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Two-wheelers: 2QFY05 in retrospect - Views on News from Equitymaster
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  • Nov 10, 2004

    Two-wheelers: 2QFY05 in retrospect

    2QFY05 turned out to be yet another good quarter for the two-wheeler industry. Riding on the back of a low interest rate regime and robust economic growth, industry volumes registered a strong growth of 13% during the quarter. While financials of the big three of the two-wheeler industry i.e. Hero Honda, Bajaj Auto and TVS Motors are already out and have also been subjected to close scrutiny, let us see how the consolidated figures of these companies.

    Since these three companies account for nearly 80% of all the two-wheelers sold in the country, it can also be considered as proxy for the entire two-wheeler industry.

      2QFY04 2QFY05 % change
    Vehicles sold (nos) 1,136,689 1,349,273 18.7%
    Net sales (Rs m) 32,888 39,483 20.1%
    Operating profit 5,103 5,818 14.0%
    OPM 15.5% 14.7%  
    Net profit 3,959 4,081 3.1%
    NPM 12.0% 10.3%  

    Motorcycle is the growth driver:  The consolidated topline was higher by 20% YoY. Since this is slightly higher than the 19% growth in volumes, industry seems to have benefited from higher sales of premium products like motorcycles and scooters as opposed to step-thrus and mopeds. Indeed, sales of motorcycles grew by 25% over corresponding period last year. Sales of other two-wheelers (scooters, mopeds and step-thrus) however, declined by 7% YoY. Significantly higher fuel efficiency and availability of a plethora of models has seen the motorcycles segment emerge as the segment of choice among two-wheeler consumers. From accounting for about 35% of the total two-wheeler volumes five years back, the motorcycles segment now accounts for a huge 78% of the total two-wheeler sales.

    A commodity?  Margins at the operating level have taken a hit of nearly 80 basis points vis--vis last year. Material expenses typically account for 65% to 75% of total expenses and hence, when prices of metals such as steel and aluminium rise, auto companies are expected to be among the worst hit. Thus, with metal prices ruling at record highs in recent times, two-wheeler industry has had to bear the brunt of it as evident from the drop in margins. Besides, prices of other key components such as rubber and plastic have also come under inflationary pressure and this also seems to be affecting profitability.

    On the positive side, employee rationalization and improvement in supply chain management has somewhat been able to stem the fall in margins. Just to put things in perspective, Bajaj Auto has seen its workforce reduce by about 6,000 in the last five years. Going forward, we expect the margin pressure to continue in the short-term. Apart from continuity of high metal prices, the fact is also borne out from the rationale that competitive pressure would force the companies to increase the marketing spend. Besides it would also cause pressure on the topline by way of price cuts and discounts.

    Operating level pressure has percolated down to the bottomline as evident from 170 basis points hit in net profit margins. Besides higher operating expenses, higher tax provisioning has also taken its toll on the bottomline of the two-wheeler companies.

    The road ahead

    Intensifying competition and a lower growth rate in motorcycles in the past couple of years definitely point to the fact that the explosive growth story of the late 90s and early 2000s may be a thing of the past. However, a 12%-13% growth in the medium to long term is not a bad proposition either provided one is patient and invests in a company with extremely strong cash flows and a robust balance sheet so that it is able to weather away the storm and come out with contemporary models which in turn ensures that the cash register keeps on ringing.



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