Nov 9, 2002|
Two-wheelers: Round two
Two-wheeler stocks have been in the thick of activity off late. Despite impressive volume growth, stocks have been volatile. While volume growth has been robust over the last five years, markets are now concerned with competition and thus pressure on operating margins. Is it because industry has saturated or such concerns are short-term in nature?
The answer is the latter one. Growth potential for the Indian two-wheeler industry is enormous if one considers the penetration levels and demographics of Indian population. A study on Indian households by The National Council for Applied Economic Research (NCAER) underpins the latent potential for growth. It was estimated that of the total households in India in FY95, 17% belonged to the consuming class, the key target segment for two-wheeler manufacturers. But the household mix is expected to change significantly by FY07 on various counts.
For one, the Indian economy has grown at 5.5%-6% in the last five years, which is expected to continue (ignoring FY03 where draught has affected growth prospects). This combined with other growth drivers like urbanisation, increasing double families, robust growth in services sector and easy availability of finance is expected to increase income in the hands of this segment in the next five years.
The study suggests that by FY07, of the total households of 199 m, 46% will be accounted by the consuming class. The prospects do not stop here. The climbers (that are typically moving up the income scale) will account for another 37% thus offering solid long-term growth potential for two-wheeler manufacturers. Of course, disposable income in the hands of consumer will only increase if the economic growth shifts to a new growth trajectory.
While we expect the two-wheeler segment to grow at a CAGR of 9% in the next five years, the motorcycle segment would lead much of the growth. This segment has been steadily eating into the market share of scooter and moped manufacturers over the last five years, which we expect to continue in the future. What are key growth drivers for the motorcycle segment? Growth drivers are demand for rural transportation, given the appalling road infrastructure, atleast in the medium term. Industry representatives suggest that product ownership life cycle also has shrank in the recent past (10 years to 6 years) due to a slew of new model introductions, from almost all manufacturers. Thus volume growth will also come from replacement demand and upgradation (scooters or mopeds to motorcycles).
But increasing affordability is the most crucial growth driver of them all. With bank rate falling form as higher 10.5% in FY98 to 6.25% in 1HFY03, interest rates on automobiles have also declined significantly thus enabling consumers to prefer motorcycles ahead of scooters. The success of all the premium-end models like ‘Pulsar’, ‘Passion’ and ‘Splendor’ are primarily on account of easy finance. Hitherto, the entry-level motorcycle model was costing Rs 30,000. But that will change soon with Bajaj expected to launch a new model in the sub 30,000 category in 4QFY03. This will fuel demand further. Given this backdrop, one gets a positive impression on growth potential.
The industry is bursting with dynamism, but where are the profits? Most players in the motorcycle segment have expanded capacity in the recent past to capitalize on the upturn in volumes. Besides, a number of new models also have been launched, both of which require capital for product development, advertising and promotions. Increased competition also means that there is a shift within the segment as well. Prices in the executive segment that encompasses models like ‘Caliber’, ‘Crux’, ‘Passion’ and ‘Splendor’ have fallen by an estimated Rs 3,000 per unit in the last two years. New models are adding to the volumes, but they also cannibalize existing sales. With the entry of the sub 30,000 category, there could be a further downward pressure on realisation.
If demand fails to meet capacity expansion expectations, the industry will suffer from excess capacity (though they are operating at full capacity levels currently). This is precisely the reason why two-wheeler stocks are languishing at current levels despite impressive volume performance. We expect operating margins for all players to decline in FY04 thus resulting in a shake up. If media reports are to be believed, there is already inventory pile up with the dealers. If this is the case, prospects are not promising in the next one year.
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