Allaying the fears of higher input costs, two-wheeler manufacturers in India are aiming for higher targets. Can they keep up the growth momentum?
Two-wheeler makers in India are likely to show a huge growth of more than 25% in sales volume in FY10 after two years of muted growth. With this robust performance, many automakers are aiming to achieve a growth of above 30% during FY11. Bajaj Auto Ltd, the country's second-largest two-wheeler maker, aims to sell 4 million units in FY11, up from 2.5 million units it sold during FY10.
While analysts believe that the Indian two-wheeler industry can grow at a compounded annual growth rate (CAGR) of 12% to 15%, the target set by Bajaj (around 60% year-on-year, including exports) looks like a bit on the higher side.
“The road ahead in FY11 is likely to be bumpy on account of a high base of FY10, as automobile manufacturers will have to deliver substantial volumes to show growth on this high base. The volumes are also likely to be tapered down by up-tick in interest rate cycle, price increase due to rise in raw material cost and mandatory up-gradation of vehicles to meet Euro IV emission norms. Thus, we believe that FY11 is going to be a testing time for auto companies to maintain the strong volume growth momentum," said Sharekhan Ltd in a research report.
Last month, some auto financiers, such as ICICI Bank Ltd, HDFC Ltd and Kotak Mahindra Bank raised interest rates by 25 basis points (bps) to 50 bps (100bps=1%). Similarly Ceat Ltd and Birla Tyres Ltd increased tyre prices while other tyre producers are seeking to increase prices by 3% to 5% due to hike in natural rubber prices and growing demand. Amidst all these concerns, the auto sector has reported strong sales volumes in March 2010 due to the strong demand across urban, rural and industrial segments.
While the strong demand from the rural segment drives the figures for Hero Honda Motors Ltd, the country's largest two-wheeler maker, it’s the urban demand for premium bikes that pushes up the numbers for Bajaj Auto. Both the players, which together hold about 79% share in the domestic market, are gearing up to meet this growing demand by ramping up their respective capacities.
"Rural market growth is expected to remain stable with higher income visibility and disposable income through non-farm sources and low two-wheeler penetration levels. Despite margin contraction from current levels, we expect industry profitability to remain above historical levels. Higher competitive intensity is unlikely to trigger a price war, as we expect the top two players to continue to remain dominant with a combined domestic motorcycle market share of 78% in FY12 (estimated) from 79% in FY10 (estimated)," said Ambit Capital Pvt Ltd in a report.
India's market is divided roughly into two categories, urban and rural, depending on the needs and resources of consumers in these areas. For example, pricing and fuel efficiency matters most for rural consumers whereas the urban consumer would prefer more power and style in a motorcycle. Rural demand has assumed significant importance with contribution to total motorcycle sales increasing to 36% in 2008 from 21% in 1984.
According a report by Enam Securities Pvt Ltd, under the Rs50,000 price tag category, Hero Honda is the undisputed two-wheeler king in India. In the entry level segment of Rs40,000 and below category, Hero Honda's market share is 43% while Bajaj Auto and TVS Motor Co Ltd's share is 30% and 25%, respectively. However, in the executive or Rs40,000-Rs50,000 price category, Hero Honda rules supreme. Its market share is a whopping 74%, while Bajaj Auto and (surprisingly) Honda Motors and Scooters Ltd (HMSI) stand a distant second and third place with a market share of 16% and 7%, respectively. TVS Motor, the country's third largest two-wheeler maker, stands far away at fourth place with a mere 1% market share in this category.
After launching two new products in the premium band of motorcycles, Bajaj Auto has once again switched its focus to the highly lucrative entry-level motorcycle market with the new ‘Platina 125’ motorcycle. The price-tag of Rs36,000 makes the new ‘Platina’ the cheapest motorcycle in the country with an electric start as a standard fitment.
Going ahead during FY11, demand would be driven by recovery in urban areas, while in the rural market, the secular demand would continue. "Demand from urban areas, which constitutes about 40%-50% of the total market, is likely to grow in FY11 as consumer sentiment improves. We expect demand for higher-end motorcycles to benefit as a result. While rural demand will also grow, pace of growth is expected to be lower on account of withdrawal of stimulus packages like the Sixth Pay Commission, increase in minimum sales price (MSP) and high base effect of FY10," said Enam. The brokerage expects two-wheeler sales to touch 15 million units by FY15.