Institutional Research

Two wheelers – Dealer Survey* Report

INDUSTRY NOT OUT OF WOODS YET!
Automobiles
The sentiment towards the two-wheeler segment has been badly hit in FY08

Dealer Survey
due to the rise in interest rates and resultant loan defaults on the part of the
customers. With banks having been forced to slow down lending for the
Analysts: purchase of two-wheelers, the incremental volume growth of most motorcycle
majors such as Bajaj Auto, TVS Motors and Hero Honda has taken a beating.
Ajay Shethiya, CFA The two-wheeler industry registered a YoY de-growth of 5% for FY08 (the
Email: ajay.shethiya@tatacapital.com biggest drop in last 15 years).
Tel: +9122 6675 2630
Harish Awasthi To understand the growth scenario for FY09, we recently surveyed dealers and
Email: harish.awasthi@tatacapital.com finance companies connected with the two-wheeler industry. Most of the
respondents hinted at the possibility of a flattish volume growth for FY09E.

Trend in two-wheeler industry Key Highlights:

Financial Scenario-From bad to worse - The credit market situation has
No’s in ’000s worsened over the past 12 months:
9,000 30% 1. IRR @ 23.4%: HDFC Bank has an IRR of 22% (up 600 bps in the last 12
8,000 25%
months) and ICICI Bank has 23.5% (up 150 bps in the last 3 months).
7,000 20%
6,000
2. Financing ratio dips by 11 percentage points: In the last 6 months, the
15%
5,000
financing ratio has declined significantly from 65% to 54%. Hero Honda
4,000
10% commands the highest financing ratio of 60% due to the better resale value
3,000
5% cited by the finance companies.
2,000 0%

1,000 -5% Financing Ratio Bajaj Auto Hero Honda TVS Motors
0 -10% 12 months back 58% 71% 65%
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09

Current 50% 59% 50%

Scooter Motor Cycles
Mopeds Industry Growth Drop 8,00bps 1,200bps 1,500bps
Source: Dealers, TATA Securities Research
Source: SIAM, Tata Securities Research 3. NPAs up almost 3.5-4 times: The average NPAs stand at
13—14% compared to normal level of 3-4%.However, dealers based in
Lucknow and Mumbai indicated the default rates to be in the range of 30-
Relative Performance 35% in some cases.

High NPAs force exit of financial players

160 4. Citibank moves out: The high NPA levels have forced Citibank to exit the
140 two-wheeler segment.
120 5. ICICI Bank may exit few circles: ICICI Bank is also planning to quit the
100 Noida and Ghaziabad circles.
80

60 Volumes under pressure in FY09: The demand scenario is expected to

40
Jun-07 Aug-07 Nov-07 Jan-08 Mar-08 Jun-08
Source: Bloomberg, Tata Securities Research
remain weak during the year.
6. The overall volume growth of the motorcycle segment in FY09 is estimated
in the range ~2-3% (50% dealers expect ~0-5% YoY growth, 15% expect a
YoY decline of 2-3% and the remaining 35% see a higher YoY growth of 5-
10%).
Trend shifts away from entry-level bikes
7. In our survey, 74% of the dealers said the customer preference is shifting
away from entry-level (100cc) bikes towards executive and premium bikes.
Bajaj Auto will be the largest long-term beneficiary of this changing trend
owing to its strong dominance in the executive and premium segments.

Note: * - The survey is based on feedback from 25 dealers ( 10 – Bajaj Auto, 11- Hero Honda and 4-
TVS Motors) spread across India and few finance companies ( Fullerton, ICICI Bank and HDFC Bank)

1 09 July 2008
 Institutional Research Dealer Survey

Increase in lending rates Financing Scenario

30%
HDFC Bank
22%
ICICI Bank 24%
24%
1.) Lending rates remain high
25% 22% 22%
22%
The overall cost of ownership has substantially gone up due to the steep
20% 18%
16% increase in lending rates.
15%
HDFC Bank’s IRR at 22% and ICICI Bank’s 24% is unlikely to soften in the near
10%
future.
5%

0%
12M back 6M back 3M back Current
2.) Default rates on the rise
Default Rates The average NPA’s range from 13-14%. However, ICICI Bank and Citi Bank
reportedly have experienced defaults anywhere between 30% and 40% in
40- 50% 6% Mumbai and Lucknow in some cases. In Lucknow, 10% of the defaulters
30- 40%
disappeared after taking delivery of the bike.
6%
In order to keep a check on the rising default rates, most banks have increased
20- 30% 6% the documentation work and tightened the lending norms in the last few
10- 20% 31%
months. The documentation process has become far more stringent in the last
12 months, according to 79% of the dealers.
0-10% 50%

0% 10% 20% 30% 40% 50% 60%

% of dealers

3.) High NPAs force exit of financial players

Registration process becoming The high NPA levels have forced Citibank to exit two-wheeler financing, while
stringent ICICI Bank is likely to leave Nodia and Ghaziabad.

Documentation Dealer view: The dealers expect the exit of ICICI Bank and other finance
has not changed
over time, 21% companies to adversely impact the sales of Hero Honda the most as it does
not have a supporting finance arm such as Bajaj Auto Finance. Bajaj Auto with
help of Bajaj Auto Finance has been successful in drawing customers away
from Hero Honda by offering higher financing during the festival season. Bajaj
Documentation was able to register higher sales in Noida on account of Bajaj Auto Finance
has tightened
over time, 79% Limited, according to a dealer.

4.) Decline in the financing ratio

Decline in financing ratio The high default rates have led to a sharp decline in the financing ratio from
65% to 54% in the last 12 months. The entry-level bikes have suffered the most
80% 71% 65% 65%
compared to premium-level bikes as they are largely purchased through
70% 59%
58%
50%
54% finance. In areas such as Noida, the financing ratio fell to as low as ~40% in
60% 50%
50% March 2008.
40%
30% Hero Honda commands the highest financing ratio of 60% due to the better
20% resale value cited by the finance companies.
10%
0%
Bajaj Hero TVS Industry
Honda
Before One Year Currently 5.) Loss in sales
The confluence of three factors 1.) Increase in the cost of ownership (owing to
Dealers view: Factors leading to high lending rates 2.) The high level of NPAs and 3.) Decreasing financing ratio
drop in sales
have led to volume de-growth.
Other, 10%

Too high EMI

17%
Unavailability of
financing
Unavailability of 54%
right mix of price
and features, 13%

Unavailability of Unavailability of
new models, 3%
discounts/incentives, 3%

Source: Dealers, Tata Securities Research

2 09 July 2008
 Institutional Research Dealer Survey

Resultant, the two wheeler finance market is likely to get

impacted

Trend in two-wheeler sales Trend in realisation LTV# and Financing Ratio

(In mn)

8.0 13% 42000 (In Rs) 80%

12% 74%
41000 70% 70%
7.8 9%
70%
40000
7.6 5%
7.4 2% 1% x 39000
38000
x 60% 65%

7.2 (3)% 50% 50%

54%
37000
7.0 (7)% 40%
(8)% 36000
6.8 (11)% FY07E FY08E FY09E
35000
FY07(E) FY08(E) FY09E FY07E FY08E FY09E LTV Financing Ratio
Volumes YoY growth Realization

#
Loan to Value

Two-wheeler finance market

(Rs bn)
200 16% 20%

10%
150
-3%
0%
100
152 -10%
50 111 107
-20%
-27%
0 -30%

FY07E FY08E FY09E

Two wheeler finance market YoY growth

Source: SIAM, Dealers, Tata Securities Research

3 09 July 2008
 Institutional Research Dealer Survey

Consumer Behaviour

1.) Consumer preference shifting away from entry-level bikes

Is customer preference shifting away from
economy bikes
A total of 74% of the dealers pointed out that customer preferences were
shifting away from entry-level bikes towards executive and premium bikes.
They cited the following reasons to support this argument:
No
Yes 9% • Finance companies are reluctant to finance entry-level bikes: This is on
74% account of increasing NPAs and past experience with the profile of buyers.
The share of entry-level bikes dropped from 38% in FY07 to 33% in FY08.
Can't Say
• Better product features and mileage for the same price: The narrowing
17%
price points between entry-level bikes and executive level bikes have led to
a shift towards the executive segment as it offers better product features
and the same mileage. Hero Hond’s 100cc Splendor NXG is priced at Rs.
41,166/- (ex-showroom) vis-à-vis Bajaj Auto’s 125cc XCD at Rs.43,848/-.

2.) Mileage, Affordability and Style are the major factors affecting buying
Major factors affecting buying decision
decisions
Other
• 76% of the dealers identified mileage as a major determinant in buying
New models
decisions
Cost of ownership
Discounts
• 52% identified price and affordability as predominant factors
Financing schemes • 40% considered style as a major plus.
Performance
Comfort
(For rating of factors based on their perceived importance by dealers,
Style And Pride
Mileage
please see Annexure-I )
Safety
Price (Affordability) Factors important for boost in sales
0% 20% 40% 60% 80%

% of dealers
The dealers rated factors such as price reduction, new models,
discounts/incentives, new features and financing in boosting sales.

• Price reduction and availability of finances received the thumbs up

Source: Dealers, Tata Securities Research
• Addition of minor features doesn’t necessarily translate into higher sales
• New models boost sales by attracting youngsters. For example, the sales of
Bajaj XCD and TVS Flame have picked up and the TVS dealers in Lucknow
are running short of supplies

(For details on rating the effectiveness of sales promotion strategies by

dealers, please see Annexure-II)

4 09 July 2008
Institutional Research Dealer Survey

Annexure- I
Rating the factors affecting buying decisions
Price Availability of Finance

3 4
6% 3 6%
6%
2
24%
1-Most
2 Important
1-Most 35% 53%
Important
70%

Product Features Discounts/Incentives

4 1-Most
6% 5-Least Important
1-Most Important 22%
3 Important 28%
28% 33%

2
11%
4
17%
2 3
33% 22%

Availability of new models

5-Least
Important
12% 1-Most
Important
4 29%
18%

3
12% 2
29%

Source: Dealers, Tata Securities Research

Scale: From 1 to 5; 1- most important and 5 - least important

5 09 July 2008
Institutional Research Dealer Survey

Annexure-II
Rating the effectiveness of sales promotion strategies
Price Reduction New Model
5-Least
5-Least
Effective 4 Effective
4% 4%
4 4%
1-Most 3
16%
Effective 13%
36%
3
16% 2 1-Most
17% Effective
62%
2
28%

Discounts/Incentives Financing

5-Least
Eff ect ive 3
4 4% 1-M ost 2 8%
12% Ef fect ive
8%
28%

3
24%
1-M ost
Ef fective
2 84%
32%

New features
5-Least
Ef fective
8% 1-M ost
Eff ective
28%

4
28%

2
3
12% 24%
s

Source: Dealers, Tata Securities Research

Scale: From 1 to 5; 1- most important and 5 - least important

6 09 July 2008
NOTES
Institutional Research Dealer Survey

Tata Securities Limited

Army & Navy Building, 2nd Floor, 148, M.G. Road, Fort, Mumbai 400 001
Tel: 91 22 67524000 Fax: 91 22 66378379 / 67524007
Web: www.tatasecurities.com

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Disclosure of Interest Statement in Dealer Survey Report

1. Name of the analysts: Ajay Shethiya / Harish Awasthi
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8 09 July 2008