Motorcycles: An oversold story?

    Despite an impressive annual growth rate (compounded) of 14% in the last three years, the prospects of the two-wheeler industry look attractive from a medium to long-term perspective. With a significantly lower penetration as compared to other developing nations and favorable demographics, a growth rate of 12%-14% over a longer-term period cannot be ruled out.

    Since motorcycles account for a huge 78% of all the two-wheelers sold in the country, it is important that one understands the dynamics of the motorcycles market in order to cash in on the industry growth story. In this article we have made an attempt to simplify the same.

    Motorcycles in India can broadly be divided into three different segments viz. the entry-level segment, the executive segment and the premium segment. Let us go through each of the segments briefly.

    Entry level (Rs 27,000-Rs 37,000): This segment, pioneered by Bajaj Auto's 'Boxer', has largely been instrumental in shifting demand from scooters to motorcycles in the two-wheeler space. The models in this segment are priced within sniffing distance of scooters and their fuel efficiency helps them score an edge over the latter. The segment has grown at a healthy CAGR of 22% in the past three years and currently accounts for 33% of all the motorcycles sold in the country.

    As far as the market share of different players is concerned, the leadership has changed hand thrice in the past couple of years. While Bajaj Auto ruled the segment in FY03, the launch of Hero Honda's 'CD Dawn' enabled the company to wrest the top spot from its nearest rival in FY04. However a new variant of 'Boxer' during the current fiscal has led to Bajaj Auto reclaiming the numero uno position. On the economics front, the segment is largely volume driven and virtually operates on wafer thin margins. With volumes already having gained a critical mass, growth is likely to stabilize at around 10% levels. Margins however, might see further erosion with the advent of new models. To summarise, though it is likely to be a growth engine, profitability is purely a function of economies of scale.

    Premium segment (above Rs 45,000): This segment, which has grown at an impressive CAGR of 29% in the past three years, currently forms a small 12% of the overall motorcycles pie. Bajaj Auto's immensely successful 'Pulsar' has largely been instrumental in expanding the market. Courtesy the bike, the company had an imposing 59% market share in the same in FY04 as compared to 43% the year before. Hero Honda, the overall market leader and TVS Motors the other major player have not been able to make significant inroads into this segment.

    Going forward, it is estimated that this segment would turn out to be the fastest growing and is likely to test the mettle of domestic companies. Infact, Honda Motorcycles and Scooters India (HMSI) has already launched its 'Unicorn' and hopes to sell at least 50,000 bikes in the first year, amounting to anywhere around 8%-10% market share. With pressure mounting, it would be interesting to see how the domestic players react to the challenge.

    Executive segment (Rs 38,000-Rs 45,000): Straddling between 'Entry' and 'Premium' segments, the 'Executive' market accounts for more than half of all the motorcycles sold in the country (55% to be precise). It has grown at an impressive CAGR of 35% in the past three years. Backed by its 'Splendor' and 'Passion' range of vehicles, Hero Honda dominates with a near 60% market share. The segment however has proved to be an achilles heel of Bajaj Auto for quite some time now and despite repeated efforts, the company has not been able to create a strong foothold. With such huge volumes, it is only obvious that the maximum number of new launches would be targeted towards this segment (as many as three new models are lined up).

    Apart from segmental nuances, the other thing that has clearly stood out is the fact that the Indian motorcycles market is only going to get more competitive from here. This is likely to exert pressure on players to consistently launch new models and incur large capex towards new capacities and R&D investments. At the same time, marketing and distribution cost is likely to increase. With margins not getting any better, cost control measures and better working capital management will have to be given utmost importance so that companies don't have to resort to external source of financing. Even here, the room for improvement is likely to be limited. Stronger balance sheet and technological superiority would thus hold the key.

    To sum it up, though motorcycles are an exciting growth story, investors have to understand that it may not be necessarily profitable. While companies are gung-ho on the export side, it is believed that margins in exports are lower than the domestic market. The fact of the matter is it is a growth story that is known to everyone and excitement to that extent, need to be toned down.



    Equitymaster requests your view! Post a comment on "Motorcycles: An oversold story?". Click here!


    More Views on News

    Tata Motors Ltd: Another Disappointing Quarter, Management fails to Perform! (Quarterly Results Update - Detailed)

    Aug 14, 2017

    Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.

    Maruti Suzuki Ltd: Bumpy First Quarter. GST dents Margins! (Quarterly Results Update - Detailed)

    Aug 2, 2017

    GST realted cost impacts Margins, Management expects good year ahead.

    Hero Motocorp Ltd: Riding on the Scooters Growth, Maintains Margins! (Quarterly Results Update - Detailed)

    Aug 1, 2017

    Good Recovery in the Scooters market, expects pick up in exports too.

    Bajaj Auto Limited: Recovery in Exports but Domestic Disappoints! (Quarterly Results Update - Detailed)

    Aug 1, 2017

    New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.

    Bajaj Auto Limited: Finishes the Year with Headwinds. Poised for a Recovery Ahead? (Quarterly Results Update - Detailed)

    Jul 6, 2017

    Ends the year on a Flat note. Expects good recovery in the exports market.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)