Two (wheelers) to tango over the next few years

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.

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    1 decade ago

    The winner will be the one who has
    a. High Quality
    b. Best Price
    c. Good Technology and
    d. Great Fuel Economy

    M&A deals worth $17 billion turn sour this year

    Mismatch in valuations and clash of interest among stakeholders have resulted in some big-ticket mergers and acquisitions (M&A) deals going sour in India, amounting to nearly $17 billion.

    Deals worth nearly $17 billion have got cancelled include the $14.5 billion Reliance-LyondellBasell deal, the $2 billion Reliance-Value Creation transaction, the $12 million PVR-DT Cinemas deal and the $130 million Wockhardt-Abbott Laboratories deal.

    Last year also two large deals—Bharti-MTN and Sterlite-Asarco—managed to reach critical stages of negotiation but got cancelled.

    “Big-ticket M&As involve a lot of variables and many things need to come together for the deal to go through. Mismatch in valuations and clash of interests of various stakeholders are some of the reasons for recent failed deals,” VCCEdge research director Rohit Madan told PTI.

    Echoing a similar opinion, SMC Capital’s Equity Head Jagannadham Thunuguntla said, “The large M&A deals running into billions of dollars often come with a whole host of uncertainties. The uncertainties can range from regulatory related, valuation related, management related or deal structure related issues.”

    Besides, experts believe, M&A deals also get affected by extreme movements in the equity markets.

    Moreover, the valuations which were low a few months back have risen on the back of overall strengthening economic scenario and bullishness in the stock markets.

    However, according to PricewaterhouseCoopers executive director (Transactions Group) Sanjeev Krishan, “RIL & Sterlite apart, this trend also shows maturity on part of Indian companies, to be able to reject deals which they believe may not be fairly priced or from which they could not derive significant incremental value.”

    Mr Thunuguntla further added that investors have to carefully assess future M&A deals on merits of each case, before making their investment decisions in those companies.

    The Indian M&A deal tally would have been double its size if the Bharti-MTN deal had happened last year, or for that matter Sterlite’s bid for Arasco or Reliance’s bid for LyondellBasell had succeeded.

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    India-US cooperation key to global economic stability: US

    The US today sought greater engagement with India on the economic front, saying that their ability to cooperate was critical to creating a more stable global financial system, balanced economic growth and an open trading system, reports PTI.

    “We face many challenges in common, such as how to extend financial services more broadly to people outside the traditional banking system, how to finance our very substantial public infrastructure needs and effectively leverage private money,” visiting US treasury secretary Timothy Geithner said here at a joint press conference with finance minister Pranab Mukherjee.

    Prime minister Manmohan Singh recently pegged India’s infrastructure funding needs at
    $1 trillion between 2012-17.

    The US has separately been demanding greater access to the Indian financial services market, including insurance—which could be used to fund infrastructure. At present, foreign direct investment in the insurance sector is capped at 26%.

    Mr Geithner said, “Our ability to cooperate on economic financial issues will be critically important to the success of global efforts to create conditions for a more stable global financial system, a more open global trading system.”

    He also said that president Barack Obama remains committed to strengthening the relationship with India, which according to him was “an indispensable partner in securing the future prosperity and security of the world.”
    The meeting comes in the backdrop of continuous growth recorded by the US economy in the last three quarters and a strong recovery in India.

    Mr Geithner said that both India and the US face the challenge of making sure that gains from economic growth in both the countries are broadly shared. “The critical test, of course, of economic growth and economic policy is to make our economies work better.”

    The two countries discussed issues on the macro-economic front, with emphasis on managing capital flows and fiscal policy measures.

    “The discussion held today focused on global development with a special emphasis on US and Indian economies including monetary and fiscal policies, financial sector regulations and managing capital flow, infrastructure finance and Public Private Partnerships (PPP),” Mr Mukherjee said.

    He further said that the two countries discussed three broad areas—micro-economic policies, financial sector and infrastructure finance, with a commitment to hold an annual meeting.

    “The partnership envisions annual Cabinet level meetings at the finance minister and US treasury secretary level. This will be supplemented by sub-Cabinet level meetings and meeting of the working groups,” the minister said.

    “I am confident that the partnership provides us an important platform for cooperation on economic issues thus contributing to strengthening and deepening of bilateral relations,” Mr Mukherjee said.

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