INSUBCONTINENT EXCLUSIVE:
industry, where competition is intensifying at major price points.
The earnings outlook for two-wheeler makers has become rather dim after
Bajaj Auto, in a post-earnings conference call, indicated that it is balancing the objectives of market share gains and margins in the
medium term to boost volumes.
Hence, the likelihood of a price war and the absence of levers to protect operating margins sent stocks of
Hero MotoCorp, Bajaj Auto, and TVS Motors to fresh 52-week lows
Two-wheeler stocks have trailed the Nifty 22-25 per cent since the beginning of the year, and are trading at a discount to their respective
five-year average price-earnings multiples.
Aggressive pricing for entry-level bikes (CT100) has paid rich dividends for Bajaj Auto in the
Its domestic motorcycle volume grew 39per cent between April and June, as compared with industry growth of 19per cent
Motorcycle lost 116 and 67 basis points, respectively, according to SIAM data
Bajaj Auto has gained market share in the domestic market for the first time in three years.
If Bajaj Auto continues to maintain its
aggressive pricing stance, Hero MotoCorp and TVS Motor may be restrained in their ability to pass on higher raw material costs to
believes that if Hero participates in the price war to maintain market share, it would have to compromise on overall margins as HF Deluxe
and Splendor make up 65per cent of the total volumes.
The entry-level segment for Bajaj Auto accounts for about 15 per cent of the total
volumes; so the price war will have lesser impact on its margins than on Hero.
If the margins squeeze persists, TVS Motor could be more
vulnerable for the sharp cut in projected earnings growth as it is the only company for which the Street is factoring in profitability
expansion for FY19 and FY20.
