twowheeler_20dec08

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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 ( % )


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



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


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


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


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



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


Contd...

TVS Rs.700-2000

HH Rs.1000-2000

BAL Up to Rs.2100

Reduction in prices due to

CenVAT


Two wheeler market has witnessed

around 15 new launches/variants

during last 6 months

Discounts during 2008 were limited for

selective models


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


Exports bridging the gap between

domestic and total sales



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



5

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...


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


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


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



6

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



7

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.

Equities: Trading through Reliance Securities Limited | NSE SEBI Registration Number Capital Market :- INB 231234833 |BSE SEBI Registration Number Capital Market :- INB 011234839 | NSE SEBI Registration Number Derivatives :- INF 231234833Commodities : Trading through Reliance Commodities Limited | MCX member code: 29030 | NCDEX member code: NCDEX-CO-05-00647|NMCE member code: CL0120 Mutual Funds : Reliance Securities Limited | AMFI ARN No.29889

Reliance Money:Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,

Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025

Tel.: 91-22-30443301, Fax No.: 30443306

Rating Stock Performance

BUY Appreciate more than 15% in next 12 months

HOLD Appreciate upto 15% in next 12 months

REDUCE Depreciate upto 10% in next 12 months

SELL Depreciate More than 10% in next 12 months

Reliance Money Stock Rating

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