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Corporate Ratings
Anjan Deb Ghosh
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aghosh@icraindia.com

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ICRA RESEARCH SERVICES



ICRA RATING FEATURE





Indian Two-Wheeler Industry

Near term growth pressures on both domestic and exports front
March 2013

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1. Overview

2. Is the Indian two-wheeler industry staring at the possibility of sluggish volume growth over the next few years?
Past Revisited: What had caused the sharp slump in two-wheeler sales in 2007-08?
What has changed in the last five years that poses risk to two-wheeler industry growth?
Medium term demand drivers

3. The promise of exports
How did the three key two-wheeler markets of the world perform in CY2012?
Trend in two-wheeler sales volumes in key markets
Geographical mix of global two-wheeler volumes
Bajaj Auto: Bearing the mantle of two-wheeler exports from India
Hero MotoCorp wants to make it big too, but challenges galore

4. Segmental Analysis of the Two-Wheeler Industry
Trend in two-wheeler segment volume mix
Trend in segment-wise sales volume growth of two-wheelers

5. Motorcycles Segment
Trend in Sales Volumes
Trend in Market Share Movement
Medium Term Outlook

6. Scooters Segment
Trend in Sales Volumes
Trend in Market Share Movement
Medium Term Outlook

7. Reality Check: Buying decision from the standpoint of total cost of ownership
Product Price Comparison
Annual Running Cost Comparison (Fuel Economy, Servicing Costs, Spare Parts Costs, Resale Value)

8. Each OEM navigating a specific set of challenges! What are they?

9. Quarterly Performance trend of listed two-wheeler OEMs
Hero MotoCorp Limited
Bajaj Auto Limited
TVS Motor Company Limited

10. Annexure Monthly sales Volume Trends.31


WHATS INSIDE?

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OVERVIEW






































INDIAN TWO-WHEELER INDUSTRY

Near term growth pressures on both domestic and exports front

March 2013

Volume Trajectory
With domestic volume growth of 3.9% YoY and exports volume growth of minus (-) 1.1% YoY in 11m 2012-13, the Indian two-wheeler (2W) is currently amidst a
slowdown phase last experienced in 2007-08/ 2008-09. Several factors including high inflation, firm interest rates, rising petrol prices, besides weak monsoons have
been dampening demand in the domestic market over last several quarters. At the same time, overseas sales have been adversely impacted by increase in interest
rates in several target countries, increase in import duty in Sri Lanka, trade restrictions imposed by Argentina and dollar sales embargo with Iran. This apart, the
reduction in incentives available to 2W exporters, twice over the last 18 months, has persuaded Indian 2W OEMs to partially hike product prices in overseas markets,
adding to the pressure on export volumes. One noteworthy statistic, however, is that based on CY2012 volumes, India is now the largest 2W market in the world with
sales volumes of 13.8 million units (domestic), having overtaken China at 12.6 million units. In fact, while 2W sales volumes in India grew by 5.8% in CY2012 over the
previous year, the domestic demand in both China and Indonesia (the second and third largest 2W markets, respectively) shrunk by 10.0% and 9.2%, respectively.

Growth Constituents
The deceleration in volume growth of the domestic 2W industry, 3.9% YoY in 11m 2012-13, is largely attributable to the motorcycles segment which grew by 0.9%YoY;
even as the scooters segment posted 16.2% YoY expansion during this period, albeit at a smaller base. With this, the share of the scooters segment in the domestic
2W industry volumes increased to 21.1% in 11m 2012-13 from 17.5% in 2010-11. Within the motorcycles segment, while the entry and executive segments comprising
of 100cc bikes and the premium segment comprising of 150cc bikes have been experiencing anaemic demand, the 125cc segment (contribution of 20% to domestic
motorcycle sales in 11m 2012-13) has been a positive outlier recording a volume growth of 29.7% YoY in 11m 2012-13, benefitting both from new model launches as
also the trend in up-trading and down-trading from the respective lower and upper price/ performance segments.

Market Share Movement
The last year and a half has been marked by greater traction in new product launches and focus on expansion of customer touch points by most 2W OEMs. However,
a dull demand environment restricted the ability of most OEMs to leverage the supply-side efforts adequately. As demand levels failed to impress, the 2W OEMs
resorted to even more supply-side doses viz., attractive financing schemes, discounts on insurance for limited period etc. The OEMs had generally not resorted to
these latter set of tools in 2009-10, 2010-11 and 2011-12 and their return to use as a promotional lever is indicative of the weak demand conditions. In terms of
market share, while Hero MotoCorp continues to remain the distant leader with a share of 43.0% in 11m 2012-13, it saw its share erode by 220 basis points (bps)
during this period compared to the corresponding previous. A large part of this market share set-back was caused by weakness in Hero MotoCorps sales volumes in
the 100cc segment, even as the OEM expanded its market share in some of the other segments like the relatively faster growing scooters segment and the 125cc
segment of bikes, by virtue of new product launches. The other two leading Indian OEMs too, namely, Bajaj Auto and TVS Motor experienced decline in their
respective share in the domestic 2W market in 11m 2012-13. Honda, however, continued to demonstrate steady gains in market share across the board and
strengthened its market share from 14.9% in 2011-12 to 18.6% in 11m 2012-13. Having overtaken TVS volumes in October 2011 and having achieved parity with Bajaj
Autos volumes in recent months, Honda is now the second largest 2W OEM in India. In ICRAs view, the ongoing environment of weak demand is likely to have a
dissimilar impact on each player depending on the respective OEMs product portfolio mix and marketing strategy. Hero MotoCorps adeptness at protecting its 100cc
segment moat, Bajaj Autos ability to maintain a consistent brand strategy, TVS ability to plug its product portfolio gaps and Hondas success in scaling up its
distribution and service network will govern the overall domestic 2W market share distribution in the times to come.

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Capacity Expansions and Investments
Several industry participants have announced greenfield capacity expansion plans in recent periods: Hero MotoCorp plans to invest Rs. 15 billion over the next two
years towards establishing facilities in Rajasthan and Gujarat; Honda is in the process of setting-up its third manufacturing facility in Karnataka; Yamaha too is setting-
up a new plant in Tamil Nadu at an investment of Rs. 15 billion. Together, these three OEMs will add 4 million units of additional 2W capacity over the next two years,
representing 22% addition on existing industry capacity. This apart, the new product development/ refurbishment expenses are also expected to increase as OEMs
scramble to launch new products in a bid to generate consumer interest and sustain market share. ICRA expects these large investments to exert pressure on the
industrys profitability metrics over the near term as volume growth moderation further takes root in the absence of immediate demand triggers.

Outlook
Overall, ICRA expects the domestic 2W industry to report a moderate volume growth of 4-5% in 2012-13 as demand slowdown as well as base effect catches up with
the industry that has demonstrated a strong volume expansion over the last three years at cumulative annual growth rate (CAGR) of 21.8%. Over the medium term,
the 2W industry is expected to report a volume CAGR of 8-9% to reach a size of 22-23 million units (domestic + exports) by 2016-17 (our longer-term growth forecast
remains at 9-11%), as we believe the various structural positives associated with the domestic 2W industry including favourable demographic profile, moderate 2W
penetration levels (in relation to several other emerging markets), under developed public transport system, growing urbanization, strong replacement demand and
moderate share of financed purchases remain intact; as also the large opportunity available to grow presence in overseas markets, mainly Africa and Latin America.
Table 1: Trend in Sales Volumes of Indian 2W Industry
Volumes (Units, Nos.) YoY Growth (%)
Domestic 2009-10 2010-11 2011-12 11m, 2012-13 2009-10 2010-11 2011-12 11m, 2012-13
Motorcycles 7,341,122 9,013,888 10,096,062 9,305,708 25.9% 22.8% 12.0% 0.9%
Scooters 1,462,534 2,057,604 2,562,841 2,673,649 27.4% 40.7% 24.6% 16.2%
Mopeds 564,584 697,418 776,866 717,333 30.9% 23.5% 11.4% 2.2%
Total Domestic 9,370,951 11,768,910 13,435,769 12,696,690 26.0% 25.6% 14.2% 3.9%
Exports 2009-10 2010-11 2011-12 11m, 2012-13 2009-10 2010-11 2011-12 11m, 2012-13
Motorcycles 1,102,978 1,474,678 1,847,517 1,723,961 13.6% 33.7% 25.3% -0.6%
Scooters 30,125 50,646 90,605 83,401 16.7% 68.1% 78.9% -4.1%
Mopeds 6,905 6,295 9,076 3,298 -5.4% -8.8% 44.2% -63.4%
Total Exports 1,140,058 1,531,619 1,947,198 1,810,660 13.5% 34.3% 27.1% -1.0%
Source: SIAM


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