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Corporate Ratings Anjan Deb Ghosh +91 22 3047 0006

aghosh@icraindia.com Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia.com

Jitin Makkar +91 124 4545 368 jitinm@icraindia.com

ICRA RESEARCH SERVICES

ICRA RATING FEATURE

Indian Two-Wheeler Industry

Industry maintaining pricing discipline amidst weak demand environment

June 2013

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1. Overview

2. Implications of next stage emission norms for the Indian two-wheeler industry

Two-wheeler industry experience in the past when BS-I, BS-II, BS-III norms were implemented

Technology options that could be considered to make two-wheeler engines BS-IV/ BS-V compliant

Challenges towards meeting next stage emission norms

3. Indian two-wheeler industry’s ‘premiumization’ has slowed down over the last two years. What lies ahead?

Premium motorcycles remain the most segmented

Comments on OEMs’ product strategy

What lies ahead?

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. Quarterly Performance trend of listed two-wheeler OEMs

Hero MotoCorp Limited

Bajaj Auto Limited

TVS Motor Company Limited

8. Annexure – Monthly sales Volume Trends

WHAT’S INSIDE?

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OVERVIEW

INDIAN TWO-WHEELER INDUSTRY

Industry maintaining pricing discipline amidst weak demand environment

June 2013

Domestic volume growth in 2012-13 slowest in last four years

The domestic two-wheeler (2W) industry recorded sales volumes of 13.8 million units in 2012-13, a growth of 2.9% over the previous year. This pace of expansion was significantly slower than the 13.7% volume CAGR posted by the industry in the last five years. In the past, India’s per capita real GDP growth at 8.6% (CAGR) over the six year period 2005-2011 had contributed substantially towards raising the standard of living of households, which in turn had been one of the key drivers of growth for the country’s automobile industry. But over 2011-12 and 2012-13, inflationary conditions, firm interest rates, rising petrol prices as well as weak monsoons adversely impacted disposable incomes causing a consumption squeeze. Over the long term, the trend in rising 2W penetration in households in the addressable income segment (already reached around 80%) is an added concern implying difficulty in sustaining penetration-driven growth over an extended time horizon. For the domestic 2W industry to revert closer to its historical growth trend line any time soon, the pie of total number of target households will need to expand. This in turn would depend on the pace of India’s 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 growth was weak in 2012-13, but OEMs view international markets as a key growth frontier, going forward

Even 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 rate 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 18 months, has persuaded Indian 2W OEMs to partially hike product prices in overseas markets, further contributing to pressure on sales volumes. The Indian OEMs on their part are taking measures such as introduction of warranties (an uncommon industry practice in several markets), providing of better training to mechanics and appointment of sub-dealers, besides chalking-out an entry strategy into new markets as a de-risking approach. From a medium term perspective, 2W exports continue to present a strong opportunity for industry participants particularly to countries in 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. In select countries, 2W OEMs in India may also have to budget investments in local assembly/ manufacturing units to exercise better control over demand-supply, branding, back-end infrastructure, currency risk, besides other tariff and other non-tariff hurdles.

Tepid demand for 100cc segment motorcycles weighs down industry growth

The deceleration in volume growth of the domestic 2W industry in 2012-13 was largely attributable to the motorcycles segment which grew by 0.1% over the previous year; even as the scooters segment posted 14.2% YoY expansion during this period, albeit on a smaller base. With this, the share of the scooters segment in the domestic 2W industry volumes increased to 21.2% in 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 experienced anaemic demand, the 125cc segment (contribution of 20% to domestic motorcycle sales in 2012-13) was a positive outlier recording a volume growth of 26.0% in 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. Also, relatively low volume segments such as the niche occupied by Eicher Motors (Royal Enfield), besides other cruiser and superbikes from the stable of Harley Davidson, Kawasaki, Honda and Suzuki witnessed a strong growth in

2012-13, albeit on a low base.

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OVERVIEW Continued…..

Industry maintains pricing discipline; new product launches and market share quest remain salient themes

Amidst an environment of slackening demand, the 2W OEMs continue to shy away from offering discounts but on the contrary have undertaken two price increases in the last six months – price increase of Rs. 300-4,000 undertaken in October 2012 and a further price increase of Rs. 500-1,500 undertaken in April 2013. Although select OEMs while launching new products have followed a penetrative pricing strategy, the ‘discounts’ lingo has remained amiss, unlike the passenger vehicle industry. Nevertheless, the 2W OEMs have been resorting to other forms of supply-side push in the form of 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. 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. In terms of market share, while Hero MotoCorp continues to remain the distant leader with a share of 42.9% in 2012-13, it saw its share erode by 221 basis points (bps) over the previous year. A large part of this market share set-back was caused by weakness in Hero MotoCorp’s 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 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 18.9% in 2012-13. Over the next two years, a large number of new models 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. Outlook

Overall, ICRA expects the domestic 2W industry volumes remain flat in 2013-14 as demand slowdown as well as base effect catches up with the industry that has demonstrated a healthy volume expansion over the last three years at cumulative annual growth rate (CAGR) of 13.8%. 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 (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.

Trend in Sales Volumes of Indian 2W Industry Volumes (Units, Nos.) YoY Growth (%) Domestic 2009-10 2010-11 2011-12 2012-13 2009-10 2010-11 2011-12 2012-13 Motorcycles 7,341,122 9,013,888 10,073,303 10,085,586 25.9% 22.8% 11.8% 0.1% Scooters 1,462,534 2,057,604 2,558,981 2,923,401 27.4% 40.7% 24.4% 14.2% Mopeds 564,584 697,418 776,866 788,761 30.9% 23.5% 11.4% 1.5% Total Domestic 9,370,951 11,768,910 13,409,150 13,797,748 26.0% 25.6% 13.9% 2.9% Exports 2009-10 2010-11 2011-12 2012-13 2009-10 2010-11 2011-12 2012-13 Motorcycles 1,102,978 1,474,678 1,871,595 1,866,549 13.6% 33.7% 26.9% -0.3% Scooters 30,125 50,646 94,440 91,084 16.7% 68.1% 86.5% -3.6% Mopeds 6,905 6,295 9,076 3,308 -5.4% -8.8% 44.2% -63.6% Total Exports 1,140,058 1,531,619 1,975,111 1,960,941 13.5% 34.3% 29.0% -0.7%

Source: SIAM

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