Prices of two-wheelers to rise sharply amid slew of new regulations

Prices of two-wheelers are expected to go up by almost a fourth as a slew of new regulations on safety, emission, fuel efficiency take effect over the next 21 months. The sharp price rise is set to pose a speed bump for sales of motorcycles and scooters in world's largest market for such vehicles particularly of those in the entry level of the market, said analysts.

Officials at most companies including Hero MotoCorp, Honda Motorcycle and Scooters India, TVS Motor and Bajaj Auto declined to comment for the story.

Two wheelers sales in India have been advancing at a brisk pace year-on-year. It expanded at a record 15 per cent in the year that ended in March 2018, zipping past the 17-million mark for the first time, overtaking China. In the first five months of the ongoing financial year, it grew 11 per cent to 94,43,286 units, according to Society of Indian Automobile Manufacturer (Siam).

The cost increases on account of higher insurance costs, higher premium costs on insurance and commodity prices, mandatory safety regulations and BSVI emissions that kicks in from 1 April 2020, will lead to a cost increase of 10 to 25 per cent, wrote Arya Sen and Ranjeet Jaiswal equity analysts at Jefferies Equity Research India in a 20 September report. All these known costs add up to at least 10-25 per cent increase in on-road prices across models over a 2-year period with most of the increase being bunched up from now to April 2020. This is unusually sharp compared to 2-4 per cent increase in 2-wheeler prices over FY08-18. The price increase is particularly sharp at 17-27 per cent for entry motorcycles and mopeds. Our calculations also do not take into account any "unknown" or regular cost increases, they wrote in their report.

While some of the costs increases have already taken effect, others will become reality soon. Earlier this year, the Supreme Court mandated had a five-year premium for third part insurance for two-wheelers effective September 1. Based on IRDA rates, this implies an increase of Rs 2,500 for entry/executive motorcycles and scooters (up to 150cc) and Rs 4,500 for premium motorcycles.  Most of the increases have already been passed to the buyers. On-road prices (which includes insurance costs among other things) have gone up from Rs 3,000 to Rs 8,000.

A mandatory requirement of safety regulations such as the combined braking system in all two-wheelers up to 125ccc and an anti-lock braking system in those above 125cc from 1 April 2019 by the ministry of road transport and highways is likely to lead to a cost increase of up to Rs 4,500

Implementation of the BSVI, which will require manufacturers to replace the fuel delivery system from carburettors to fuel injection, will lead to another round of price hike ranging from Rs 4,000 to Rs 7,000 wrote the Jeffries analysts.

Meanwhile, manufacturers are also facing cost headwinds fan from increase in commodity prices prompting some of them to announce price hikes. Two-wheeler market leader, Hero Moto Corp, for instance, said on September 26 it will hike prices of models across its range by up to Rs 900 effective October 3 to offset the increase in raw material prices a and weaker rupee. Others are also like to follow suit. 

Some believe the regulatory changes are likely to pose a bigger challenge for companies that draw a major chunk of sales from the entry-level segment. We expect a scenario where a spike in two-wheeler prices and low fuel efficiency post BSVI may pose a challenge to OEMs with high entry/commuter segment exposure and hasten consumer upgrade velocity, unless players sacrifice their margins significantly. Smooth transition to new emission norms without sacrificing performance/reliability will showcase the technological capabilities of manufacturers. Thus, we would prefer players ahead in brand, portfolio and technology curve since they can gain volume and profitability faster as we look beyond 2020, wrote analysts Priya Ranjan, Apoorva Patil and Vikrant Gupta, analysts at Antique Stock Broking. According to them while Hero MotoCorp is most vulnerable to the changes others like Bajaj Auto and Royal Enfield on account of higher share coming from premium models and exports, are better positioned. The disruptions ahead are already weighing on sentiments of investors in two-wheeler stocks. Led by two-wheeler stocks that have lost up to 5.3 per cent, the BSE Auto Index was among the highest sectoral losers, shedding 2.3 per cent in trade on Friday. Including Friday, the index has dropped over 20 per cent since the start of the year as compared to gains of 6 per cent for the benchmark Sensex.