Two-wheelers: Hitting a speed-breaker

Even Hero Honda, which till now had managed to push through volumes, seems to have hit a speed-breaker; motorcycle volumes for the company appear to have fallen by an estimated 12 per cent in December. For the better part of 2008-09, the company had managed to grow volumes thanks to its strong presence in rural markets and strong product portfolio.

But even the fact that a relatively lower share of its sales are made though finance schemes, which are now not easily available, doesn’t appear to have helped the company in the last couple of months. So it’s not surprising that peer Bajaj Auto, which relies on finance schemes, has seen motorcycles volumes slip by 33 per cent in December; the Pune-based firm’s volumes have been subdued for most of 2008 — volumes between April-December 2008 were down 8 per cent.

The valuation gap between the two is unlikely to narrow — at Rs 774, Hero Honda trades at around 11 times 2009-10 estimated earnings while at the current price of Rs 407, Bajaj Auto trades at just 6.5 ties estimated 2009-10 earnings.

Despite slowing volumes, Hero Honda will probably be the only auto company to post a rise in net sales — of about 5 per cent — in the December 2008 quarter. The increase in sales in the September 2008 quarter was a strong 36 per cent. The Rs 9,046 crore Bajaj Auto, on the other hand, could see a double-digit fall.

Operating profit margins for Hero Honda, however should be flat at around 14 per cent because the benefits of lower commodity prices will flow in only in the March 2009 quarter. Even if the raw material bill does come down, unless volumes sustain margins could remain under pressure in the coming quarters too.

For Bajaj Auto the turnaround could take its time coming though the company has lined up several launches over the next few months. If customers bite, the pick-up in revenues could happen sooner but in the meanwhile, margins should remain in single digits.