- The two-wheeler industry in India saw a decline in quarterly volume growth to 11% in Q3 2011-12, the lowest in three years, with motorcycles growing at 9.2% versus over 20% for scooters. - Overall growth for the domestic two-wheeler industry in 2011-12 is expected to be around 13% as growth is projected to further slow in Q4 due to high base effects. - Market share in the motorcycle segment remains dominated by Hero MotoCorp at over 55%, while Honda regained its position as the third largest player in Q3 2011-12.

1. INDIAN TWO-WHEELER INDUSTRY
Volume growth decelerates in Q3, 2011-12; slower growth expected in Q4, 2011-12 as well
ICRA RATING FEATURE
FEBRUARY 2012
Overview
The Indian two-wheeler (2W) industry recorded sales volumes of 3.4 million units in Q3, 2011-121, a growth of 11.0% (YoY) but Corporate Ratings
flat (QoQ). Although the YoY volume growth of the industry remained in double digits, the pace of growth during the last quarter Anjan Deb Ghosh
was at its lowest gear in the last three years. The deceleration in growth was contributed mainly by the motorcycles segment +91 22 3047 0006
which grew at a much lower rate of 9.2% (YoY) in Q3, 2011-12; even as the scooters segment continued to post 20%+ (YoY) anjan@icraindia.com
expansion. Overall, ICRA expects the domestic 2W industry to report a volume growth of ~13% in 2011-12 as we expect growth
to fade further in Q4, 2011-122 due to base effect. Analyst Contacts:
Subrata Ray
In an environment where the northward movement of inflation, fuel prices and interest rates has been the nemesis of the Indian +91 22 3047 0027
automobile industry at large, the 2W industry has been the most resilient reflected in its healthy volume growth of 15.0% (YoY) in subrata@icraindia.com
9m, 2011-12. The growth has been supported by various structural positives associated with the domestic 2W industry including
favourable demographic profile, moderate 2W penetration levels (in relation to several other emerging markets), under Jitin Makkar
developed public transport system, growing urbanization and expected strong replacement demand, besides moderate share of +91 124 4545 368
financed purchases. ICRA expects these strengths, coupled with the OEMs’ thrust on exports, to aid the 2W industry to report a jitinm@icraindia.com
volume CAGR of 10-12% over the medium term to reach a size of 21-23 million units (domestic + exports) by 2015-16.
Table 1: Trend in Sales Volumes of the Indian 2W Industry (Source: SIAM)
Volumes (Units, Nos.) YoY Growth (%)
Q1 Q2 Q3 Q1 Q2 Q3
Domestic 2009-10 2010-11 2009-10 2010-11
2011-12 2011-12 2011-12 2011-12 2011-12 2011-12
Motorcycles 7,341,122 9,019,090 2,464,143 2,558,515 2,556,782 25.9% 22.9% 17.5% 15.4% 9.2%
Scooters 1,462,534 2,073,797 532,867 650,155 659,643 27.4% 41.8% 13.3% 29.0% 21.6%
Mopeds 564,584 697,418 190,672 192,859 186,472 30.9% 23.5% 21.0% 7.0% 2.6%
Total Domestic 9,368,240 11,790,305 3,187,682 3,401,529 3,402,897 26.0% 25.8% 17.0% 17.3% 11.0%
Q1 Q2 Q3 Q1 Q2 Q3
Exports 2009-10 2010-11 2009-10 2010-11
2011-12 2011-12 2011-12 2011-12 2011-12 2011-12
Motorcycles 1,102,978 1,480,983 482,566 492,408 448,090 13.6% 34.3% 27.1% 31.7% 21.8%
Scooters 30,125 52,312 20,949 24,696 23,950 16.7% 73.6% 100.4% 88.5% 92.0%
Mopeds 6,905 6,295 1,461 3,478 2,796 -5.4% -8.8% -44.0% 159.2% 188.0%
Total Exports 1,140,008 1,539,590 504,976 520,582 474,836 13.5% 35.0% 28.6% 34.0% 24.5%
1
Refers to domestic sales volumes
2
The domestic 2W industry grew by 14.8% (YoY) in 10m, 2011-12
ICRA LIMITED

2. TREND IN QUARTERLY SALES VOLUMES AND MARKET SHARE IN MOTORCYCLES
Chart 1: Trend in Quarterly Sales Volumes of Motorcycles (Domestic) Sales Volumes Analysis - Motorcycles
The domestic motorcycles segment recorded a volume growth of 9.2% YoY
3.0 35%
in Q3, 2011-12 and as has been the trend over the last several quarters, the
>125cc segment of motorcycles grew much faster than the 75-125cc
2.5
30% segment. With this, the contribution of the >125 cc segment to the total
25%
motorcycles segment increased from 26% in 2009-10 to 29% in 9m, 2011-
2.0
12.
million units (Nos.)
20%
Market Share Trends
1.5 15% The Indian motorcycles segment continues to be dominated by Hero
MotoCorp which has maintained its market share at over 55% in the
10%
1.0 domestic motorcycles segment over the last five quarters (Refer Chart 2).
5% The top three players accounted for 89.5% of the industry’s volumes in Q3,
0.5
0%
2011-12 (92.0% in 2007-08), with Honda Motorcycles reclaiming its spot as
the third largest player, a position which it had lost out to TVS in the
- -5% previous quarter after having retained it since Q4, 2009-10. In the 75-125cc
Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12
segment of motorcycles (that represented 71% of total motorcycles sales
Motorcycles Volumes Growth (QoQ) Growth (YoY) volumes in 9m, 2011-12), Hero MotoCorp continues to be a strong market
leader with a share of 74.2% in 9m, 2011-12 (70.4% in 9m, 2010-11). In the
Source: SIAM, ICRA’s Estimates
>125cc segment of motorcycles, while Bajaj Auto continues to account for
Chart 2: Trend in Market Share in Motorcycles Segment (Domestic) nearly half the segment’s volumes (49.1% in 9m, 2011-12), Yamaha has
been the fastest growing having improved its market share from 8.1% in
3.6% 4.2% 4.4% 4.6% 4.9% 4.9%
9m, 2010-11 to 10.1% in 9m, 2011-12.
100% 4.9%
8.2% 7.3% 7.1% 6.8% 7.3% 6.5% 8.1%
Short to Medium Term Outlook
90%
7.3% 7.1% 6.9% 6.8% 6.3% 6.8% 5.6%  ICRA expects the entry segment (bikes having price less than Rs.
80%
40,000) volumes in the domestic market to grow at a much slower
70% 25.6% 26.1% 25.3% 26.8% 25.1% pace than the overall 2W industry and volume growth in this segment
27.0% 28.5%
60% to be driven mainly by exports. This is because the segment is no
50% longer a key focus area of OEMs due to limited scope for margin
40%
expansion and high interest rate sensitivity.
 While the executive segment (bikes in the Rs. 40,000-50,000 price
30% 55.5% 55.9% 56.5% 56.2%
54.0% 52.9% 55.0% range) is expected to maintain its steady growth, competition is likely
20%
to intensify following aggressive model refurbishment and new model
10% launch plans of most OEMs.
0%  The premium segment (bikes having price greater than Rs. 50,000) is
Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12
expected to remain the fastest growing over the medium term, given
Hero MotoCorp Bajaj Auto TVS Honda Motorcycles Others the strong growth in purchasing power in the hands of middle-class
urbanites, especially in the age group of 20-30 years. This should also
Source: SIAM, ICRA’s Estimates
translate into superior profit margins for players that are stronger in
the premium segment.
ICRA LIMITED

3. TREND IN QUARTERLY SALES VOLUMES AND MARKET SHARE IN SCOOTERS
Chart 3: Trend in Quarterly Sales Volumes of Scooters (Domestic)
Sales Volumes Analysis - Scooters
Segment-Wise Analysis
0.7 60%
 The strong double-digit volume growth recorded by the motorcycles
Barring Q1, 2011-12, the growth in scooter segment’s sales volumes has
generally outperformed that of(Refer Chart 1) was not consistent across all
segment in Q1, 2011-12 the motorcycles segment, partly due to the
0.6 50% former’s smaller Entry, Executive and Premium. The volume growth was a
segments - base. In Q3, 2011-12 too, the sales volumes of the
domestic scooters segment at ~660,000 units recorded a growth of 21.6%
blend of:
0.5 40% (YoY), The flattish growthgrowth of motorcycle sales. With this, the share
higher than the 9.2% (~3%) in the entry segment (bikes having price
million units (Nos.)
of the scooters segment in which accounts for around 16% of volumes
less than Rs. 40,000) the total domestic two-wheeler the total
0.4 30%
increased to 19.4% in Q3, 2011-12 from 17.6% in 2010-11.
domestic motorcycles sales volumes
0.3 20%  The steady growth (~17%)of the executive segment (bikes in the Rs.
Market Share Trends price range) which accounts for around 65% of the
40,000-50,000
0.2 10% Overall, Honda Motorcycles continues to maintain its leadership position in
total domestic motorcycles sales volumes
the scooters segment through its flagship brand Activa (besides Aviator and
 The fast growing (~30%) premium segment (bikes having price
0.1 0% Dio) enjoying a than Rs.share of which accounts for around 19% of total
greater market 50,000) 50.7% in Q3, 2011-12. While capacity
shortfall domestic motorcycles sales volumes (Haryana) had restricted its
at the company’s plant at Manesar
- -10%
Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12
volume growth in the recent past, the company began commercial
Scooters Volumes Growth (QoQ) Growth (YoY)
productionMedium term Outlook
Short to at its new plant at Tapukara (Rajasthan) in July 2011. This has
allowed the company tosegment volumes in the domesticover theto grow at
ICRA expects the entry consolidate its market position market last two
Source: SIAM, ICRA’s Estimates quarters. slower pace thanMotoCorp’s 2W industry and volume growth to be
a much However, Hero the overall demonstrated success in improving
market share (through its sole brand Pleasure) coupled with newkey focus
driven mainly by exports. This is because the segment is not a scooter
Chart 4: Trend in Market Share in Scooters Segment (Domestic)
models proposed toto limited scope Hero MotoCorp, TVS and Yamaha over
area of OEMs due be launched by for margin expansion and high interest-
100% the short to medium could imply shrinkage of market share to maintain its
rate sensitivity. While the executive segment is expected gap between
5.8% 8.7% 8.7% 7.3% 6.1% 6.5% 4.9%
9.1%
the market leader and others over time. to intensify following aggressive
steady growth, competition is likely
90% 11.1% 10.4%
9.9% 12.1% 12.7%
11.3% existing model refurbishment and new model launch plans of most OEMs.
80%
15.3% 15.0%
15.9% Shortpremium segment is expected to remain the fastest growing over the
The to Medium Term Outlook
15.4% 18.4%
70% 16.7% 18.4% ICRA expects the scooters disproportionate growth in purchasing power in
medium term, given the segment to gradually increase its share in the
60% 19.4% domestic 2W market from 17.6% in 2010-11 to ~21%the 2014-15. With 20-30
the hands of middle-class urbanites, especially in by age group of this,
19.6% 22.8%
23.6% 21.9% 21.2% 20.5% the domestic should also translate into superior profit margins for players
years. This scooters market is estimated to nearly double in size by 2014-
50%
15. Thus,stronger in a multitude segment. already dot the segment’s
that are even as the premium of brands
40% landscape and more are expected to follow, the likely expansion in the pie
30% should offer sufficient volumes for the industry to grow profitably. For the
Market Share Trends
48.3%
42.4% 41.3% 41.0% 42.4% 45.4%
50.7% new entrants,motorcycles segment continues to be dominated by Hero
The Indian a faster gain in market share could hasten the process of
20%
profitability improvement. Honda) which has been recording sequential
MotoCorp (erstwhile Hero
10%
gains in market share over the last three quarters. The top three players
0% accounted for 88.2% of the industry’s volumes in Q1, 2011-12 (92.0% in
Q1, 2010-11 Q2, 2010-11 Q3, 2010-11 Q4, 2010-11 Q1, 2011-12 Q2, 2011-12 Q3, 2011-12 FINANCIAL PERFORMANCE OF TWO-WHEELER OEMs
2007-08), with Honda Motorcycles having overtaken TVS since Q1, 2010-11
Honda Motorcycles TVS Hero MotoCorp Suzuki Mahindra
as the third largest player after Hero MotoCorp and Bajaj Auto.
Source: SIAM, ICRA’s Estimates
ICRA LIMITED

4. FINANCIAL PERFORMANCE OF TWO-WHEELER OEMs
Hero MotoCorp Bajaj Auto
Chart 5: Trend in Financial Performance of Hero MotoCorp Chart 6: Trend in Financial Performance of Bajaj Auto
7,000 18% 6,000 35%
16% 30%
6,000 5,000
14%
5,000 25%
12% 4,000
Rs. Crore
20%
Rs. Crore
4,000 10%
3,000
3,000 8% 15%
6% 2,000
2,000 10%
4%
1,000 1,000 5%
2%
0 0% 0 0%
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Revenues OPM PAT Margins Revenues OPM PAT Margins
Revenues: In Q3, 2011-12, Hero MotoCorp’s revenues at Rs. 5,983.6 Crore Revenues: In Q3, 2011-12, Bajaj Auto’s revenues at Rs. 5,063.2 Crore grew by
grew by 16.9% YoY and 3.4% QoQ, supported by 11.3% YoY and 2.9% QoQ 21.2% YoY but declined by 3.9% QoQ) led by continued strong exports growth in
increase in sales volumes and 5.0% YoY and 0.5% QoQ increase in average both the 2W as well the three-wheeler (3W) segments; increase in average
realizations. Till 2010-11, exports accounted for 2.5% of the company’s realization due to both price increase as well as favourable change in product
sales volumes. Although since the time Hero MotoCorp’s JV agreement mix; and favourable currency movement on exports. The company
with its erstwhile partner Honda (Japan) ceded in Dec 2010, the company management’s outlook on exports (~32% of 2W volumes in Q3, 2011-12)
has been unable to scale up its exports much; it is likely to get more remains robust with a target to achieve export of 1.5 million units in 2011-12E,
aggressive on the exports front as and when its fourth manufacturing plant reflecting a growth of 25% over 2010-11.
gets established (for which the company is mulling a location near one of Operating Profit Margins (OPM): Bajaj Auto’s OPM improved to 21.0% in Q3,
the ports). 2011-12, higher by 63 bps YoY and 89 bps QoQ. The improvement in margins
Operating Profit Margins (OPM): Hero MotoCorp’s OPM at 15.0% in Q3, was supported by relatively higher realizations from exports, operating leverage
2011-12, declined marginally by 15 basis points (bps) QoQ but increased by benefits and rationalization of spends on sales promotion. The DEPB benefits
454 bps YoY. The YoY expansion in HMCL’s core EBITDA margins, however, were discontinued post September 2011; however, BAL has undertaken price
was relatively lower at 194 bps YoY on exclusion of the estimated royalty increase on export models (besides price increase on domestic models), which
payments made by HMCL to its erstwhile partner Honda Motor Company should allow the company to sustain its margins going forward.
(HMC, Japan) in Q3, 2010-11. Going forward, HMCL’s ability to sustain the Net Profits: In Q3, 2011-12, while Bajaj Auto’s OPBITDA growth at 25.0% (YoY)
scale required to absorb the additional expenses being incurred for was robust, the company’s PAT at Rs. 795.2 Crore grew at a relatively lower rate
creating a new corporate brand, introduction of new models, building of of 19.2% (YoY). This was due to the exceptional MTM loss of Rs. 58.9 Crore
R&D capability and exploring overseas markets will govern its profitability. recorded by the company in Q3, 2011-12 related to the valuation of forward
exchange contracts. This is a notional loss and would get reversed on maturity
Net Profits: Hero MotoCorp’s Q3, 2011-12 PAT at Rs. 613.0 Crore grew by of the underlying contracts (assuming the company’s actual exports remain in
42.9% YoY and 1.6% QoQ. Overall, the company’s revenues and PAT line with its budgeted estimates during the term of the contract).
touched a record high in Q3, 2011-12.
ICRA LIMITED

5. FINANCIAL PERFORMANCE OF TWO-WHEELER OEMs
TVS Motor
Chart 7: Trend in Financial Performance of TVS
Revenues: In Q3, 2011-12, TVS’ Net Sales at Rs. 1,762.2 Crore grew by
2,500 8% 7.0% YoY but declined by 11.5% QoQ. While the company’s total 2W
7% volumes in Q3, 2011-12 grew by 0.9% YoY and total three-wheeler (3W)
2,000 volumes declined by 11.0% YoY, the revenue growth was much higher by
6% virtue of favourable change in product mix. Thus, notwithstanding the
increase in proportion of low-ticket mopeds in TVS’s domestic 2W sales
1,500 5%
volumes from 39% in Q3, 2010-11 to 41% in Q3, 2011-12, the increase in
Rs. Crore
4% proportion of >100cc scooter (Wego) and >125cc motorcycles (mainly
1,000 Apache RTR family) in its sales mix enabled it to improve its average
3%
realization YoY.
2%
500 Operating Profit Margins (OPM): TVS’ OPM at 6.5% in Q3, 2011-12 was
1% 44 bps higher YoY but 40 bps lower QoQ. While the company’s product mix
0 0% in Q3, 2011-12 was in its favour on YoY basis, its relative deterioration on
QoQ basis accordingly translated into movement in OPM.
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY10
Q1 FY11
Net Profits: While TVS recorded OPBITDA growth of 14.6% YoY in Q3,
Revenues OPM PAT Margins 2011-12, the company’s PAT growth at 1.4% YoY was much lower on
account of higher tax rate and lower ‘other income’. Also, the company’s
PAT in Q3, 2011-12 declined by 26.1% on QoQ basis both due to negative
revenue growth (QoQ) as well as decline in OPM on QoQ basis.
ICRA LIMITED

6. Analyst Contacts
Analysts Contacts
Mumbai
Subrata Ray subrata@icraindia.com 022 – 3047 0027
Kinjal Shah kinjal.shah@icraindia.com 022 – 3047 0027
Delhi
Anupama Arora anupama@icraindia.com 0124 – 4545303
Shamsher Dewan shamsherd@icraindia.com 0124 – 4545328
Jitin Makkar jitinm@icraindia.com 0124 – 4545368
Chennai
Pavethra Ponniah pavethrap@icraindia.com 044 – 45964314
ICRA Limited
An Associate of Moody's Investors Service
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