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Two-wheelers in the fast lane

Parvatha Vardhini C | Updated on January 10, 2018

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The two-wheeler segment is racing ahead, powered by scooters and premium bikes. Here are some takeaways for investors



With the lull from demonetisation and uncertainties due to changeover to BS IV emission norms and GST behind it, the two-wheeler industry looks set to record double-digit growth for the year 2017-18. Strong rural demand from good monsoons, the Seventh Pay Commission payouts and lower borrowing costs are expected to help, too. Already in the first five months of this fiscal, the two-wheeler industry (consisting of motorcycles, scooters and mopeds) has shown 10.4 per cent growth, higher than cars and commercial vehicles.

But not all segments of the industry are growing equally. Scooters are selling like hot cakes and customers are choosing bikes with more ride comfort and engine power, over the plain old commuter bikes. Premium bikes are gaining popularity too, with the population going on weekend trips and adventure rides gaining in popularity.

Scooters racing ahead

Even as motorcycle sales volumes have grown by 7.8 per cent so far this fiscal (over the same period last fiscal), scooters have witnessed a much stronger growth of 18.2 per cent in the same period.

This trend of volume growth in scooters outpacing motorcycles is not new. When motorcycles showed shrinkage in volumes in 2012-13 and again in 2015-16, scooters continued to show double-digit volume growth. Thanks to this, from about 20 per cent five years ago, the share of scooters in total two-wheeler sales has now moved up to 34 per cent.

With scooters commanding only about one-third of the total two-wheeler volumes even today, a part of their high growth can be attributed to a smaller base. But the fact that scooters have been steadily gaining a larger share of the two-wheeler pie cannot be denied.

Crowded traffic conditions, poor public transport, increasing number of women drivers, style and unisex appeal have been some of the demand drivers for gearless scooters, which form the bulk of the market here.

With scooters proving to be a good counter to the cyclical nature of the rest of the auto industry including motorcycles, companies have cashed in on this trend. Hero, Honda and TVS have traditionally been the big players in this segment, with Suzuki garnering a small market share.

Yamaha entered in 2012-13 with the Ray and has steadily grown its market share in this segment to 7 per cent now with other launches such as the Alpha and Fascino. The same year, Piaggio came up with the Vespa, a premium offering among scooters. It also brought out two more scooters under the Aprilia brand in 2016 and 2017.

However, thanks to the onslaught from Honda (Activa, Dio, Aviator) players such as Piaggio, Suzuki and the listed Hero MotoCorp (Pleasure, Maestro Edge, Duet) have seen their market shares decline in the last five years. The tough competition from Honda has seen Hero’s market share in scooters come down steadily to about 12 per cent from 19 per cent five years ago. In the same period, Honda’s market share has improved by at least 10 percentage points to 59 per cent.

TVS too faced the heat from Honda initially due to the positioning of its offerings. While the 90-125 cc scooter segment is where bulk of the sales lies, TVS had only the ‘Wego’ in this category at that point in time. The flagship ‘Scooty’ and its variants fell in the 75-90 cc category, which did not garner as much interest among consumers.

However, in the last three to four years, the company has pulled up its socks with the launch of the Jupiter and Zest in the 90-125cc segment. This has helped the company push up its market share to 14-15 per cent and maintain it in the last three-four years, after the earlier decline to 12 per cent. Listed players may, nevertheless, continue to face the heat in this segment as Honda cannot be wished away any time soon. While so far scooters were typically targeted at urban consumers, Honda recently brought out the Cliq, a scooter at an attractive price point targeted at rural India, creating a fresh challenge.

Consumers are upgrading

Within motorcycles, higher disposable incomes and increasing purchasing power have seen consumers shift to bikes with more ride comfort and engine power in the last five years. Thus, the 75-110 cc category of bikes, typically considered the entry segment, has seen its share in total motorcycle sales decline to 58 per cent now, from 64 per cent five years ago. Part of this decline can be attributed to cannibalisation by scooters as well.

Yamaha has exited the entry segment and Bajaj Auto (Boxer, CT, Platina, Discover) has seen erosion in market share. Honda (Dream Yuga, Livo) and TVS (Max 4R, Victor, Jive, Star City) too have been on somewhat shaky ground.

Hero MotoCorp (Dawn, Deluxe, Splendor, Passion) is the only exception. While its market share here did take a beating in 2013-14 (down three percentage points over the previous year to 66 per cent), it has improved since then to 75 per cent currently. Its strong foothold in the more price-sensitive rural markets has helped the company do well so far.

Yet, headwinds remain in the form of competition from scooters and the willingness of consumers to upgrade to higher segment bikes.

While interest in the entry segment has waned, it has grown in the mid-segment, especially in the category of 150 -200 cc bikes. With TVS’s Apache doing well here, Honda and Suzuki launched products in this segment in the last three to four years, sensing the shifting customer interest.

Thus Honda ‘s CB Unicorn 160, CB Hornet 160 and Suzuki’s Gixxer in this category have met with success in this segment. This success, though, has been at the cost of Bajaj Auto (KTM , Pulsar), an early mover in this category. Bajaj’s market share in the 150-200 cc bikes category has now come down to 20 per cent from almost 50 per cent five years ago.

However, higher demand for Avenger and Pulsar in the 200-250 cc category as well as the recent introduction of the V15 bike in the 125-150 cc segment has helped the company make up for this loss.

Thus the interest in bikes with higher engine capacity goes to show that customers are now willing to shell out more for the superior feel and ride experience rather than just settle for plain Jane bikes with no bells and whistles.

Premium bikes in vogue

A third trend coming out of motorcycle sales patterns is the growing interest in bikes with engine capacity over 250 cc, considered a premium segment. Higher disposable incomes, availability of finance from banks specifically for purchase of these super bikes as well as a spirit of adventure among buyers are driving the demand for these bikes.

From less than 1 per cent five years ago, bikes above 250 cc now command a little over 6 per cent share in total motorcycle sales. Royal Enfield has been a big gainer from this new found interest for premium bikes among customers. Its Bullet/Classic 350 and Bullet/Classic 500 have been popular choices in the 250-500 cc segment.

Taking note of the growing interest, Kawasaki (Ninja 300), Yamaha (R3) Mahindra (Mojo), Bajaj (Dominar 400) are the other players that have entered this segment in the last five years.

TVS has already begun export of bikes in the 250-350cc category from its partnership with BMW. These bikes are expected to be made available for the domestic market sooner than later. Besides, Bajaj Auto recently entered into a partnership with the premium brand Triumph, from which sub-500 cc bikes are expected to be rolled out for emerging markets.

International players with niche offerings much above 500 cc are also trying to cash in on the growing interest in superbikes. Harley-Davidson has set up a plant at Haryana for some of its bikes. Others are setting up assembly units in India to reduce the costs, as import of fully built bikes can be more expensive. Triumph, for instance, assembles its CKD imports at its plant at Haryana while Benelli’s CKD imports are assembled in Maharashtra.

...what it means for the stocks

The bounce-back in two-wheeler sales this fiscal turns the spotlight on the prospects for stocks in this space. With many players such as Honda, Yamaha and Suzuki being unlisted in India, the choice for investors is only among Hero MotoCorp, Bajaj Auto, TVS Motors and Eicher Motors (Royal Enfield).

Eicher: Premiumisation

The strong drift towards premium bikes will continue to benefit Eicher Motors. In the last five years, the motorcycle industry faced two years of shrinkage in volumes (2012-13 and 2015-16) and grew only in single digits each of the remaining periods. However, Royal Enfield has managed to grow volumes by 30-67 per cent in each of these years. Although this high growth has been on a small base, the shift in market preference indicates that Eicher will continue to show healthy double-digit volume growth in the foreseeable future. Considering the increasing demand and the long wait periods, the company set up a third plant near Chennai, which commenced operations last month. It is also expanding its footprint across the country by setting up new dealerships.

However, it is not that the market has not recognised the potential for this stock. The Eicher Motors stock has been a multi-bagger, moving up nine fold since the beginning of the market rally in September 2013. The stock now trades at a rich valuation of nearly 50 times the trailing 12-month earnings, leaving less scope for a strong rally from the current level.

Hero of the masses

At the other end of the spectrum, with rural demand reviving, Hero continues to be in pole position in the entry-segment, where it has seen its market share increase over the last few years. Yet, to remain competitive over the long term, the company does recognise the need to have a stronger presence in the fast growing scooter and executive/premium segments. Refreshed versions of the Maestro Edge and Duet scooters were launched recently. Ditto with the Achiever, a bike in the 150cc segment. Plans are afoot to launch a new 200cc bike towards the end of the fiscal as well. Considering that its market leadership in the entry-segment will hold the company in good stead in the near to medium term, the stock may be a good one to hold. Valuations are also reasonable at 22 times trailing 12-month earnings.

Valuation dampens TVS

TVS has got the going right on scooters and premium bikes. First, it has not succumbed to the pressure from Honda in the scooters segment and has managed to hold on to its market share. Secondly, the Apache has also been a key volume booster in the popular 150-200cc segment. Besides, the alliance with BMW is also a source of strength for the fast growing premium category. Two products in the premium segment are expected to be launched this fiscal as well. These factors have helped the company tide over vagaries in exports, especially in the three-wheeler segment. Tailwinds for the company in two-wheelers remain; but the stock has moved up sharply, taking the valuation to about 53 times the trailing 12-month earnings. This limits the room for upside from here on.

Headwinds for Bajaj Auto

Similar to Hero MotoCorp, Bajaj Auto is among the more reasonably valued auto stocks, trading at 22.5 its trailing 12-month earnings. However, it may not be an attractive one to hold now. Exports constitute at least 35 per cent of the total revenues and it has been grappling with headwinds in this segment. The company has been trying to address this by moving away from its traditional export markets such as Sri Lanka and Nigeria, to newer ones such as Turkey, Iran, South-East Asia and Bangladesh. Besides, although the company focuses on mid- and higher segment bikes and has had launches in the right segments in the recent past, competitive pressures remain strong.



Published on September 23, 2017

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