Two-wheelers: 1HFY05, a rear mirror gaze… - Views on News from Equitymaster

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Two-wheelers: 1HFY05, a rear mirror gaze…

Oct 6, 2004

1HFY05 seems to have turned out to be another good period for the two-wheeler industry with most of the company carving out good numbers on the back of robust economic growth and continuity of low interest regime. Against this backdrop, let’s have a look at the sales performance of the three leading two-wheeler companies and try and analyse what would be the shape of things to come.

 1HFY041HFY05% change
Hero Honda
Motorcycles 905,243 1,223,919 35.2%
Bajaj Auto
Motorcycles 490,663 612,211 24.8%
Total 2-wheelers 622,989 699,659 12.3%
3- wheelers 105,229 118,759 12.9%
Bajaj Total 728,218 818,418 12.4%
TVS Motors
Motorcycles 363,127 299,370 -17.6%
Scooters 93,513 119,059 27.3%
Mopeds 121,271 130,004 7.2%
TVS Total 577,911 548,433 -5.1%

Hero Honda:  The country’s largest two-wheeler manufacturer has continued to outperform its rivals with a strong 35% growth in volumes during the first half of the current fiscal. With its strong presence in rural India, the company seems to have benefited from good monsoons in FY03 as income in the hands of rural populace usually comes with a lag effect. Moreover, with no significant new launches by rivals in the executive segment, a segment where the company derives majority of its revenues from, its offerings in the segment have continued to notch up high volumes.

As far as the company’s prospect over the rest of the year is concerned, we would like to exercise caution, mainly on the basis of two factors. First, while the competition has lined up new launches in the executive segment, the company’s own new offering is only going to be launched towards the fag end of the year, thus increasing the risk of a market share loss. Secondly, sales in the second half of FY04 accounted for 56% of the total sales in FY04 thus making it difficult for the company to grow at a similar rate during the last two quarters of the current year as a higher base effect continues to set in. Moreover, with the company offering discounts on its models, margins are also under pressure owing to increased marketing expenses. To put in a nutshell, tough times lie ahead for the company.

Bajaj Auto:  India’s second largest two-wheeler manufacturer has witnessed a 12% YoY growth in sales of two-wheelers while the three-wheeler volumes have jumped 13% during the same period. Motorcycles volumes have witnessed a strong growth of 25% led primarily by ‘Boxer CT100’ its offering in the entry segment. The bike, which was launched earlier this year, has been a good success story and has managed to edge past rival Hero Honda and re-claim the number one spot in the segment. Meanwhile, ‘Discover’, its new offering in the executive segment, has also been rolled out and if the initial response is any indication, the growth in volumes might be even higher from here.

Other two-wheeler segments however, have continued to be a drag on the overall two-wheeler volumes and on account of 33% YoY drop in volumes have restricted the total two-wheeler sales growth to 12%. While the company hopes to stem the tide with a launch in the ungeared scooter segment, we believe that it will still be some time before the segment starts making a positive contribution to the company’s profitability. On the three-wheeler segment front, the company has managed to carve out a significant 13% YoY growth in volumes, led in part by a new launch in the goods carrier segment.

TVS Motor:  The country’s third largest two-wheeler manufacturer has once again failed to impress as overall two-wheeler volumes have continued to fall (down 5% during the first half of the current fiscal). Motorcycles segment have been the worst hit (18% decline in volumes). The weakness could be attributed to the company’s larger dependence on a single market and absence of a truly successful pan Indian model. After the success of ‘Victor’, the company has not been able to do a repeat act and this has hurt its performance. Moreover, its product portfolio was tilted towards two-stroke bikes, which is falling out of favor.

Its other two-wheelers, namely scooters and mopeds, have managed to record positive growth rates with the former growing by an impressive 27%. As far as the future prospects are concerned, the company has lined up a slew of launches, mostly in the motorcycles segment and given the smaller size of its balance sheet as compared to rivals, the risk of failure is on the higher side.

Having looked at the performance of the three major companies, we believe that while growth in volumes will not be a problem, it is the intensifying competition that needs to be seriously looked into. With demographics stacked increasingly in favor of high growth, it has whetted the appetite of global majors like Honda and Suzuki. Already, Honda has taken the leadership honours in the scooters segment and is vying to do a repeat act in the motorcycles segment. Competing against such heavyweights would require frequent new launches and contemporary models, which would mean greater investments and shorter product life cycles. Thus, while margins are likely to be affected, pay-offs would not be a certainty. Overall, risks seem to outweigh return.

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