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ICRAGhosh RATING FEATURE Anjan Deb +91 22 3047 0006 aghosh@icraindia.com

Indian Two-Wheeler Industry

Near term growth pressures on both domestic and exports front

Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia.com Jitin Makkar +91 124 4545 368 jitinm@icraindia.com

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Page March 2013

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WHATS INSIDE?
1. Overview 2. Is the Indian two-wheeler industry staring at the possibility of sluggish volume growth over the next few years? Past Revisited: What had caused the sharp slump in two-wheeler sales in 2007-08? What has changed in the last five years that poses risk to two-wheeler industry growth? Medium term demand drivers 3. The promise of exports How did the three key two-wheeler markets of the world perform in CY2012? Trend in two-wheeler sales volumes in key markets Geographical mix of global two-wheeler volumes Bajaj Auto: Bearing the mantle of two-wheeler exports from India Hero MotoCorp wants to make it big too, but challenges galore 4. Segmental Analysis of the Two-Wheeler Industry Trend in two-wheeler segment volume mix Trend in segment-wise sales volume growth of two-wheelers 5. Motorcycles Segment Trend in Sales Volumes Trend in Market Share Movement Medium Term Outlook 6. Scooters Segment Trend in Sales Volumes Trend in Market Share Movement Medium Term Outlook 7. Reality Check: Buying decision from the standpoint of total cost of ownership Product Price Comparison Annual Running Cost Comparison (Fuel Economy, Servicing Costs, Spare Parts Costs, Resale Value)
8.

Each OEM navigating a specific set of challenges! What are they?

9. Quarterly Performance trend of listed two-wheeler OEMs Hero MotoCorp Limited Bajaj Auto Limited TVS Motor Company Limited 10. Annexure Monthly sales Volume Trends.31 P age |2

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INDIAN TWO-WHEELER INDUSTRY

Near term growth pressures on both domestic and exports front
March 2013

OVERVIEW
Volume Trajectory With domestic volume growth of 3.9% YoY and exports volume growth of minus (-) 1.1% YoY in 11m 2012-13, the Indian two-wheeler (2W) is currently amidst a slowdown phase last experienced in 2007-08/ 2008-09. Several factors including high inflation, firm interest rates, rising petrol prices, besides weak monsoons have been dampening demand in the domestic market over last several quarters. At the same time, overseas sales have been adversely impacted by increase in interest rates in several target countries, increase in import duty in Sri Lanka, trade restrictions imposed by Argentina and dollar sales embargo with Iran. This apart, the reduction in incentives available to 2W exporters, twice over the last 18 months, has persuaded Indian 2W OEMs to partially hike product prices in overseas markets, adding to the pressure on export volumes. One noteworthy statistic, however, is that based on CY2012 volumes, India is now the largest 2W market in the world with sales volumes of 13.8 million units (domestic), having overtaken China at 12.6 million units. In fact, while 2W sales volumes in India grew by 5.8% in CY2012 over the previous year, the domestic demand in both China and Indonesia (the second and third largest 2W markets, respectively) shrunk by 10.0% and 9.2%, respectively. Growth Constituents The deceleration in volume growth of the domestic 2W industry, 3.9% YoY in 11m 2012-13, is largely attributable to the motorcycles segment which grew by 0.9%YoY; even as the scooters segment posted 16.2% YoY expansion during this period, albeit at a smaller base. With this, the share of the scooters segment in the domestic 2W industry volumes increased to 21.1% in 11m 2012-13 from 17.5% in 2010-11. Within the motorcycles segment, while the entry and executive segments comprising of 100cc bikes and the premium segment comprising of 150cc bikes have been experiencing anaemic demand, the 125cc segment ( contribution of 20% to domestic motorcycle sales in 11m 2012-13) has been a positive outlier recording a volume growth of 29.7% YoY in 11m 2012-13, benefitting both from new model launches as also the trend in up-trading and down-trading from the respective lower and upper price/ performance segments. Market Share Movement The last year and a half has been marked by greater traction in new product launches and focus on expansion of customer touch points by most 2W OEMs. However, a dull demand environment restricted the ability of most OEMs to leverage the supply-side efforts adequately. As demand levels failed to impress, the 2W OEMs resorted to even more supply-side doses viz., attractive financing schemes, discounts on insurance for limited period etc. The OEMs had generally not resorted to these latter set of tools in 2009-10, 2010-11 and 2011-12 and their return to use as a promotional lever is indicative of the weak demand conditions. In terms of market share, while Hero MotoCorp continues to remain the distant leader with a share of 43.0% in 11m 2012-13, it saw its share erode by 220 basis points (bps) during this period compared to the corresponding previous. A large part of this market share set-back was caused by weakness in Hero MotoCorps sales volumes in the 100cc segment, even as the OEM expanded its market share in some of the other segments like the relatively faster growing scooters segment and the 125cc segment of bikes, by virtue of new product launches. The other two leading Indian OEMs too, namely, Bajaj Auto and TVS Motor experienced decline in their respective share in the domestic 2W market in 11m 2012-13. Honda, however, continued to demonstrate steady gains in market share across the board and strengthened its market share from 14.9% in 2011-12 to 18.6% in 11m 2012-13. Having overtaken TVS volumes in October 2011 and having achieved parity with Bajaj Autos volumes in recent months, Honda is now the second largest 2W OEM in India. In ICRAs view, the ongoing environment of weak demand is likely to have a dissimilar impact on each player depending on the respective OEMs product portfolio mix and marketing strategy. Hero MotoCorps adeptness at protecting its 100cc segment moat, Bajaj Autos ability to maintain a consistent brand strategy, TVS ability to plug its product portfolio gaps and Hondas success in scaling up its distribution and service network will govern the overall domestic 2W market share distribution in the times to come.

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Capacity Expansions and Investments Several industry participants have announced greenfield capacity expansion plans in recent periods: Hero MotoCorp plans to invest Rs. 15 billion over the next two years towards establishing facilities in Rajasthan and Gujarat; Honda is in the process of setting-up its third manufacturing facility in Karnataka; Yamaha too is settingup a new plant in Tamil Nadu at an investment of Rs. 15 billion. Together, these three OEMs will add 4 million units of additional 2W capacity over the next two years, representing 22% addition on existing industry capacity. This apart, the new product development/ refurbishment expenses are also expected to increase as OEMs scramble to launch new products in a bid to generate consumer interest and sustain market share. ICRA expects these large investments to exert pressure on the industrys profitability metrics over the near term as volume growth moderation further takes root in the absence of immediate demand triggers. Outlook Overall, ICRA expects the domestic 2W industry to report a moderate volume growth of 4-5% in 2012-13 as demand slowdown as well as base effect catches up with the industry that has demonstrated a strong volume expansion over the last three years at cumulative annual growth rate (CAGR) of 21.8%. Over the medium term, the 2W industry is expected to report a volume CAGR of 8-9% to reach a size of 22-23 million units (domestic + exports) by 2016-17 (our longer-term growth forecast remains at 9-11%), as we believe the various structural positives associated with the domestic 2W industry including favourable demographic profile, moderate 2W penetration levels (in relation to several other emerging markets), under developed public transport system, growing urbanization, strong replacement demand and moderate share of financed purchases remain intact; as also the large opportunity available to grow presence in overseas markets, mainly Africa and Latin America. Table 1: Trend in Sales Volumes of Indian 2W Industry Volumes (Units, Nos.) Domestic 2009-10 2010-11 2011-12 Motorcycles 7,341,122 9,013,888 10,096,062 Scooters 1,462,534 2,057,604 2,562,841 Mopeds 564,584 697,418 776,866 Total Domestic 9,370,951 11,768,910 13,435,769 Exports 2009-10 2010-11 2011-12 Motorcycles 1,102,978 1,474,678 1,847,517 Scooters 30,125 50,646 90,605 Mopeds 6,905 6,295 9,076 Total Exports 1,140,058 1,531,619 1,947,198 Source: SIAM YoY Growth (%) 2010-11 2011-12 22.8% 12.0% 40.7% 24.6% 23.5% 11.4% 25.6% 14.2% 2010-11 2011-12 33.7% 25.3% 68.1% 78.9% -8.8% 44.2% 34.3% 27.1%

11m, 2012-13 9,305,708 2,673,649 717,333 12,696,690 11m, 2012-13 1,723,961 83,401 3,298 1,810,660

2009-10 25.9% 27.4% 30.9% 26.0% 2009-10 13.6% 16.7% -5.4% 13.5%

11m, 2012-13 0.9% 16.2% 2.2% 3.9% 11m, 2012-13 -0.6% -4.1% -63.4% -1.0%

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Please contact ICRA to get a copy of the full report

CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 REGISTERED OFFICE th 1105, Kailash Building, 11 Floor, 26, Kasturba Gandhi Marg, New Delhi 110 001 Tel: +91-11-23357940-50 Fax: +91-11-23357014 MUMBAI Mr. L. Shivakumar Mobile: 9821086490 3rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025 Ph : +91-22-30470000, 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia.com

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