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The si

Corporate Ratings
Anjan Deb Ghosh
+91 22 6179 6392

Subrata Ray
+91 22 6179 6386

Jitin Makkar
+91 124 4545 368



Indian Two-Wheeler Industry
Searching for exports-driven growth, but challenges galore

March 2014

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1. Overview

2. Special Feature
Overseas Market: Opportunities and Challenges
Global Two-Wheeler (2W) Industry Leaderboard
India has been amongst the fastest growing 2W markets in the world in the last five years
India overtook China in terms of domestic 2W sales volumes in 2012; the gap increased further in 2013
Indonesia, the third largest 2W market, has also seen industry growth stagnate over the last few years
Slowdown in economic growth in Vietnam hurts domestic 2W demand; yet, OEMs remain in an investment mode with an eye on
boosting exports
Developed markets of North America, Europe and Japan have experienced significant contraction in new 2W registrations in the
last few years

Domestic 2W growth expected to falter due to high penetration in addressable income segment
Domestic 2W sales volume growth expected to remain tepid over the near term; economic growth recovery holds the key to
increase the pie of households having the threshold purchasing power to buy a 2W

Indian 2W OEMs exports performance trends
2W exports from India have grown at a healthy volume CAGR of 19% in the last seven years, albeit on a low base
Bajaj Auto remains the largest 2W exporter from Indian by far
2W exports growth from India slowed down during last two years due to country-specific challenges; yet OEMs remain bullish on
growing their exports pie

Case Study: Indonesia
Indonesian economy had grown well post the last downturn; recent trends in economic indicators have several similarities with
that of Indias economic performance
Given that Indonesia is the third largest 2W market in the world, it presents a large opportunity for any new entrant (at least
Japanese brands rule the 2W market of Indonesia
Similarities between the Indonesian and the Indian 2W market
Challenges galore for Indian 2W OEMs in Indonesia

Other ASEAN Markets
Vietnam and Thailand are no different in terms of their liking for Japanese 2W brands; Philippines is an exception though

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Latin America
Sales of 2Ws in Brazil, the largest market in Latin America, have declined for two consecutive years
Market still remains under-penetrated which augurs well for long-term growth prospects
Honda is the clear market leader in Brazil; Bajaj Auto may look to make an entry into the Brazilian market in partnership with
The odds of Indian OEMs doing well in other smaller Latin American markets appear higher

Select South Asian Countries
2W exports from India to Sri Lanka have suffered in last two years due to increase in import duty; Bajaj Auto remains the leading
2W player in the country
2W demand drivers: High population, in case of Pakistan and Bangladesh; relatively higher purchasing power, in case of Sri Lanka

Nigeria is the largest 2W market in Africa; although it has shrunk post the ban imposed on commercial motorcycle taxis in select
2W OEMs in Nigeria have had to explore other African markets to cushion the impact of decline in 2W demand in Nigeria
Unlike Nigeria, the Kenyan 2W market is expected to sustain its healthy growth; Indian 2W OEMs are positioning themselves well
to capitalize on this growth opportunity
Although Africa provides a strong long term growth opportunity for 2W OEMs, near to medium term growth in the continent may
remain moderate

3. Segmental Analysis of the Indian 2W Industry
Trend in 2W segment volume mix
Trend in segment-wise sales volume growth of 2Ws

4. Quarterly Performance trends of publically-listed 2W OEMs in India
Hero MotoCorp Limited
Bajaj Auto Limited
TVS Motor Company Limited

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Searching for exports-driven growth, but challenges galore

March 2014

Domestic 2W demand to decelerate further in the near term
The Indian two-wheeler (2W) market, the largest in the world at 14 million units, has grown at a volume CAGR of 14% over the last five years (CY 2008-2013). This
track record of healthy growth has been much better than that of the global 2W industry as a whole that grew at a relatively slower rate of 3% during this period. The
key growth drivers for Indias domestic 2W industry have been its large population (fostering strong consumption trends), favourable demographic profile, moderate
2W penetration levels (in relation to several other emerging markets), under developed public transport system, growing urbanization and strong replacement
demand. Although over the last two years, domestic 2W demand has slowed down, reflected in growth of 2.9% in 2012-13 and 6.1% YoY in 11m 2013-14, the overall
performance has remained much better than some of the other automobile segments, namely passenger vehicles and commercial vehicles, that have experienced
negative growth. However, we expect 2W demand growth to decelerate more in the near term as current penetration level in the addressable income segment runs
high. Our report discusses the trends in 2W penetration levels in India in the addressable income segment over the years, highlighting the movement in number of
households having the threshold purchasing power to buy a 2W.

Growth in demand for scooters may continue to outshine that of motorcycles
Even as the 2W industry as a whole may possibly run against the high penetration cliff in the near term, the scooters segment in our view enjoys several structural
advantages. Compared to motorcycles (targeted at males), the penetration of scooters (targeted at both males and females) remains lower by a factor of 3-4 times. As
more women adopt mobile lifestyles and as scooters get increasingly targeted at both the sexes, the case for continued penetration-led growth for the scooters
segment remains strong. The increased supply push in the form of new scooter launches will only add to the growth momentum. In the last five years, the share of
scooters in total 2W sales volumes has increased from 15% in 2008-09 to 24% in 11m 2013-14. In terms of recent trends, while domestic motorcycle sales volumes
grew by a modest 2.7% YoY in 11m 2013-14, the volumes of scooters expanded by a robust 21.4% YoY during the same period. However, we expect the bigger
segment of motorcycles, which accounts for 76% of industry volumes, to see a further slowdown in demand till such time as the pie of households having the
threshold purchasing power to buy a 2W expands. This in turn would depend on the pace of Indias economic growth recovery that could (a) boost personal
disposable incomes and resultant consumption growth, (b) pull up the un-penetrated households from a low income segment to the next higher income segment, (c)
further enable increase in the number multiple two-wheeler households, enabling penetration supported rise in 2W demand.

Exports could potentially be the next growth frontier, but challenges abound
On the exports front, the year 2012-13 was a period of weak growth for the industry with volumes at 2.0 million units declining by 0.7% over the previous year. This
was consequent to hike in interest rates in several countries, increase in import duty in Sri Lanka, trade restrictions imposed by Argentina, dollar sales embargo with
Iran and ban imposed on motorcycle taxis in Nigeria. This apart, the reduction in incentives available to 2W exporters, twice over the last two years, had also made
Indian 2W OEMs partially hike product prices in overseas markets, further contributing to pressure on sales volumes. In 11m 2013-14, growth in 2W exports has been
higher at 5.4% YoY led by strong traction in export volumes of Yamaha, TVS and Honda, even as Bajaj Auto (the largest 2W exporter from India that also occupies
leading position in several overseas 2W markets) witnessed tepid exports growth for the second year running. From a medium term perspective, 2W exports continue
to present a strong opportunity for industry participants to expand presence in geographies such as Africa and Latin America that have low 2W penetration,
inadequate public transport infrastructure and adequate scope for both secular as well as market share gain-led growth. Hero MotoCorp, the largest 2W OEM in India,
which currently has a small presence internationally, considers expansion in overseas markets to be one of its key growth driver over the next few years. Indian 2W
OEMs are also investing in international markets (mainly Africa and Latin America) to set-up local assembly units to exercise better control over demand-supply,
branding, back-end infrastructure, currency risk, besides other tariff and other non-tariff hurdles. While some of the international 2W markets are mature and have
entrenched incumbents, who would be hard to compete against, the Indian 2W OEMs are being prudent in identifying markets that are currently smaller in size, or

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OVERVIEW Continued..

have relatively lower competitive intensity. Our report discusses key characteristics of the 2W market in the ASEAN region, Latin America, South Asia and Africa while
pointing out trends in volume growth, market share and possible challenges for Indian 2W OEMs in their endeavour to target these markets for future growth.

Honda continues to grow its market share
In terms of market share, while Hero MotoCorp continues to remain the distant leader with a share of 41.6% in 11m 2013-14, it saw its share erode by 121 basis points
(bps) compared to 2012-13 (45.1% market share in 2011-12). A large part of Hero MotoCorps market share erosion is attributable to weakness in demand for 100cc
bikes, a segment which is the companys primary volume contributor. 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 2013-14 compared to 2012-13 (by 353 bps and 106 bps, respectively). The loss of Hero MotoCorp, Bajaj Auto
and TVS has been Hondas gain as it continues to demonstrate steady gains in market share across the board. Honda has strengthened its market share in the domestic
2W industry from 14.9% in 2011-12 to 23.6% in 11m 2013-14 on the strength of its strong brand, growing distribution network and new product launches. In the recent
months as also over the short to medium term, a large number of new models have been/ are likely to be introduced by various 2W OEMs across segments. This, in an
environment of weak domestic demand, is likely to make the OEMs quest to expand volumes be accompanied by pressure on profitability.

Overall, ICRA expects the domestic 2W industry volumes to grow by around 6-7% in 2013-14 and 2-4% in 2014-15 as base effect as well as high penetration in the
addressable income segment weigh on demand. Over the medium term, the 2W industry is expected to report a volume CAGR of 8-9% to reach a size of 21-22 million
units (domestic + exports) by 2016-17, 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

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