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Hero set to ride on Honda's capacity constraints, Bajaj's volume woes

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Hero MotoCorp, the biggest two-wheeler manufacturer in India, is likely to benefit as competition continues to face capacity constraints and slowing volumes.

Despite the slowdown in the automobile industry, the two-wheeler segment continued to remain steady last year on account of increasing demand for scooters and motorcycles.

And with signs of recovery in the economy, the segment is likely to witness double-digit growth this year.

According to the data by Society of Indian Automobile Manufacturers (SIAM), the domestic two-wheeler volumes grew by 15% year on year (yoy) during April-August 2014, led by strong growth in scooter (31% yoy) and motorcycle (9%) volumes.

Experts expect the two-wheeler industry, led by scooters, to grow in double digits in the next two years. "We reckon improved economic growth, decline in cost of ownership (lower fuel prices) and an enhanced distribution network by manufacturers will spur growth in the two-wheeler industry," wrote Hitesh Goel and Kumar Gaurav, analysts with Kotak Institutional Equities Research, in a report dated September 16.

With demand prospects, manufacturers are looking at enhancing capacities. Hero MotoCorp and Honda Motorcycle and Scooter India (HMSI) are building plants at Gujarat, which are expected to take care of the demand for the next few years.

However, experts feel that HMSI's production constraints and slow demand for its mass volume motorcycles may help in pushing the demand for Hero's products. HMSI currently has an order backlog of 65,000 scooters, while its efforts into the mass volume category, which Hero continues to dominate, has not yield enough volumes. "We expect Hero to enhance market share in domestic motorcycle segment by 280 bps over 2014-16 and Honda to lose 160 bps market share," said the Kotak report.

"Our channel checks suggest strong traction for Hero products, both in scooters as well as motorcycle segments. Also, HMSI has not been able to make a dent in the traditionally strong market for Hero (mainly the northern market)," Surjit Singh Arora and Hussain Kagzi, analysts with Prabhudas Lilladher, wrote in a report dated September 16.

Hero, Bajaj Auto and Honda are likely to operate at over 80% capacity utilisation, said the experts.

On the other hand, Bajaj Auto – the second-largest motorcycle maker -- has been losing market share and is re-aligning strategies in the mass volume (Discover) category to boost sales.

"On account of lower sales of Discover and Platina, Bajaj's volumes declined by 15.6% year on year in the 75?110cc segment as against 24.4% year on year growth in the segment during August. This led to 445 bps loss in market share to 9.4% for August. On the other hand, Hero gained 585 bps market share in this segment, given the strong demand for Deluxe and Splendor," Prabhudas Lilladher report said.

According to the SIAM data, Bajaj Auto in August reported a decline of 9% yoy, losing market share to the tune of 390 basis points (bps) yoy to 15.1%, while HMSI and Royal Enfield reported a 6.3% and 66.3% yoy increase respectively in August. On the other hand, Hero's volumes grew 23.7% yoy in August, maintaining a market share of 53.7%.

Analysts are bullish about scooter penetration and expect the growth of two-wheeler segment driven by the segment. "Scooter penetration as a percentage of overall two-wheeler volumes has reached 50% in South India but in North India penetration is still low at 11-12%. The number of launches in the scooter segment is also likely to outstrip launches in the motorcycle segment over the next few years," the Kotak report said.

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