The first clouds became visible on the horizon in January. That's when the roar in the motorcycle sector growth numbers began to sputter. By March-end, it became evident that the engine was in need of an overhaul-the 2006-07 figures showed a decline of 14.5 per cent year-on-year; for the first quarter of the current year, the market has declined by a similar percentage.
This has affected the Big 3 of the sector-Hero Honda Motors (HHML), Bajaj Auto (BAL) and TVS Motor Company (TVS). They have all reported drop in sales volumes and all three have cut back production.
So what went wrong? The short answer, according to Anil Dua, Vice President (Sales and Marketing), HHML, is interest rates. The sudden tightening of liquidity, he says, forced many consumers to put off their purchases. Compounding this problem was the exit of financiers from certain high volume but risky markets. "Dealerships were not registering motorcycles and many consumers were just decamping with bikes.
This was particularly rampant in northern Karnataka and parts of Uttar Pradesh," says Ashok Khanna, Executive Vice President and Head (Auto Loans), HDFC Bank, adding that default rates for motorcycles stand at around 2.5-3 per cent, much above the default rates for cars. "Over 70 per cent of two-wheeler sales are financed. The average weighted loan amount is Rs 36,000 and the average tenure is 25 months. But given the current market conditions, we will be more cautious about financing motorcycles," he says.
But it isn't just interest rates that have hit two-wheeler manufacturers. Rising commodity prices are also eating into their margins. TVS Motor had net margins of only 1 per cent for the fourth quarter of 2006-07; Hero Honda saw its margins decline to 7.4 per cent, and analysts expect it to decline further. This is a major difference from the heady days of 2004-05 when it enjoyed margins of over 15 per cent. Bajaj Auto's margins also shrank to 10.4 per cent during the first quarter of the current year, but this is still the best in the industry primarily because of its profitable line of higher-capacity motorcycles and three-wheelers.
But the negative sentiment has not yet filtered into the markets. While the Bajaj scrip has declined since April, this is attributed to the fact that Allianz, its partner in the insurance business, had been given favourable terms to increase its stake in the JV. In fact, all research reports continue to rate Bajaj far higher than either of its two main competitors.
Analysts are less positive on Hero Honda, but a majority of them still maintain a "hold" rating on the scrip. TVS Motor was the worst performer in the BSE-Auto index last fiscal and though the scrip has risen recently, it has underperformed the market by a wide margin.
But things are not that rosy at Bajaj. Net revenue for the first quarter declined 4.2 per cent to Rs 2,109 crore, and net profits sank 18 per cent to Rs 226.5 crore. But this was due to MD Rajiv Bajaj's grand plan of "defocussing" on the mass market 100cc segment. "We are not interested in gaining market share at the cost of margins. Our 100cc portfolio does not enjoy the margins of products like the Pulsar. It's a volume game," he says. In fact, the company saw sales of its sub-125cc range, where margins are wafer thin, decline 39.5 per cent.
This has actually left the company with a more favourable product-mix than in the past. A majority of its sales now come from higher capacity motorcycles where it enjoys double-digit margins.
The other companies in this sector are too small to count.
Honda Motorcycle and Scooter India (HMSI)
The second Honda two-wheeler company in India actually managed to grow sales 70.4 per cent during the first quarter. Though its market share in motorcycles is barely 4.1 per cent, it dominates the scooter segment in India, which grew 18 per cent in the first quarter, to 256,000 units with a 60.8 per cent share.
Yamaha Motor India
Despite getting one of Bollywood's best-known faces, John Abraham, to endorse its product line, the company has stalled in India. Sales were down 59 per cent for the first quarter of the year. A lack of exciting products and a weak distribution structure have meant that Yamaha is quickly joining the ranks of the also-rans in this country.
Suzuki Motorcycle India
It sold only 13,800 motorcycles in the first quarter, but sales have been climbing slowly but surely. But its weak product portfolio and a small distribution network mean it has a mountain to climb. It plans to enter the scooter market.
In trouble with a capital T, it sold just 200 motorcycles in June. A planned revival in the scooter market also hasn't happened. Its erstwhile JV partner, Honda Motor, is the dominant player in this market.
However, as Bajaj himself acknowledged at a recent press briefing, the company has virtually no presence in the Rs 35,000-42,000 price bracket, which is Hero Honda's mainstay. "We'll launch a new product in that segment in September," says Bajaj. It is also shifting production of its Platina 100cc bikes to a new plant in Uttaranchal to take advantage of the tax breaks being offered by that state; this will help revive margins for this line of bikes. There have also been reports of a major European acquisition but Bajaj declined to comment on the issue.
Squeezed between the Hero Honda-Bajaj battle is the country's third-largest motorcycle and two-wheeler company, TVS Motor. Even though it has recently revamped its line-up and launched the Apache 160 RTR, a high-powered sports bike, to take on the Bajaj Pulsar and (Hero Honda) CBZ X-Treme, the decline in margins has taken the market by surprise. When bt went to press, the company was yet to declare results for the quarter ended June 2007. The market remains uncertain about its prospects. "The pressure on margins remains a concern," says a recent report by Motilal Oswal Securities, which has placed the company on neutral. "But we expect a turnaround by the second-half of the year," Chairman and Managing Director Venu Srinivasan told reporters at his press conference in Indonesia.
At Hero Honda, officials admit the decline in sales has been "disappointing" but are quick to point out that HHML has actually increased its market share. "This has taken place across geographies and market segments. We have gained share both in the base model CD Deluxe and in the high-end CBZ X-Treme and Karizma product lines," says Dua. However, because of the slackening of demand, the company has decided to put on ice its plans for a third plant in Uttaranchal as it would have created excess capacity in the market. "There will be overcapacity for a couple of years even if Hero Honda puts off expansion till 2008. I think it will take two-three years for the market to absorb the existing capacity," says HDFC Bank's Khanna, adding: "There is a lot of pent-up demand in the country, and we expect sales to pick up in the festive, post-monsoon season."
Therefore, despite the negative growth so far this year, most market players believe that sales growth will pick up going forward, and that the sector will end the year with sales of a just under seven million units-a growth of a shade under 7 per cent. So, despite experiencing the worst quarter in recent memory, there's hope that come September, the party will resume all over again.