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Indian Two-Wheeler Industry aghosh@icraindia.com

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Anupama Arora
+91 124 4545 303
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Sruthi Thomas
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Bishwarup Pakrasi
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bishwarup.pakrasi@icraindia.com

Healthy wholesale demand post regulatory changes and tax reforms

speed up revival in domestic two-wheeler industry
ICRA LIMITED Page
August 2017 |1
 WHAT’S INSIDE?
1. Overview

2. Segment-wise performance
 Two wheeler sales pick-up; scooter segment growth outpacing the industry growth

3. Motorcycles: Motorcycles revive gradually on the back of entry-level sub-segment

 Entry segment-led recovery in the motorcycle segment
 Premium segment continues its healthy growth streak; other sub-segments display mixed performance
 Entry sub-segment continues to be Hero MotoCorp’s forte while other players trail far behind
 Honda races ahead of Hero in 125-cc sub-segment and inches closer to Yamaha in 150-cc sub-segment
 TVS further maintains and strengthens its leadership position in the 150-250cc motorcycle sub-segment

4. Scooters: Healthy growth in Q1FY2018 at 20.1% after two quarters of de-growth

 Scooter sales report double-digit growth in Q1 FY2018 after two quarters of de-growth
 Honda remains the strongest scooter player; now targeting the rural market with the launch of CLIQ
 TVS and Hero lose out market share to Honda; however TVS retains its second spot in the scooter segment

5. Channel Check – Dealers and Financiers

 Positive demand trends post GST; no adverse impact of GST on the demand drivers
 Stable demand with no adverse effect of GST; financiers expect a good festive season ahead

6. Raw Material Price Trend: Two-wheeler OEMs likely to face margin pressures due to commodity price hardening

7. Export Performance: Two-wheeler exports recovery gradually gains pace

8. ICRA Outlook for the Two-wheeler industry

9. International Markets
 Marginal growth in the second largest two-wheeler market in 7M CY2017
 Stagnation of demand in developed markets affects two-wheeler industry growth rates
 Muted growth sentiments in the European markets in H1 CY2017 after a positive CY2016

10. ICRA Ratings: Two-Wheeler Industry

11. Industry Peer Comparison: Two-Wheeler Industry

12. Company Section

Hero Motocorp Limited
Bajaj Auto Limited
TVS Motor Company Limited
Eicher Motors Limited

ICRA LIMITED Page |2

INDIAN TWO-WHEELER INDUSTRY
Healthy wholesale demand post regulatory changes and tax reforms speed up revival in domestic two-wheeler industry
August 2017
OVERVIEW
Industry posts strong wholesale
volumes during 4M FY2018
supported by channel-filling
measures employed by OEMs
post BS IV and GST
implementation
Revival in entry level sub-
segment supports growth in
domestic motorcycle volumes;
premium motorcycle segment
continues its dream run
ICRA LIMITED
Two wheeler sales pick-up; scooter segment growth outpacing the industry growth
After ending FY2017 with a moderate growth of 6.9%, the growth rate in the two-wheeler industry improved in 4M FY2018 to 9.2% over the
corresponding previous. The industry growth rate of 16.0% during Apr-Oct’16 moderated from November 2016 following liquidity crisis post-
demonetisation and inventory correction measures undertaken by original equipment manufacturers (OEMs) for the transition from BS III to
BS IV norms thereby limiting the overall growth for domestic volumes at 6.9% during FY2017. However, the growth rate revived during the
current fiscal, supported by channel-filling measures of most OEMs post massive discounting done just prior to the transition to BS-IV emission
norms. The only minor hiccup was in June 2017, as the dealers were de-stocking in the pre-GST period. Over the first four months of FY2018,
the scooter segment reported healthy growth of 18.2% while the motorcycles segment reported moderate growth of 6.6%, However, the
growth in the motorcycle segment improved in July 2017, growing at 16.9% and outpacing the scooter segment growth after many months,
supported by stocking up post GST implementation. The mopeds segment reported de-growth of 13.0% in 4M FY2018, after a dream run in
FY2017.
Scooter sales report double digit growth in 4MFY2018 after two quarters of de-growth
After two quarters of consecutive de-growth, the scooter segment reported healthy growth of 18.2% in 4MFY2018. Both Q3 and Q4FY2017
were marred by negative effects of demonetisation and channel correction activities taken up by the OEMs as the industry shifted from BS III
to BS IV emission norms. However, during 4M FY2018 this has reversed, and the scooter segment reported double digit growth for all the
months with lowest growth rate being 10.6% in June 2017 as dealers cleared their inventory prior to GST implementation. The 90-125cc sub-
segment continues to account for the major proportion of domestic scooter volumes, supported by the wider variety of product offerings.
Nonetheless, the <90cc sub-segment reported robust growth since Q2 FY2017, driven by launch of the updated TVS Scooty Pep+ and the
higher displacement categories also reported healthy growth during the current fiscal, driven by the Vespa 150 and Aprilia SR 150 models in
the 150-cc segment.
Motorcycles revive gradually on the back of entry-level sub-segment
Emerging from the de-growth it had been reporting for six continuous months since the demonetisation exercise in November 2016, the
motorcycle segment finally turned around since the beginning of FY2018 as the cash situation eased out, reporting a moderate growth of 3.4%
in Q1 FY2018, and a much higher growth of 16.9% in July 2017. While the marriage season in the North also supported the sales during the
period, the primary driver for the spurt in volumes has been channel replenishment post the implementation of BS-IV emission norms and GST
from April 1, 2017 and July 1, 2017 respectively.
The lower displacement entry sub-segment of motorcycles (75-110 cc) has led the volume growth in the motorcycle segment during the
current fiscal, supported by a general improvement in rural demand sentiment on expectations of a normal monsoon. This is expected to
continue into subsequent quarters, with cash inflows from the kharif crop and the upcoming festive season expected to support rural
sentiment and sales over the near term. While the higher displacement premium motorcycles (>250-cc) continued their healthy growth streak,
the other motorcycle sub-segments reported mixed performance during the current fiscal. Going forward too, the higher displacement sub-
segments of motorcycles are expected to continue their healthy growth streak, supported by the premiumisation trend in the country, with
increasing disposable incomes and the current favourable demographic split.
Page |3
OVERVIEW Continued…..
Motorcycle and scooter segments
continue to be Hero MotoCorp and
Honda’s strongholds respectively;
Bajaj cedes significant share as it
loses out on channel-filling activities
Operating profitability of two-
wheeler OEMs moderate as
commodity prices firm up
ICRA LIMITED
Hero and Honda consolidate their dominance in motorcycle and scooter segments respectively while Bajaj loses out
 Hero MotoCorp Limited (Hero MotoCorp): Recovery in demand in the largest motorcycle sub-segment (entry level), which accounts
for close to 60% of the total segment, and Hero MotoCorp’s continued dominance in the sub-segment, supported expansion in its
overall market share in the motorcycle segment to 52% during 4M FY2017, an improvement of 96 bps from FY2017 levels; this was
in spite of absence in the fast growing higher displacement premium motorcycle sub-segments. During the same period, however,
the OEM’s share in the scooter segment further eroded to 12.5% (14.7% in FY2017).
 Bajaj Auto Limited (Bajaj): Bajaj conceded its position as the second largest motorcycle manufacturer to Honda during 4M FY2018,
with market share dropping down to 14% from 18.0% during FY2017. With many of the OEMs carrying out channel-filling measures
actively post BS IV implementation in April 2017, while Bajaj had commenced the same from January 2017 with its BSIV compliant
vehicles, the OEM has lost out on market share significantly during the first few months of FY2018.
 Honda Motorcycle and Scooter India (Honda): Honda remains the dominant market leader in the scooter segment during 4M
FY2018 with a market share of 59.4%, further strengthened from FY2017 levels of 56.9%. The OEM has benefited from continued
strong demand for its Activa model, increasing acceptance of scooters in the market, and additional capacities that have come on-
stream with its scooter-only facility in Gujarat. Overall, the OEM expanded its market share in the domestic two-wheeler market
from 27% during FY2017 to 30.2% in Q1 FY2018, benefitting from its market share gains in the scooter segment.
 TVS Motor Company Limited (TVS): TVS remains the third-largest two-wheeler player, supported by its presence across product
segments. The OEM displaced Hero MotoCorp from its position as second-largest scooter manufacturer during FY2017 and has
maintained the same during the current fiscal. It has also emerged as the largest player in the 150-250 cc sub-segment of
motorcycles on the back of healthy demand for its Apache model.
Firming up of commodity prices and increased costs related to BS-IV hurt profitability of two-wheeler OEMs
The aggregate revenues of the four listed two-wheeler OEMs continued their positive growth trajectory during Q1 FY2018, supported by
improved volume off-take and price hikes undertaken. However, the operating profit margins moderated on a YoY basis, with firming up
of commodity prices and increased costs related to BS-IV compliance. Furthermore, the one-time GST compensation given to dealers by
the OEMs also had a marginal impact on the margins. Although price hikes have been undertaken by most OEMs to pass on the
increased costs to consumers, it is unlikely that the operating profitability would return to the historic highs reported during the period
of soft commodity prices over the past two fiscals.
Outlook
The domestic two wheeler industry’s volume growth was restricted to 6.9% in FY2017 over the previous fiscal as the sector witnessed
event driven headwinds that included demonetisation in Q3FY2017 followed by Supreme Court order in Q4FY2017 restricting
st
registration of only BSIV compliant vehicles from 1 April 2017. With the channel inventory of most OEMs shrinking sharply by end of
FY2017 following liquidation of BSIII inventory, the first two months of FY2018 were characterised by inventory replenishment driving
the wholesale volumes. Subsequently in June 2017, the trade undertook destocking in preparation of implementation of Goods and
Services Tax (GST) effective July 2017. Thus, the growth rate for 4M FY2018 settled at 9.2% on YoY basis. Notwithstanding the challenges
faced till recently, ICRA expects domestic two wheeler volumes to grow by 8-10% during FY2018 as demand recovers from both rural and
urban households. The expectations of improved farm sentiments following two seasons of good crop as well as reasonable expansion in
agricultural output in current kharif season despite muted price outlook coupled with benefits from rural employment guarantee
schemes augur well for the demand from rural population. On the other hand, urban sentiments are expected to draw support from
staggered pay revision for state Government employees and pensioners as well as muted CPI inflation.
Page |4
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Building No. 8, 2nd Floor, Mr. Jayanta Chatterjee Mr. M.S.K. Aditya
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E-mail: jayantac@icraindia.com

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 ICRA Limited
An Associate of Moody's Investors Service
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