Two-wheelers: Three is crowd

Honda’s entry into the segment is expected to eat into Hero Honda’s volumes

The auto story — particularly two-wheelers — has seemingly peaked. With margins under pressure and growth driven by volumes, a downward shift in earnings seems inevitable. Honda splitting from its partner, the Hero Group, will only make matters more challenging, as the industry will see an end of a duopolistic regime. At present, 96 per cent of the total two-wheeler volumes come from four players.

Hero Honda and Bajaj Auto are the two dominant players in the market on Thursday. In any sector where competition rises, analysts typically spell trouble for the market leader. So is the case for the two-wheeler industry where Hero Honda has a 58 per cent market share. Analysts expect both margins and market share to decline as Honda enters the fray.

According to a report by Citi, the industry’s first test will be when Honda Motorcycle and Scooter India (HMSI) adds fresh capacity of 600,000 in the first half of financial year 2011-12 (33 per cent of incremental demand). HMSI also plans to increase its dealers by 200 each year (400 at present), which implies it will exceed Bajaj Auto in two years, and be a strong No 2 after Hero Honda. Keeping the competitive environment in mind, analysts have de-rated Hero Honda to reflect execution risks relating to product and export market development.

While Bajaj Auto is better placed in terms of profitability than its rival, analysts still believe its weakness in the economy and executive segments may affect the company going forward. Bajaj Auto’s focus on profitability has led to higher gains in profit share vis-à-vis market share.

Analysts expect the trend to continue with the new variant, Discover, which is slated for a April-May launch, and next generation Pulsar in November. What analysts like about Bajaj Auto is its diversification into three-wheelers, export focus and concentration of profitability rather than volumes. Going forward, analysts wonder how Bajaj will respond to the competitive pressures.

According to JM Financial, data suggest a shift from executive to premium segment has commenced. Bajaj Auto is expected to be a key beneficiary. Going forward, Honda Motor plans to ramp up motorcycle production and triple sales in India to five million units annually in five years (as reported in Nikkei Business Daily).

However, most calculations are based on the fact that Honda will target the executive segment, which is the meat of the market. Things will substantially change if Honda launches a $600 bike in the economy segment, which would then have to be manufactured in China. Analysts forecast motorcycles will decline from 78 per cent of volumes in financial year 2009-10 to around 76 per cent in financial year 2012-13. Clearly, all eyes will be on Honda Motors and its play in the two-wheeler market.