Just when two-wheeler makers are reporting bumper December sales numbers, Kotak says it expects a slowdown in this segment next year, due to high petrol and loan rates

In a report to clients today, Kotak researchers say they expect domestic two-wheeler industry growth to moderate from 20% in the current fiscal year to 14% in FY12, due to high petrol prices and higher interest rates.

Two-wheeler companies reported good numbers in December. India Yamaha Motor reported a 70% rise in total sales at 34,839 units. The company's domestic sales for the calendar year 2010 were up 18% at 2,58,987 units and exports were up a substantial 85% to 91,277 units. Hero Honda Motors' sales in December were up 33% to 5,01,111 units, whereas it sold over 5 million units for the full year, a growth of 16%. Bajaj Auto reported subdued growth of 11% at 2,43,675 units for December, 5% growth in commercial vehicle sales at 31,575 units and 4% growth in exports to 95,388 units.

Honda Motorcycle & Scooter India has a target of 1.6 million units for FY11 versus 1.3 million units in FY10. In December, both Hero Honda and Bajaj Auto hiked the prices of two-wheelers by Rs500-Rs1,000 with effect from new year day on account of the rise in input costs.

Kotak believes that the factors that supported a 20%-plus growth for two-wheelers over the past couple of years will not be there in FY12. Some of these factors were the government stimulus measures, substantial salary hikes for government employees on pay commission reforms and pent up demand from FY08-09 when there was flat growth.

"We forecast Bajaj Auto's domestic motorcycle sales to grow at 13% CAGR (compounded annual growth rate) over the next two years." Bajaj's total sales in the nine-month period from April to December 2010 were up 42% at 2.87 million units. Kotak also believes that Bajaj Auto's margins will decline by 120 basis points y-o-y in FY12 and that the company's exports will also moderate to 15% CAGR in FY11-13 compared to 36% CAGR between 2007 and 2011.

Margins will decline because the "limited pricing power in the industry will not be able to fully offset rising material cost pressures and the moderate improvement in product mix will not be able to positively impact margins," the Kotak report says. Exports will moderate, because unlike the last three years Bajaj will find it difficult to gain market share in the countries it exports to-in neighbouring Sri Lanka and Bangladesh, and from Africa, to the Middle East and Latin America-going forward, since it has already achieved a share of about 15% in these markets.



Three-wheeler growth, too, will not be as good as it was in FY09-11 (21% CAGR), Kotak says, because of a high base effect and an increase in personal vehicle ownership. Three-wheeler growth was superb in the last 2-3 years because state governments issued fresh permits.

It must be noted that while Kotak has put a 'Reduce' rating on Bajaj Auto, its target price is only 5% below the current market price. Also, Kotak says in its report, that "at 15 times price-to-earnings on our FY12 earnings per share estimate, Bajaj is currently trading at a 19% discount to Hero Honda which we believe is unjustified. From a relative perspective, we prefer Bajaj Auto to Hero Honda in the two-wheeler sector".

Despite the split between Hero Honda and Honda, the brokerage does not expect any major change in the industry structure over the next two years, but it believes that "Honda could take some market share from Hero Honda". Bajaj's market share will remain relatively stable over this period, it says.