The Supreme Court’s mandate to increase third-party insurance cover for new bikes and scooters to five years, will have a significant impact on two-wheeler owners, more so, considering the other cost pressures faced by the industry. The manufacturers are left with a tough choice to either pass on the costs to maintain their profit margins, or absorb some of it to support demand.
The premium appears small (see chart), but it is significant considering the price of two-wheelers.The five-year premium for third-party insurance is a lump sum payable upfront as opposed to an annual premium earlier. This adds to the purchase price of the vehicle. Moreover, in case of annual payments, the consumer had the benefit of a drop in value of the vehicle after the second year (depreciated value) due to which the insurance premium was also lower.
“Based on IRDA rates, this implies an increase of ₹ 2,500 for entry/executive motorcycles and scooters (up to 150cc) and ₹ 4,500 for premium motorcycles, a substantial increase especially at the lower end," says a report by Jefferies India Pvt. Ltd. Irda stands for the Insurance Regulatory and Development Authority of India.
Unfortunately, the timing is inappropriate. Costs for auto firms as a whole are stacking up. Although more stable now, the cost of raw materials especially metals and more recently rubber have all been rising. This may hurt profitability if costs are not passed on to the consumer, in the long run.
Add to this, about six months from now, the mandatory introduction of anti-locking braking system and combined braking system would also imply additional costs. Then, analysts foresee a cost increase due to technological changes required to comply with new emission norms from 1 April 2020.
All these costs put together would lead to pricing pressure for two-wheeler manufacturers. They will stack up to make a significant difference to two-wheeler sales and the manufacturing companies’ prospects. Companies such as Bajaj Auto Ltd with high exports may be able to withstand the cost pressures better than firms such as Hero MotoCorp Ltd and TVS Motor Co. Ltd.
The heightened competition in the domestic two-wheeler market may make it hard for companies to pass on costs to consumers. If so, it may hurt sales growth and consequently profitability too. Alternatively, sales may grow at the expense of margins. In any case, for the current quarter, analysts have forecast a moderation in sales because the festive season of Dussehra falls in the next quarter.
Highlighting the cost pressures, the Jefferies India report points out, “All these known cost increases add up to at least 10-25% increase in the on-road prices of two-wheelers, over a two-year period."
The moot question is whether such a steep increase will affect sales or profit margins of entry-level motorcycles and mopeds. The base is also higher now, given that the auto industry as a whole experienced robust demand for about two-three years.
Any such adverse impact is bound to hurt the share prices of two-wheeler makers, which have anyway come off substantially from their highs in the past seven months.