It's going to be a 'wild' ride for two-wheelers

The constant hike in interest rates and fuel prices by the government is expected to have a negative impact on the financial performance of automobile companies for the June 2011 quarter.

In a recent report published by Motilal Oswal, sectoral sales and profits comprising major companies (see table) are expected to fall by 7.5 percent and 8 percent, respectively for the June 2011 quarter compared to the March 2011 quarter.

Among this, two wheeler companies are expected to outperform their four wheeler counterparts.

Bajaj Auto is expected to lead the pack with a 14.7 percent rise in sales while Hero Honda will rise by 4.6 percent sequentially. Two-wheeler companies are not affected by inflationary trends as most of them are bought outright.

This could be an opportune time for two wheeler companies to increase their revenue even further by expanding their markets to rural areas of India. Angel Broking expects low penetration levels coupled with increasing per capita income to drive the long term growth of the auto industry.

Bajaj Auto is already geared up to take advantage of this as it plans to increase its monthly target (comprising bikes and three wheelers) to 4.2 lakh bikes by October from the current 3.7 lakh units a month. Rajiv Bajaj, MD, Bajaj Auto told Business Line that a large chunk of the additional volume would be generated from the new 150cc Boxer which will be launched next month.

Hero Honda is also planning to ramp up by increasing its R&D spend and scouting for new technology.

In the passenger car industry, the analyst expects Maruti to report the steepest fall in sales and profits. Apart from the hike in fuel prices and interest rates, the recent 13 day strike at its Manesar facility translated into an 18 percent sequential decline in domestic volumes. This coupled with higher commodity prices could lead to a 29 percent fall in profits sequentially.

While the four wheeler passenger car industry has grown impressively at the hands of the new middle class, it is still too expensive for a vast majority of Indian buyers, and the recent hikes in interest rates and fuel/diesel does not make things easier for these companies, said a sectoral analyst.

Mahindra & Mahindra and Tata Motors margins are also expected to contract. However, this is mainly on account of increased purchases from its subsidiary, said PINC research.

Key points to look out for in June 2011 quarter earnings:

• Rating agency ICRA expects the two wheeler industry to grow at a volume growth of 10-12 percent over the next five years to reach a size of 22 million units by 2015-16.

• Entry of new players, product launches, growing distribution reach and cheap ownership costs to drive two wheeler industry growth in the medium term

• Bajaj Auto to increase its monthly product target to 4.2 lakh bikes from 3.7 lakh bikes earlier

• Hero Honda could look at foreign acquisition in the two wheeler space