The Hindu Business Line : Poor monsoon may haunt two-wheeler industry

A GROWING perception that inadequate monsoon could have impact on two-wheeler volumes saw investor interest moving away from counters such as Hero Honda and Bajaj Auto in the recent past. Brokers said the stock prices of these two companies have been moving southwards over concerns that volumes will be affected if monsoon is not `up to' mark.

Interestingly, the stock price of Hero Honda has lost ground by around 16.35 per cent from around Rs 505 levels as on July 1 to its current levels of Rs 434 on the bourses. Bajaj Auto, on its part, has lost 10.75 per cent from around Rs 896 levels since July 1, to its current close of Rs 809 on the bourses.

Around 2.71 lakh shares of Hero Honda were traded on the BSE, while for Bajaj Auto it was 23,489 shares.

A couple of negative reports on the prospects of the two-wheeler industry appear to have added to the current disenchantment with the sector.

Taking a more macro view, analysts opine that poor monsoon does not augur well for the whole industry and should not be viewed as specific to the two-wheeler industry.

"Investors in the automobile industry should on the whole adopt a more cautious approach. This is not a time to be overweight on autos," an analyst said.

According to another analyst, volume growth momentum is expected to ease off. As such then pricing power will take a hit. "This at a time when commodity prices are ruling firm. Additionally, one should not forget that everybody is operating on full capacity with many even having gone in for capex," he added.

Yet a section of analysts feel that there is no clear indication of any adverse impact due to monsoon as yet. "There is no denying that one will see a dip in volumes in the two quarters after the monsoon. But one cannot expect the industry to grow at 30 per cent year-on-year. Despite the negative factors, motorycycles will, however, grow at 12-14 per cent annually," said an analyst with a leading domestic brokerage.

A Merrill Lynch report, while acknowledging that the two-wheeler stocks have outperformed four wheelers by 17 per cent in the first quarter of the financial year 2005, opines that listed two wheeler companies are expected to lag sector growth. The reasoning being that Honda's entry into motorcycles later this year (via its 100 per cent subsidiary) will take away a part of incremental growth.

"We see limited upsides for two-wheeler stocks and prefer faster growing four-wheeler companies. We believe that market share changes influence two-wheeler stock valuations. For instance, Hero Honda has seen its rating expand with rising market share over the past year, in converse, valuations contracted when it lost out to competition in fiscal 2003," says the report.

The perception being that given the plethora of planned new launches, no player would achieve significant market share gains for extended periods of time. Thus no stock would have a sustainable out performance.

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