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Two-Wheelers To Overcome Temporary Road-Bumps

Monday, October 01, 2012
By Manik Kumar Malakar

When the fresh financial year rolls on one industry that will probably mourn the passing of FY13 will be the two-wheeler industry in India, battered by a series of factors as diverse as inflation, economic slowdown and monsoons.

“The two wheeler segment of the Automobile Industry will be under pressure in FY13,” says Sudip Bandyopadhyay, MD and CEO Destimoney. This will be both in terms of volumes as also margins. “In terms of volume growth, the sector is unlikely to post double digit growth in FY13 and is expected to end the financial year with a single digit growth rate,” says Gaurant Dadwal, Senior Research Analyst, Nirmal Bang Equities.

So what were the reasons for the underperformance of the two wheeler segment in FY 13?  “A drastic slow down in domestic economy coupled with high inflation and interest cost, has adversely affected the overall demand for two wheelers,” says Bandyopadhyay.

And this is just part of an alarming trend that runs counter to the usual growth that this sector witnesses. “Since the beginning of FY13 the domestic two-wheeler industry began showing moderation in demand with low single digit volume growth versus high double-digit growth recorded in past three years, when the domestic two-wheeler industry outperformed its historical average growth by a high margin of 1000 bps to approximately 21.8%, backed by strong rural demand and rising per capita income,” says says Mitul Shah of Karvy in an analysis on the two-wheeler segment.

And the rural demand, usually a strong growth driver is expected to be flat this year due to monsoons and other factors. “The near-term economic slowdown and monsoon deficit, would result in modest rural volume in FY13,” says Shah. In perspective please note that in the past healthy rural income and strong MSP has resulted in robust demand for two-wheelers. 

“The resurgence of rural demand can change the fortunes of this industry,” says Bandyopadhyay highlighting the importance of the rural market for the Indian two-wheeler industry. Other experts however note that in the long run rural demand will continue to be a driver for the industry as it has been traditionally. “Rural demand will continue to be normal with a slight negative bias,” says K Jayraman, Research Associate, Bonanza Portfolio. This situation may improve after two months with revival of demand. While the monsoon may be a factor for the time being, the ensuing months may be better for the industry.  Why? “The two wheeler is the least expensive mode of commutation for individuals and a time saver in rural areas and these ground realities will surface and with new models and offers for sales the demand is bound to increase,” is Jayraman’s reply.

And will Dipavali, the Festival of Lights, bring cheer to the sector? Historically it usually has. “The overall demand for the auto industry typically picks-up during the festive season and hence expectations are high that the festive season will result in some demand revival,” says Dadwal of Nirmal Bang. “Leading companies are proposing a cut in production to neutralize the situation today. There are still hopes that the Dipavali season will spruce up the demand and bring cheer to the industry,” is Jayraman’s more segment specific analysis.

Currently inventory level are of over 1.5 month in the two-wheeler industry, much higher than its average normal level of two to three weeks, indicating huge demand pressure, with the retail sales falling for the past two to three months. “In case the demand remains robust in ensuing festive season, it would only reduce inventory, while the dispatches may remain weak going forward,” cautions Shah.

But yes, there is, as an aspect of woman’s empowerment that will rouse a cheer from the two-wheeler industry. “In the last four to five years, the growth in working females has resulted in higher usage of scooters/scooterretes, which is likely to continue for next two to three years with high double-digit growth,” says Shah. Thus, this segment is likely to outperform the bike segment by a wide margin.

Incidentally, innovation/new launches are one aspect of the industry that always receives a thumbs-up from experts. “Two-wheeler companies are already introducing new models to cater to various segments of the market,” says Jayraman. The gearless scooter remains buoyant in its demand due to various user friendly features. “Therefore it is better to realize that there are new dimensions of issues to score over to keep and sustain the momentum,” he continues.  “The two wheeler industry has seen phenomenal growth in the recent years and one month lower sales may not be a cause to worry,” says Jayraman.  “However certainly sustaining the demand at these high levels and to assume growth over and above this may throw up more challenges on retaining market shares, maintaining the current levels of profitability and to satisfy the market expectations on design and fuel efficiency and other factors,” ends Bonanza’s Jayraman.

The Investor and the Industry
“Looking at the current valuations, we believe that the two wheeler stocks are fairly valued. Given the current slowdown, we would recommend investors to buy Bajaj Auto and Hero Motocorp, if they correct 10 to 15% from current levels,” says Gaurant Dadwal of Nirmal Bang.

“Companies like HeroMotor and Bajaj auto are currently trading at multiple times (8 to 9 times) their book value and are trading at PE of 16 to 17 at current prices,” says K Jayraman of Bonanza Portfolio. Looking at the track record, the sequential growth, the brand value, market share etc., this is not out of place.

However, if the current scenario of low demand continues longer, leading to production cuts, Inventory management etc., this may certainly put severe strain on maintaining profitability. “Therefore the ideal thing will be to monitor the developments at least for the next quarter and in the meanwhile reduce exposure if already invested and delay fresh investments until more clarity emerges,” Jayraman continues.

“For the long term retail investors, two wheeler stocks are a good buy.  In spite of the short term volatility, the long term growth story remains intact,” says Sudip Bandyopadhyay of Destimoney Securities. “Both Bajaj Auto and Hero Moto Corp are good long term purchases, even at current levels,” Bandyopadhyay continues.

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