Muted demand, costlier BS-6 models keep outlook for two-wheelers hazy
The transition to BS-6 emission norms is gathering pace among two-wheeler manufacturers. Three out of the top five original equipment manufacturers (OEMs) have launched BS-6 models of their existing brands. Indeed, this will help gauge customer response to the new models.
Trending CarsFind More Bikes
However, the higher prices could dampen demand and weigh on the already weak growth outlook for two-wheelers in FY20.
Jefferies India Pvt. Ltd in a report said: “The median price hike across different models and OEMs, so far, has been ₹7,700 (ex-showroom, Delhi) with a range of ₹6,500 to ₹9,500 (8-14%). Given the similar amount of price increase across models, in percentage terms, the impact is the highest in entry-level two-wheelers."
Even though OEMs are highlighting the additional features of the BS-V6 models, such as higher torque and mileage compared to BS-4 variants, higher prices could impact sales.
Note that the price hikes comes when the industry is battling tough times with falling sales and high inventories. November sales declined by 14% year-on-year. In fact, with the moderate festive sales in October and a dull November, analysts and OEMs have watered down expectations for Q3 FY20.
However, some dealers are hopeful that high-priced BS-VI models may induce pre-buying at least in price-sensitive segments. For instance, Hero MotoCorp priced the BS-6 variant of Splendor iSmart 13% higher than the BS-4 model. This is true of TVS Motor’s Jupiter Classic and Honda Motorcycle’s Activa 125 Disc.
So, even as two-wheeler OEMs ride into the new year with some BS-6 launches, demand outlook is uncertain. “We cut our industry estimates for FY20 and now expect the year to end at ~8% lower volumes YoY. Over November-March, the implied volume growth is about 6%. We think this would reflect weak base as well as some pre-buy, especially in the lower-end motorcycles," said a Citi Research report. Hence, the cost of transition to BS-VI and weak operating leverage could weigh on profit margins. If anything, moderating prices of steel and aluminium may bring some relief.
Yet, two-wheeler stocks have been wobbly. Shares of Hero and TVS fell 11% and 4%, respectively, in the past month, while Bajaj Auto Ltd was less impacted as exports offset the pain in domestic markets. “The next few quarters will be hazy given factors such as BS-4 de-stocking and BS-6 re-stocking in wholesales, retail pre-buying, consumer preference for upgraded models, use of higher financing and discounts, adverse impact of BS-6 models on overall margins," added the Jefferies India report.