Decline in revenue, profitability in store for two-wheeler majors

Companies are expecting an improvement in sales of vehicles from the quarter beginning April

Country’s top two-wheeler companies, Hero MotoCorp and Bajaj Auto, are set to see a dip in revenue and profitability in the January-March quarter of FY17 as volumes remain under pressure. Firm raw material prices will also weigh upon the margins.

This will be the second consecutive quarter of a marginal dip in profits for these leading two-wheeler makers. Both Hero and Bajaj had reported their best profits in the July-September quarter of FY17. However, in Q3 (October-December) of FY17, Hero’s profit had declined 2.6 per cent to Rs 772 crore while Bajaj reported a decline of five per cent in profit to Rs 924 crore.

The decline was an outcome of the withdrawal of two high denomination currency notes (Rs 500 and Rs 1,000) from circulation by the government and a consequent dip in currency circulation in the economy. The situation impacted sentiments and hit purchases. Hero, the country’s biggest two-wheeler maker, saw its Q3 volume dip close to 13 per cent to 1.47 million units. Bajaj’s volume declined more than 9 per cent.

With improved currency availability, the situation is better in Q4 but there is no growth in volumes. In the first two months of Q4, Hero’s two-wheeler sales to dealers have declined more than 9 per cent to 1.01 million units. The company is unlikely to make up for this loss in March 2017. 

Pune-headquartered Bajaj Auto’s two-wheeler volume has declined 6.4 per cent during January-February to 0.45 million units. Bajaj, which is also the country’s largest three-wheeler maker, has seen sales of the vehicle decline by a sharp 25 per cent to 58,648 units in the January-February period.

Companies are expecting an improvement from next quarter, beginning April. Ashok Bhasin, head of sales & marketing at Hero said last month that March volume could be flat and that further improvement is likely from April onwards.

In addition to volume pressure, there is a challenge of firm raw material cost from steel and aluminium. Benign raw material was one key factor in profit growths witnessed in previous few quarters. Companies like Hero took a price hike of Rs 500-1,500 per unit but it only partly covers the raw material increase and the hike was also meant to recover the cost of higher emission norm two wheelers. Bhasin said the impact of cost hit on commodity front may come in Q4 and certainly in Q1 (of FY18) and the company will evaluate the market scenario and take the appropriate pricing decision.

The domestic two-wheeler industry had seen a low growth of 3 per cent in sales during FY16, especially due to a flat performance in motorcycles as deficit monsoon had weighed upon rural purchases. With better rainfall and revised wages of government employees, companies were hopeful of a double-digit volume growth in FY17. Demonetisation, however, threw a spanner and restricted growth to a single digit.