Hero MotoCorp, TVS Motor, Bajaj Auto facing the heat of high inventory levels

It looks like the pressure on two-wheeler companies is mounting. February data on two-wheeler retail sales paint a weak picture for March quarter sales, analysts at some leading brokerage firms have pointed out.

Even though dispatches from companies to dealers were lowered, inventory continues to pile up. Discounts and incentives are failing to power sales. Inventory levels continue to remain high at 40-45 days, with no respite seen in the near term. Normally, with January and February being the season for weddings, demand for two-wheelers tends to rev up. For instance, sales grew 25-35% year-on-year in these two months.

The slowdown in two-wheeler sales was triggered by a hike in insurance premium about six months ago. The payment schedule for mandatory third-party insurance was changed from an annual fee to a five-year term, payable upfront at the time of purchase of a new bike. This led to a sharp increase in the purchase price of motorcycles.

Meanwhile, Bajaj Auto Ltd’s aggressive pricing strategy to regain lost market share in motorcycles increased competition. According to Bharat Gianani, an analyst at Sharekhan Ltd, “Bajaj Auto’s market share in domestic motorcycles inched up sharply by 280 bps (basis points) to 18.4% in the nine months of FY2019 and it is targeting 24% market share. So, the strategy will continue for some time, implying high competitive intensity in two-wheelers."

Analysts and dealers say even Hero MotoCorp Ltd has enhanced incentives at the retail level, which are about ₹3,500 per bike. Honda Motorcycle and Scooter India Pvt. Ltd too has been battling in the marketplace, as it had ceded share to some incumbents in the recent past.

To sum up, falling sales and high discounts are the order of the day. This does not augur well for two-wheeler manufacturers. A report by Motilal Oswal Financial Services Ltd says, “We expect Bajaj Auto and TVS wholesales to grow 2.4%/15.3% YoY (year-on-year), while Hero MotoCorp dispatches are seen declining 13%".

Also read: Budget proposals can put the two-wheeler segment in the fast lane

That’s not all. Profit margins are bound to be impacted too. “Persistent weakness in retail volumes and higher discounting could trigger further earnings downgrades," says Giannini of Sharekhan. Note that brokerage firms had flagged these concerns almost two quarters before, and stock prices have corrected already.

Share prices of Hero MotoCorp and TVS Motor Co. Ltd is down 25% and 32%, respectively, in the past year. Bajaj Auto has been better off, as it gained market share, besides which exports and its three-wheeler segment supported revenue and profit growth.

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