twowheeler_20dec08
TRANSCRIPT
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1919191919ththththth DecDecDecDecDecemberemberemberemberember 20082008200820082008
Two Wheeler Sector UpdateUmesh [email protected]+91 22 30443305
Gaurant Dadwal
[email protected]+91 22 30443321
Riding through tough times…..Two wheeler sales have been witnessing a tough road ever since October 2006. During
April-November 2008 the two wheeler sales volume have reported a growth of 4% on
a comparative lower base in the same period last year. Although the interest rates
have come down by 75 bps during last 4 months, there is no relief from the financing
institutions on stringent financing norms adopted by them earlier. We believe although
the interest rates are softening and prices have come down due to cut in excise duty,
the road ahead for two wheelers for rest of FY09E period does not look promising.
After registering minor a growth of 4% in the first 8 months, we believe that the sales
volumes will fall in the remaining 4 months thereby reporting a 2-3% fall for FY09E in
the overall two wheeler sales volumes.
Two wheeler sales have been falling since the last 24 months, After touching a peak of
8,18,537 vehicles during festive season in October 2006 sales volumes of two wheelers
have not been able to breach this benchmark.
April-November 2008 sales review Segment wiseAll the three segments Viz. Motorcycle, Scooters and Mopeds have registered positive
growth in the first 8 months of FY09. Motorcycle segment which accounts for 80% of
the market for two wheelers has reported a growth of 3% on low base effect. while
scooters and Moped have reported growth of 7%and 5% y-o-y
Contd...
Although interest rates have started
coming down, two wheeler market is
likely to remain weak in the near term
We estimate FY09E two wheeler
market to report decline by 2-3%
Average growth in sales volume for
last 32 months has come down to 0.8%
as against long term growth of ~10%
All the three segments Viz. Motorcycle,
Scooters and Mopeds have registered
positive growth in the first 8 months of
FY09.
Domestic Sales Trend
Source: Reliance Money Research
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
A p r - 0 6
M a y - 0 6
J u n - 0 6
J u l - 0 6
A u g - 0 6
S e p - 0 6
O c t - 0 6
N o v - 0 6
D e c - 0 6
J a n - 0 7
F e b - 0 7
M a r - 0 7
A p r - 0 7
M a y - 0 7
J u n - 0 7
J u l - 0 7
A u g - 0 7
S e p - 0 7
O c t - 0 7
N o v - 0 7
D e c - 0 7
J a n - 0 8
F e b - 0 8
M a r - 0 8
A p r - 0 8
M a y - 0 8
J u n - 0 8
J u l - 0 8
A u g - 0 8
S e p - 0 8
O c t - 0 8
N o v - 0 8
U n i t s
(30)
(20)
(10)
0
10
20
30
40
G r o w t h ( % )
Source: Reliance Money Research
Market Share in Apr- Nov 2008
Market share in 2001
Growth in Apr- Nov 2008
Sales volume Base
Reasons behind growth in Apr- Nov
2008
Motorcycles
80%
54%
3.0%
Low base - As motorcycle sales
plummeted in FY08
Fuel price hike led to decline in car
sales in crease in volumes of premium
segment bikes
Low base and Higher market share
Economy segment showing growth on
back of cash sales
Array of New model and Launches
Scooters
15%
26%
7.0%
Minor Growth in FY08 due to lower
market share
Gearless scooters Riding growth
Honda motor (HMSI) reporting good
growth
Activa and Dio reporting good volumes
Mopeds
5%
19%
5.0%
Minor Growth in FY08 due to
lower market share
Still preffered in Rural Areas
Comparatively lower price tag
Least affected by Interest rates
due to lower price tag and higher
cash sales
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2
19th December 2008
Why sales volume have been declining?
Interest rates still hovering at high levels
High interest rates are among the major reasons for the slowdown in sales. PLR has
moved northwards from 10.25% in May 2006 to 13.75% in November 2006. A year
back almost 50% of two wheeler sales were financed on credit but with soaring interest
rates credit financing has dropped and the proportion of cash sales have increased.Our analysis and feedback from industry suggest that credit financing has dropped to
30% while cash sales have moved up to 70%. We site the main reason for this change
is because of high level of interest rates offered by financing institutions. The two wheeler
market in India is especially vulnerable to interest rate. But although interest rates have
started softening due to cut in CRR and repo rates, we believe it still hovering at high
levels and needs to come down to push two wheeler demand.
Lack of Financers also affecting sales
Due to increase in number defaults, financers like Citi and ICICI irked themselves out
of the two wheeler financing business thereby the pie of two wheeler financing has
contracted. Initially ICICI which had a major market share of 40% in two wheeler financing
started lending in few locations, but later with the rise in number of delinquencies it has
completely moved out of the two wheeler financing business at the dealer’s location.
We believe that financers are not likely to return back in the short term.
Financing norms have become more stringent
With the increase in number of defaults and rising delinquencies, the existing financers
have made financing stricter in order to minimize the number of defaults. Our check
with dealers brings us the point that previously financing was pretty easy but now with
various requirements such as CIBIL check, permanent residence proof, strict check on
number of dependent etc., financing has become more difficult which in turn has leadto rejection of financing cases which is also impacting the sales volumes two wheeler
sector.
Price hikes mainly due to raw material cost push
Prices of key raw materials such as steel and aluminium had started moving up since
January 2008, which led to few price hikes by the players in two wheeler market which
in fact deteriorated the situation to worse level for the struggling two wheeler industry.
Consumers of two wheeler market had started postponing their purchase decision due
to rising prices of vehicles. However, since October 2008 price of steel has softened to
a marginal extent and so there is not much scope of a price cut. Even if there is a price
cut we believe that the price cut will not fuel the growth of two wheeler sales volumes as
the main problem which in front of the two wheeler industry still remains as lack of
financing.
Contd...
Steel Price Movement
Source: Reliance Money Research
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
A p r - 0 6
J u n - 0 6
A u g - 0 6
O c t - 0 6
D e c - 0 6
F e b - 0 7
A p r - 0 7
J u n - 0 7
A u g - 0 7
O c t - 0 7
D e c - 0 7
F e b - 0 8
A p r - 0 8
J u n - 0 8
A u g - 0 8
O c t - 0 8
Month
P e r T o n n e / I N R
Company % of Price Hike ~ Price Hike Amount
TVS 2-3 % hike in YTD FY09 Rs.1000
HH Two price hikes in April 2008 Rs.500-1000 in April and upto
and August 2008 Rs.1500 in August
BAL 2-3% hike Rs.1500
Source: Reliance Money Research
Credit financing has dropped to 30%
while cash sales have moved up to
70%.
We believe that financers are not
likely to return back in the short term.
PLR rates
Source: Reliance Money Research
10
11
12
13
14
M a r - 0 6
A p r - 0 6
M a y - 0 6
J u n - 0 6
J u l - 0 6
A u g - 0 6
S e p - 0 6
O c t - 0 6
N o v - 0 6
D e c - 0 6
J a n - 0 7
F e b - 0 7
M a r - 0 7
A p r - 0 7
M a y - 0 7
J u n - 0 7
J u l - 0 7
A u g - 0 7
S e p - 0 7
O c t - 0 7
N o v - 0 7
D e c - 0 7
J a n - 0 8
F e b - 0 8
M a r - 0 8
A p r - 0 8
M a y - 0 8
J u n - 0 8
J u l - 0 8
A u g - 0 8
S e p - 0 8
O c t - 0 8
N o v - 0 8
D e c - 0 8
I n %
Because of rising raw material costs,
two wheeler players incresed the prices
of vehicles
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3
19th December 2008
Measures to control decline
Aggressive new launches has not supported the fall in demandSince Oct 2006, when sales have plummeted two wheeler players have made array of
new launches post September 2008 i.e. during the festive season in FY08. Two wheeler
market has witnessed around 15 new launches/variants during last 6 months, but it
attracted consumers only for a limited period.
Limited discounts, not supportiveDue to declining sales volume few players opted for discounts and promotional schemes
to push the volumes. However, compared to earlier years the discounts were very
restricted to just a few selected models largely due to stress on margins which was on
the back of rising input costs.
BAL - In October 2007 had reduced the prices and had extended the discount on
Platina till December 2007. While in December 2008 the company has announced a
7.99% financing scheme on its vehicle which compared to the existing 14% interest
rates prevailing in the market is cheaper and attracting customers.
HH - HH in October 2007 had offered discount only on 2 of its entry segment bike.
TVS - Badly Impacted by delay in launch of Flame the company did not offer any
discounts.
Tie ups with banks, likely to help in the long termPost the exit of major financers from two wheeler financing market, all the three major
two wheeler manufacturers have been entering into agreements with banks to finance
two wheeler sales. BAL with its financing arm of BAFL has been offering attractive
financing schemes. HH has tied up with Fullerton India and Andhra bank. While TVS
along with its financing arm TVS Finance has tied up with IndusInd Bank. But we
believe this strategy will help the companies in the long term and in the short term we
do not expect any major positive impact.
Exports supporting sales volume to some extentIn FY08, when the domestic sales reported a slump of 8% in sales volumes, exports
reported a robust growth of 32% in volumes on a Y-o-Y basis, thereby restricting theoverall fall to 5% y-o-y. For the period Apr-Nov 08 export sales have showed strong
growth momentum and have recorded a growth of 31% y-o-y. As domestic markets
continued to decline, majority of two wheeler majors have put special impetus on the
export segment sales. BAL and TVS Motors have partly offset the poor sales volume
numbers in FY09 due to rise in exports. Exports of BAL and TVS During the first 8
months of FY09 reported a growth of 41% and 51% respectively. We expect exports
for the year FY09 to register a growth of 15% in FY09E. But the concerns over slowdown
in the global market may impact the exports of two wheeler companies in near future.
Cenvat cut impact, in fact likely to be negativeThe government as a measure to ease out the declining sales volumes in the automobile
industry has reduced excise duty on all the segments of two wheelers. The reduced
rates of excise duty will remain valid till 31st March 2009. All the major two wheeler
manufacturers have passed on the excise duty benefit to their customers in terms of
price cuts. But with the disappointing sales during the festive season has piled up the
inventory levels at dealers end and with immediate price cuts being announced, webelieve that two wheeler companies will have to bear the difference of prices on stock
at dealers end. We expect BAL to be impacted to a larger extent as there is a
comparative huge inventory piled up at BAL dealers.
Nos FY08 FY07 % Growth Apr-Nov 08 Apr-Nov 09 % Growth
Motorcycles 776141 545887 42% 676986 504232 34%Mopeds 18224 37566 -51% 5414 13952 -61%
Scooters 25482 35685 -29% 19436 17632 10%
Total 819847 619138 32% 701836 535816 31%
Exports
Source: Reliance Money Research
Contd...
TVS Rs.700-2000
HH Rs.1000-2000
BAL Up to Rs.2100
Reduction in prices due to
CenVAT
Source: Reliance Money Research
Two wheeler market has witnessed
around 15 new launches/variants
during last 6 months
Discounts during 2008 were limited for
selective models
Source: Reliance Money Research
Export Sales
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
A p r - 0 6
J u n - 0 6
A u g - 0 6
O c t - 0 6
D e c - 0 6
F e b - 0 7
A p r - 0 7
J u n - 0 7
A u g - 0 7
O c t - 0 7
D e c - 0 7
F e b - 0 8
A p r - 0 8
J u n - 0 8
A u g - 0 8
O c t - 0 8
N o o f U n i t s
D o me s ti c s a le s D o m + Exp Sa le s
Export Growth %
47
21%
40%
47%38%
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
FY04 FY05 FY06 FY07 FY08
0
5
10
15
20
25
30
35
40
45
50
In Mn Un it s % grow th
Source: Reliance Money Research
Exports bridging the gap between
domestic and total sales
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4
19th December 2008
Massive Impact on Two Wheeler Companies
We believe the long term growth story for two wheeler market remains intact, but due
to recent change in economic cycle and global slowdown, the two wheeler markets
have taken a breather for the short/medium term period.
Inventory levels are likely to go up
Due to drop in demand for two wheelers, the inventory levels at the dealers have goneup. According to our feedback from few dealers, the inventory levels have gone up to
2-2.5 months. We expect the inventory levels and working capital cycle for these
companies would go up in FY09E and FY10E. We have tried to analyse historical
trends for working capital cycle. In FY01 and FY08, the two wheeler industry’s sales
volume dipped by 0.5% and 5.1% respectively. We have used both of these years to
analyse the changes in working capital cycle for both of these years. In FY08, the
working capital cycle went up marginally for TVS and BAL. We estimate the working
capital cycle for BAL to become positive and for TVS and HH it will increase to 34 days
and negative 31 days respectively for FY09E.
Margins to remain under pressureAlthough raw material prices have started softening and expected to ease out the
pressure on margins, we believe because of likely decline in the sales volume, the
margins for FY09E will continue to remain under pressure. We do not estimate any
major gains in margins due to softening raw material prices for FY09E.
Capex plans are likely to get deferred further As the sales volume continues to decline most of the two wheeler companies are
becoming conservative and have deferred their respective capex plans.
Company Estimated/announced Comment
capex
Bajaj Auto Rs.1.5 bn Can fund capex through internal accruals.
TVS Rs.400 mn Already cut capex plans from Rs1bn to Rs.400mn.
Hero Honda Rs.4bn Can fund capex plans through internal accruals.
Contd...
WC (Days) FY99 FY00 FY01 FY02 FY07 FY08 FY09E FY10E
Bajaj Auto 74.8 69.5 67.4 30.9 (22.6) (11.3) 0.6 0.7
Hero Honda (5.6) (8.9) (12.7) (37.3) (21.9) (35.5) (30.9) (31.2)
TVS 15.8 21.3 24.5 7.1 10.2 22.8 33.8 25.6
Source:Reliance Money Research, Working Capital for BAL is for erstwhile Bajaj Holdings
Demand Driver Earlier Outlook Short/Medium Outlook Long Term OutlookRising income
Interest Rates
Financing
Excise cut
Price cuts
Inventory
New launches
Exports
Demand Drivers
Source:Reliance Money Research
We expect the inventory levels and working capital cycle for these
companies would go up in FY09E and
FY10E.
Historically net working capital days
moved up marginally during slowdown
We do not estimate any major gains in
margins due to softening raw material
prices for FY09E.
Source: Reliance Money Research, company announcements
Net Working Capital (Days)
Excise duty cuts is likely to remain
positive demand driver
Inventory clearance offers are likely to
attract customers
Capex programs are likely get deferred
further in near future
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19th December 2008
Company Announced capex Comment
Honda Motorcycle Rs. 3 bn Raising production capacity
from 1.2 mn to 1.5 mn (3 Years)
Suzuki Rs. 1.5 bn Raising production Capacity to 2.5 lakh
units by next year, up from 1.7 lakh units.
Yamaha Rs. 5.6 bn Capacity to 8 lakh units in twoyears, up from 1.7 lakh units.Planning
to set up R & D (2 Years)
But smaller players maintaining capex plans
No major negative impact likely on ROCE
Two wheeler business is regarded high for their healthy cash generation abilities and
higher return on capital. The capex requirement of our universe companies for FY09E
and FY10E is not substantial and except TVS, both BAL and HH have very good working
capital management. Although margins for two wheeler companies would remain under
pressure, we don’t expect any substantial dip in margins which in turn would not impact
ROCE negatively for FY09E and FY10E. Only in the case of HH, ROCE is likely to dip
up to 41% in FY09E.
Contd...
Source: Reliance Money Research
More production is likely to shift to tax free zoneDue to slowdown production of two wheeler companies have come down substantially.
Few companies have opted for shut down of production plants. We believe to remain
competitive many players are likely to shift more production to excise free zones like
Uttarakhand. All the three two wheeler majors have production facilities at these areas
and would get benefit due to zero tax rates.
We expect two wheeler demand to decline by 2-3% y-o-y in FY09EHigh interest rates, stringent financing policies, slowdown in overall economy etc has
been impacting the sales volume of two wheeler sector. We estimate domestic sales
volume of two wheeler sector to decline by ~4% y-o-y in FY09E to 6.9mn and exports
to grow by ~15% to 0.9mn and total two wheeler sales to decline by ~3% to 7.9mn. We
believe the fall in sales volume to also impact Q3FY09E results of these companies.
We do not foresee any change in the situation unless there would be improvement on
further softening interest rates, availability of easy financing options and improvement
in overall economy cycle.
We downgrade HH estimates due to likely dip in sales volume for rest of the period in
FY09E. We estimate HH to report EPS growth of 18% y-o-y and recommend a HOLD
rating on HH with a target price of Rs.837. While for BAL we estimate EPS decline of
12% for FY09E. KTM would also likely to face pressures due to slowdown in Europeanregion, we believe it would not provide any immediate benefit to BAL. We recommend
a Reduce rating for BAL with a target price of Rs.394. For TVS we estimate EPS to
decline by 11% and recommend a Reduce with a target price of Rs.25.
26.6
24.2
32.330.3
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
FY07 FY08 FY09E FY10E
51.7
47.8
44.141.0
-
10.0
20.0
30.0
40.0
50.0
60.0
FY07 FY08 FY09E FY10E
9.0
2.6
5.0
5.7
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
FY07 FY08 FY09E FY10E
Bajaj Auto Hero Honda TVS Motors
Source: Reliance Money Research, Company announcements
In the case of HH, ROCE is likely to
dip up to 41% in FY09E.
We believe the fall in sales volume to
also impact Q3FY09E results of these
companies.
We recommend a HOLD for HH and
Reduce on BAL snd TVS
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19th December 2008
Bajaj Auto Hero Honda TVS Motor
Year Ended Mar09E Mar10E Mar09E Mar10E Mar09E Mar10E
Net Sales (Rs Mn) 84,799 91,173 117,084 132,368 35,091 39,601
EBITDA (Rs Mn) 11,159 12,149 15,791 17,240 1,033 1,436
EBITDA (%) 13.2 13.3 13.5 13 2.9 3.6
PAT (Rs Mn) 6,971 7,744 11,467 13,374 283 346
EPS (Rs) 48.2 53.5 57.4 67 1.2 1.5
CMP (Rs) 410 410 822 822 26.4 26.4
P/E (x) 8.5 7.7 14.3 12.3 22.0 17.6
Financial Estimates
Dealer checkWe visited few dealers to have a understanding at the grass root level and here are
the key findings of the same
Our dealer check suggests that cash sales as part of overall sales has jumped to
approx 70-75% as compared to a mere 40% a year back. While, number of financed
vehicles has dropped down to 25-30% as against 60% a year back.
Financing norms have become very stringent in the last one year. Financers are now
doing a CIBIL check and family background, residential proof etc have been stressed
on to a comparatively higher extent.
Interest rates for two wheelers have not taken a dip as against normal PLR interest
rates which have cooled down to a certain extent. Due to increase in number of
defaults financers prefer higher Interest rates in order to keep customers at bay.
Interest rates have eased up from 14.5% to 13.5% now.
Dealers have also agreed to the fact that sales volumes are not going to jump
significantly unless financing norms and interest rates are eased up. Price cuts might
offer temporary boost to sales but the long term problem still lies in the roots of
financing and not pricing. Two wheeler auto majors are feeling the pinch of rising input costs and weakening
sales. In order to push the margins the companies have reduced dealer commissions.
Due to the slowdown, two wheeler companies have stressed on cost cutting measures.
Our meetings with dealers suggest that companies are cutting down on unnecessary
day to day costs like lesser consumption of electricity, rationalization of staff. The
earlier planned expenditure like expansion /renovation of showroom has also kept
on hold. But most of the dealers said they would sustain in this market even if two
wheeler market doesn’t pick up of next 5-6 months.
Number of footfalls in the showrooms has dropped down significantly. One of our
dealer said that footfalls have dropped down to 20-25/day as against 50/day previously
thereby reporting a 50% fall in demand in Urban areas.
Companies had offered restricted discounts on selective models during the last festive
season in 2007. However, in the recent festive season companies have strategically
launched new awaited models in order to push sales without any discounts on the
promotions.
Companies are facing stiff cost pressure and in order to cut down expenses companies
are cutting down on vendor bases.
Companies have been passing on all necessary benefits to the customers when it
comes to reduction in prices. Apart from this companies are now focusing on attracting
customers by tying up with financers thereby making financing easier.
Due to the slowdown, two wheeler
companies have stressed on cost
cutting measures.
Number of inquiries have also reduced
at dealers end
Companies are launching new products
without any discounts/schemes
Cash Sales have jumped to 70-75% as
against 40% a year back
Interest rates have softened marginally
during last one year
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19th December 2008
DISCLAIMER:This document has been prepared by Reliance Money Limited, Mumbai and is to be used by the recipient and not to be circulated. The information
provided should not be reproduced, distributed or published, in whole or in part without prior permission from the company. The information and the opinions
contained in the document have been compiled from source believed to be reliable . The company does not warrant its accuracy, completeness and correctness.
This document is not and should not be construed as an offer to sell or solicitation to buy any securities.
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Tel.: 91-22-30443301, Fax No.: 30443306
Rating Stock Performance
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HOLD Appreciate upto 15% in next 12 months
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