2-wheeler scrips face a rough ride

The shares of two-wheeler makers, Hero Honda, Bajaj Auto and TVS Motors fell by over two per cent today as the rising interest rates and sluggish demand have compelled companies to cut production by as much as 10 per cent.

Hero Honda and Bajaj Auto, the country's two largest motorcycle makers, were the top losers among the 30 Sensex today.

Bajaj Auto shed as much as 2.84 per cent to Rs 2,155.25 in a weak market, while Hero Honda, the nation's largest motorbike maker, wiped off 2.30 per cent to end at Rs 697.40.

The Chennai-based TVS Motors, which has not yet announced a cut in production, has seen its stock price decline by 1.62 per cent to Rs 66.90. The shares have shed 7.64 per cent in a month's time.

Bajaj Auto has lost as much as 16.65 per cent in the last one month, while Hero Honda lost nearly 5 per cent in a week. The benchmark Sensex index gained by 1.74 per cent during this calendar year, while Bajaj Auto was down by 21 per cent and Hero Honda was down 12.43 per cent during the same period.

"The decline in demand (for two-wheelers) started at the entry level. The gap between pricing in the mid and entry-level segments became narrow and thus there was a shift of consumers from entry to mid-level," said Umesh Karne, a research analyst with Emkay Share & Stocks.

Analysts also attributed the weak demand to rising interest rates as most vehicle buyers take bank loans to finance their purchases.

A series of liquidity tightening measures by the Reserve Bank of India since last December led to a hike in the lending rates by commercial banks between 200 and 250 basis points. Further, the sales of motorcycles and scooters generally slowdown from June to September each year because of monsoons in most parts of the country.

"The margins of financing companies are 1-1.25 per cent for two-wheelers and close to 2 per cent for four-wheelers. The rising interest rates have meant that people cannot pay their equated monthly installments (EMIs) on time," said Vaishali Jajoo, auto analyst, Angel Broking.

While GE Money announced today that it was exiting the two-wheeler financing business, companies such as Bajaj Auto Finance will take a 'minimum hit'. The share prices of Bajaj Auto Finance closed at Rs 400, up 0.81 per cent.

"The first and second quarters will be bad due to the stagnant demand. Recovery will take a year, with the RBI eventually cutting interest rates. Diwali should be a demand driver," said Karne of Emkay.

Despite the muted demand, the two-wheeler companies are not shying away from announcing new models. Hero Honda announced its new model, Splendor NXG in May 2007 and Bajaj Auto made the launch of Discover DTSi and Pulsar 200 DTSi public in April 2007.

New models help maintain growth volumes in a lean market, according to analysts.