Uphill ride for bike makers

Aggressive pricing and higher raw material costs have eaten into the profit margins of the country's leading two-wheeler companies during the July-September 2006 quarter.

Days after Bajaj Auto reported a less-than-expected 10 per cent rise in net profit, Hero Honda, the country's largest two-wheeler company, reported a 9.2 per cent drop in quarterly profit, while TVS Motor Company's profit tumbled 22.28 per cent.

The booming Rs 33,000-crore two-wheeler market has seen cut-throat competition as companies have launched new models at attractive prices. Coupled with rising input costs, this has squeezed the profit margins of companies.

Hero Honda's operating margin fell to 12.7 per cent in July-September 2006 from 15.4 per cent in the same quarter last year, while TVS' margin fell to 5 per cent from 8 per cent during the period.

Bajaj Auto's earnings before interest, depreciation, tax and amortisation margin fell to 15.10 per cent in July-September from 17.20 per cent during the corresponding quarter last year.

To check the squeeze on margins, all three companies plan to migrate some production to tax havens: Uttaranchal for Hero Honda and Bajaj Auto and Himachal Pradesh for TVS.

"Our new plant in Uttaranchal with a production capacity of 500,000 units will help us tide over rising costs," Hero Honda Managing Director Pawan Munjal said.

Auto analysts also expect the company to cut vendor margins to cope with the situation.

In spite of the unimpressive show in the July-September quarter, there is every indication that the intense competition will carry on into the subsequent quarters.

Companies are expected to flood the market with at least 15 new two-wheeler models in the next 12 months. While Bajaj is expected to launch five new models, Hero Honda will launch four. Companies like TVS and Kinetic are expected to launch 2-3 models each in the next 12 months.