 "Two-wheelers make more money than four-wheelers")
They are small and less glamorous than sports utility vehicles (SUV) and passenger cars but two-wheelers make more money for their makers than four-wheelers. Last financial year, the operating margins of two-wheeler makers in India were nearly twice that of the average margins of top passenger car and SUV makers.
Margins in the two-wheeler industry have consistently been higher than those in the four-wheeler industry for all of the past decade, thanks to a good showing by top two-wheeler makers like Hero MotoCorp and Bajaj Auto.
The analysis is based on the audited financial results of unlisted and listed two- and four-wheeler makers. The sample includes six four-wheeler makers - Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Hyundai Motors India, Honda Cars India, Toyota Kirloskar and Ford India. Other multinationals were dropped as their data for 10 years was not available.
Two-wheeler makers in the sample include Hero MotoCorp, Bajaj Auto, TVS Motors, Eicher Motors and Honda Motorcycle & Scooters India. Each company's standalone finances have been considered in this analysis to reflect their domestic automotive business.
Two-wheeler makers' superior profitability reflects in their balance sheets. The industry is almost debt-free and most companies are sitting on free cash. In 2014-15, the five two-wheeler makers had combined debt of Rs 1,082 crore on their books, down nearly 50 per cent over the past five years and equivalent to less than 5 per cent of their net worth.
In comparison, most four-wheeler makers had to raise debt to invest in product development and expansion. At the end of March 2015, the six top four-wheeler makers had debt of Rs 40,300 crore, up nearly 60 per cent in the past year and equivalent to nearly 60 per cent of their net worth.
In 2014-15 two-wheeler firms in our sample reported combined revenues and net profit of Rs 81,500 crore, including other income, and Rs 6,900 crore, respectively. In comparison, four-wheeler makers reported combined revenues and net profit of Rs 1.95 lakh crore and Rs 3,440 crore, respectively.
Two-wheeler makers have also grown faster. In the past five years, the combined revenues of the top five two-wheeler firms grew at a compounded annual rate of 17 per cent, outpacing the 11 per cent growth in the combined revenues of the country's top six four-wheeler makers.
"Historically, two-wheeler demand is aligned to consumer demand, while four-wheeler demand is correlated to industrial growth. As the former has been robust in the past six-seven years, two-wheeler makers have done better than other segments of the automotive industry," said G Chokkalingam founder and chief executive officer, Equinomics Research & Advisory.
"It takes far more capital to set up a passenger car business than two-wheeler manufacturing. New product development is also more expensive in the four-wheeler industry than in the two-wheeler industry," says Navin Matta, analyst at HDFC Securities. This affects the profitability and cash flows of passenger car makers.
Four-wheeler companies have together invested around Rs 71,000 crore in capacity expansion and new product development in the past five years. During the same period, two-wheeler makers' capex was around Rs 13,000 crore.
Matta, however, expects the four-wheeler industry to grow faster than two-wheelers in future. "In most markets globally, consumers have shifted to cars and SUVs from two-wheelers, in line with the rise in income. The same is likely to happen in India," he said.
