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Two-wheelers: Take II - Views on News from Equitymaster
 
 
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  • Dec 23, 2002

    Two-wheelers: Take II

    Reality strikes! After going hung-ho about the long-term growth prospects of the Indian two-wheeler sector in the past, bourses are now taking stock of the situation to ascertain whether atleast even half of the historical growth rate in the motorcycle segment can be achieved in the next five years. We take a look at the growth prospects and comparative valuations.

    As is evident from the table below, the performance of the motorcycle and ungeared scooter segments stand out. As against the overall sector growth rate of 7.8% CAGR in the last five years, motorcycle segment has outpaced this by some margin. Clearly, scooter, moped and step-thrus are losing out to more trendier and fuel-efficient models from motorcycle manufacturers. Compared to just 30% share in FY98, the motorcycle segment accounted for as high as 66% in FY02 and the trend is expected to continue in the medium-term (3-5 years). One of the key reasons for this dramatical shift is the fact that affordability has increased. This has come in two forms. Decline in interest rates over the years and ever-narrowing gap between an entry-level motorcycle and a scooter have shifted growth balance in favour of the latter.

    Looking forward…
    Segment CAGR (last five yrs) CAGR (next five yrs)
    Motorcycles 28.9% 10.7%
    Scooters -7.7% 3.3%
    – Geared -14.1% -4.4%
    – Ungeared 9.2% 10.8%
    Mopeds -5.1% -7.1%
    Step-thrus -12.0% -8.7%
    Industry 7.8% 7.5%
    Source: Our estimates

    But the key question now is whether such growth rates are sustainable? Our answer is No. Though one is aware of the current penetration levels and prospects of higher disposable income with the Indian households, the reality is that a lot is dependent on the economy. In the last five years, the two-wheeler industry has grown at 0.5x-2.9x GDP. We expect growth rate to peter down in the medium-term and fall more in sync with the growth of the economy in the long-term. As the table above shows, we expect the two-wheeler industry to grow at a CAGR of 7.5% in the next five years. Motorcycle segment would continue to outperform thus accounting for a lion's share in the future (77%). As is also evident, scooter manufacturers are now focusing on the ungeared scooter segment and this would mean a continuation in the declining trend for geared scooter manufacturers.

    Moving away from volumes, value growth in the medium-term looks challenging for motorcycle players for the simple reason that competition is stiff with smaller players adding significant capacities in the last three years. Though the current capacity utilisation levels for the top three players are high (it is 89% for Hero Honda), there are reports of inventory pile-up with dealers already. Just to draw a parallel, stiff competition and a subdued demand scenario has resulted in capacity utilisation falling to 50% currently in the tractor sector. Also, with manufacturers now focusing on the entry-level category (i.e. sub Rs 30,000 or US$ 612 per unit), value growth seems unlikely. We expect Hero Honda's price realisation to fall at a faster clip compared to its peers. This is one of the key concerns.

    Coming to valuations, despite superior return ratios, Hero Honda trades at a lower valuation as compared to Bajaj Auto and TVS. This is because Hero Honda's market share (just above 50% in FY02) is now being threatened by the other two players. Before getting into the two-wheeler sector, investors' should keep in mind the key growth deterrents in the medium-term (3-5 years), viz. slower economic growth, increased competitive pressure and prospects of higher credit sales in the near-term to sustain market share.

    Valuation comparison…
    Particulars Hero Honda Bajaj Auto TVS Motors
    Current price (Rs) 280.0 489.3 486.6
    P/E (x)* 9.4 10.7 10.8
    Market Cap/Sales (x) 1.3 1.2 0.4
    Performance parameters      
    Operating margin (%) 15.4% 16.4% 9.4%
    Return on Assets (%) 29.9% 8.1% 11.0%
    Return on Networth (%) 66.7% 14.6% 25.2%
    Net working capital/Sales (%) -9.5% 6.0% 1.0%
    Source: Our estimates

     

     

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