Fear of price wars spooks stocks of two-wheeler manufacturers
Share prices of two-wheeler companies tanked in two trading sessions as investors feel that fierce competition could take a toll on margins
Shares of leading two-wheeler makers have fallen sharply in the last two trading sessions. Blame it on Bajaj Auto Ltd. After dismal June quarter results, the management statement that it has charted out an aggressive pricing strategy has sent fears of a price war among the company’s peers.
Perhaps it’s a do-or-die situation for Bajaj Auto in the entry-level motorcycle segment. The company reportedly has a weak presence in the commuter segment, which is also a low-margin business. Besides, its overall Ebitda (earnings before interest, tax, depreciation and amortization) margin, among the highest in the industry, has been riding largely on exports and three-wheelers.
Another concern is that its domestic motorcycle sales in FY18 were lower than FY12, even in absolute terms, when the rest of the incumbents have been surging ahead.
Credit Suisse said, in a report, that Bajaj Auto aims to grow its share in the domestic market to 20% by the end of this fiscal year, from 16% currently, and to 24-25% over the next two-three years.
The exercise had already begun a few months ago, when Bajaj Auto cut prices of entry-level motorcycles by 2%. And its market share in the June quarter rose even as it unseated Honda Motorcycle and Scooter India Pvt. Ltd from the second place.
Meanwhile, Hero MotoCorp Ltd, the market leader, is way ahead of the pack. It has complete control over the entry-level segment, with nearly three-fourths of the market. Hero also has a strong presence in rural areas, where Bajaj may seek greater mileage through an aggressive pricing strategy.
But then Bajaj, Hero and Honda have strong balance sheets and cash reserves to cut prices and compete for market share gains. TVS Motor Co. Ltd may be under higher stress, as it is just coming out of the woods after battling competition over several years. Apart from price cuts, there would be large cash outflows for marketing and promotion, and introduction of new models and sub-models. And all this is in the low-end segment, where margins are already weak.
Meanwhile, the rural recovery has not played out as expected, especially in two-wheelers. Growth in domestic motorcycle sales has been weaker than expected. And, input costs are rising. Analysts foresee that the need to introduce technical improvements to comply with BS-VI and safety norms in two-wheelers will further increase vehicle costs.
In other words, these multiple headwinds have taken the charm off the two-wheeler segment. Margin pressure will cap earnings expansion. Little wonder then that Bajaj, Hero and TVS fell by 13%, 9% and 3%, respectively, in the last two trading sessions.
More clarity may emerge from the conference calls of Hero and TVS, whose June quarter results are expected soon and which could throw light on how they would counter Bajaj’s aggression in the market.
- Supreme Court’s decision on Aadhaar: impact on tax compliance
- Sensex, BSE MidCap valuation gap shrinks sharply in FY19
- Gold prices today rise by nearly Rs 200, silver rates recover
- Oil trades below $70 as stockpile gain counters US-Saudi row
- Deals Buzz: Reliance to buy majority stake in Hathway, Den Networks for Rs 5,230 crore
- India’s rising steel demand is making companies starry-eyed
- ACC’s operating margins feel the stress as cost pressures grow
- Federal Bank rides out Kerala floods but growth metrics need to sustain
- RIL’s consumer businesses deliver on growth; investments stay high
- Hero MotoCorp Q2: Costs apply brakes on profit growth