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.
|Vehicles sold (nos)
|Net sales (Rs m)
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-à-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.
More Views on News
Aug 14, 2017
Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.
Aug 2, 2017
GST realted cost impacts Margins, Management expects good year ahead.
Aug 1, 2017
Good Recovery in the Scooters market, expects pick up in exports too.
Aug 1, 2017
New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.
Jul 6, 2017
Ends the year on a Flat note. Expects good recovery in the exports market.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407