Sec

Secttor Updat
Updat e
ate
19th December 2008
December

Umesh Karne
umesh.karne@relianceada.com
+91 22 30443305
Gaurant Dadwal
gaurant.dadwal@relianceada.com
+91 22 30443321
Although interest rates have started
coming down, two wheeler market is
likely to remain weak in the near term
Two Wheeler Sector Update
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.

We estimate FY09E two wheeler Two wheeler sales have been falling since the last 24 months, After touching a peak of
market to report decline by 2-3% 8,18,537 vehicles during festive season in October 2006 sales volumes of two wheelers
have not been able to breach this benchmark.

Domestic Sales Trend

900,000 40

800,000
30
700,000
20
600,000

Average growth in sales volume for

Growth (%)
500,000 10
Units

last 32 months has come down to 0.8% 400,000 0

as against long term growth of ~10% 300,000
(10)
200,000
(20)
100,000

- (30)
May-06
Jun-06
Jul-06

Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07

May-07
Jun-07
Jul-07

Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08

May-08
Jun-08
Jul-08

Oct-08
Nov-08
Sep-06

Sep-07

Sep-08
Apr-06

Aug-06

Apr-07

Aug-07

Apr-08

Aug-08

Source: Reliance Money Research

All the three segments Viz. Motorcycle,

Scooters and Mopeds have registered
positive growth in the first 8 months of
FY09.
April-November 2008 sales review Segment wise
All 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

Motorcycles Scooters Mopeds

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
80% 15% 5%
54% 26% 19%
3.0% 7.0% 5.0%
Low base - As motorcycle sales Minor Growth in FY08 due to lower Minor Growth in FY08 due to
plummeted in FY08 market share lower market share
Fuel price hike led to decline in car Gearless scooters Riding growth Still preffered in Rural Areas
sales in crease in volumes of premium
segment bikes
Low base and Higher market share Honda motor (HMSI) reporting good Comparatively lower price tag
growth
Economy segment showing growth on Activa and Dio reporting good volumes Least affected by Interest rates
back of cash sales due to lower price tag and higher
cash sales
Array of New model and Launches

Source: Reliance Money Research

Contd...
 19th December 2008

Why sales volume have been declining?

Interest rates still hovering at high levels
PLR rates 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
14
back almost 50% of two wheeler sales were financed on credit but with soaring interest
13
rates credit financing has dropped and the proportion of cash sales have increased.
In %

12
Our analysis and feedback from industry suggest that credit financing has dropped to
11 30% while cash sales have moved up to 70%. We site the main reason for this change
10 is because of high level of interest rates offered by financing institutions. The two wheeler
Nov-06

Nov-07

Nov-08
Jun-06
Jul-06

Jan-07

Jun-07
Jul-07

Jan-08

Jun-08
Jul-08
Mar-06
Apr-06
May-06

Aug-06
Sep-06
Oct-06
Dec-06
Feb-07
Mar-07
Apr-07
May-07

Aug-07
Sep-07
Oct-07
Dec-07
Feb-08
Mar-08
Apr-08
May-08

Aug-08
Sep-08
Oct-08
Dec-08

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
Source: Reliance Money Research
levels and needs to come down to push two wheeler demand.

Credit financing has dropped to 30% Lack of Financers also affecting sales
while cash sales have moved up to Due to increase in number defaults, financers like Citi and ICICI irked themselves out
70%. 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
We believe that financers are not completely moved out of the two wheeler financing business at the dealer’s location.
likely to return back in the short term. 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 lead
to rejection of financing cases which is also impacting the sales volumes two wheeler
sector.
Steel Price Movement
50000
Price hikes mainly due to raw material cost push
45000
40000
Prices of key raw materials such as steel and aluminium had started moving up since
35000
January 2008, which led to few price hikes by the players in two wheeler market which
Per Tonne / INR

30000
25000
20000
in fact deteriorated the situation to worse level for the struggling two wheeler industry.
15000
10000 Consumers of two wheeler market had started postponing their purchase decision due
5000
0 to rising prices of vehicles. However, since October 2008 price of steel has softened to
Oct-06

Feb-07

Oct-07

Jun-08

Oct-08
Jun-06

Dec-06

Jun-07

Dec-07
Feb-08
Apr-06

Aug-06

Apr-07

Apr-08
Aug-07

Aug-08

a marginal extent and so there is not much scope of a price cut. Even if there is a price
Month
cut we believe that the price cut will not fuel the growth of two wheeler sales volumes as
Source: Reliance Money Research
the main problem which in front of the two wheeler industry still remains as lack of
financing.

Company % of Price Hike ~ Price Hike Amount

Because of rising raw material costs,
TVS 2-3 % hike in YTD FY09 Rs.1000
two wheeler players incresed the prices HH Two price hikes in April 2008 Rs.500-1000 in April and upto
of vehicles and August 2008 Rs.1500 in August
BAL 2-3% hike Rs.1500
Source: Reliance Money Research

Contd...
2
 19th December 2008

Measures to control decline

Aggressive new launches has not supported the fall in demand
Two wheeler market has witnessed Since Oct 2006, when sales have plummeted two wheeler players have made array of
around 15 new launches/variants new launches post September 2008 i.e. during the festive season in FY08. Two wheeler
during last 6 months market has witnessed around 15 new launches/variants during last 6 months, but it
attracted consumers only for a limited period.

Limited discounts, not supportive

Due to declining sales volume few players opted for discounts and promotional schemes
Discounts during 2008 were limited for to push the volumes. However, compared to earlier years the discounts were very
selective models 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
Exports bridging the gap between discounts.
domestic and total sales
Tie ups with banks, likely to help in the long term
Post the exit of major financers from two wheeler financing market, all the three major
Export Sales 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
1,000,000

900,000
financing schemes. HH has tied up with Fullerton India and Andhra bank. While TVS
800,000
along with its financing arm TVS Finance has tied up with IndusInd Bank. But we
No of Units

700,000 believe this strategy will help the companies in the long term and in the short term we
600,000
do not expect any major positive impact.
500,000

Exports supporting sales volume to some extent

400,000
Apr-06

Aug-06

Apr-07

Aug-07

Apr-08

Aug-08
Jun-06

Oct-06

Dec-06

Feb-07

Jun-07

Oct-07

Dec-07

Feb-08

Jun-08

Oct-08

Dom es tic s ales Dom + Exp Sales

In 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 the
Source: Reliance Money Research overall 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
Export Growth % months of FY09 reported a growth of 41% and 51% respectively. We expect exports
900,000 50 for the year FY09 to register a growth of 15% in FY09E. But the concerns over slowdown
47
800,000

700,000
47%
38%
45

40
in the global market may impact the exports of two wheeler companies in near future.
35
600,000
21%
30
500,000

400,000
40%
25 Exports
20
300,000
15 Nos FY08 FY07 % Growth Apr-Nov 08 Apr-Nov 09 % Growth
200,000 10
100,000 5 Motorcycles 776141 545887 42% 676986 504232 34%
- 0
FY04 FY05 FY06 FY07 FY08 Mopeds 18224 37566 -51% 5414 13952 -61%
In Mn Units % growth
Scooters 25482 35685 -29% 19436 17632 10%
Source: Reliance Money Research
Total 819847 619138 32% 701836 535816 31%
Source: Reliance Money Research

Cenvat cut impact, in fact likely to be negative

The 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
Reduction in prices due to manufacturers have passed on the excise duty benefit to their customers in terms of
CenVAT price cuts. But with the disappointing sales during the festive season has piled up the
TVS Rs.700-2000 inventory levels at dealers end and with immediate price cuts being announced, we
HH Rs.1000-2000 believe that two wheeler companies will have to bear the difference of prices on stock
BAL Up to Rs.2100 at dealers end. We expect BAL to be impacted to a larger extent as there is a
Source: Reliance Money Research comparative huge inventory piled up at BAL dealers.
Contd...

3
 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.

Demand Drivers
Demand Driver Earlier Outlook Short/Medium Outlook Long Term Outlook
Rising income
Excise duty cuts is likely to remain
Interest Rates
positive demand driver
Financing
Excise cut
Price cuts
Inventory clearance offers are likely to
Inventory
attract customers
New launches
Exports
Source:Reliance Money Research

Inventory levels are likely to go up

We expect the inventory levels and
Due to drop in demand for two wheelers, the inventory levels at the dealers have gone
working capital cycle for these
up. According to our feedback from few dealers, the inventory levels have gone up to
companies would go up in FY09E and
2-2.5 months. We expect the inventory levels and working capital cycle for these
FY10E.
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.

Net Working Capital (Days)

Historically net working capital days WC (Days) FY99 FY00 FY01 FY02 FY07 FY08 FY09E FY10E
moved up marginally during slowdown 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

We do not estimate any major gains in Margins to remain under pressure

margins due to softening raw material Although raw material prices have started softening and expected to ease out the
prices for FY09E. 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
Capex programs are likely get deferred becoming conservative and have deferred their respective capex plans.
further in near future
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.
Source: Reliance Money Research, company announcements

Contd...
4
 19th December 2008

But smaller players maintaining capex plans

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 two
years, up from 1.7 lakh units.Planning
to set up R & D (2 Years)
Source: Reliance Money Research, Company announcements

No major negative impact likely on ROCE

In the case of HH, ROCE is likely to
dip up to 41% in FY09E.
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.

Bajaj Auto Hero Honda TVS Motors

35.0 60.0 10.0
32.3 9.0
30.3 51.7 9.0
30.0 50.0 47.8
26.6 44.1 8.0
24.2 41.0
25.0 7.0
40.0
6.0 5.7
20.0 5.0
30.0 5.0
15.0
4.0
20.0
10.0 3.0 2.6

2.0
5.0 10.0
1.0
- - -
FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10E

Source: Reliance Money Research

More production is likely to shift to tax free zone

Due 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 FY09E

We believe the fall in sales volume to
also impact Q3FY09E results of these
companies.
High 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 recommend a HOLD for HH and
Reduce on BAL snd TVS
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 European
region, 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.
Contd...
5
 19th December 2008

Financial Estimates
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

Dealer check
We visited few dealers to have a understanding at the grass root level and here are
the key findings of the same

Cash Sales have jumped to 70-75% as
against 40% a year back
Interest rates have softened marginally
during last one year
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
„ 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.

6
 19th December 2008

Reliance Money Stock Rating

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:
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

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 231234833
Commodities : 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

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.