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Indian motorbike makers, hurt by higher interest rates hitting demand and facing an imminent threat from cheaper cars, are launching bigger bikes that they expect will help protect margins and retain customers. Rising incomes and a young population have driven demand, particularly for entry-level 100cc bikes in India, the world's second biggest market after China.
Motorbike makers rolled out more than 6.5 million bikes in the domestic market in 2006/07. But slowing demand has forced makers to keep a lid on prices of 100cc bikes, which make up nearly two-thirds of the market. Such bikes sell for less than 35,000 rupees ($880), with a new manufacturer pricing its 100cc bike at 20,000 rupees.
"With margins in entry-level having reduced significantly, the battle in the executive segment will determine the course for the future," said auto analyst Ajay Shethiya at Enam Securities. Executive 110cc-135cc bikes, which make up about a quarter of the market, are priced at about 45,000 rupees, with premium bikes priced at around 80,000 rupees. Bajaj Auto Ltd , the No. 2 bike maker, estimates margins on 100cc bikes are "practically zero", while margins on executive bikes are about 9-10 percent, with margins on more premium bikes at about 12-13 percent. Bajaj has said it would exit the 100cc segment, and is raising capacity of its new XCD 125cc bike to 75,000 units a month from 50,000. Smaller rival TVS Motor Co is launching a new 125cc bike and a new 150cc bike.
Even market leader Hero Honda Motors Ltd is pushing bigger bikes, including the new 150cc Hunk, as it faces more heat from Bajaj, TVS and a wholly-owned Honda Motor Co unit. Motorcycle sales rose by about 17 percent on average annually in the last three years on higher incomes and cheap finance. But cheaper cars, including one from Tata Motors priced at $2,500 and scheduled for launch in 2008, are expected to encourage bikers to upgrade faster to cars.
Bajaj is in talks with Renault/Nissan on building a $3,000 car for India and other markets. "A consumer looking at 100cc bikes is thinking primarily of fuel-efficiency and lower cost of ownership, which will determine the purchase decision for the low-cost car also," Shethiya said. Bajaj's motorbike sales are down 12 percent in the first seven months of fiscal year that began in April compared to a year earlier, although 65 percent of it sales are now in executive and premium segments. That shift has helped it post a rise in profit in its fiscal second quarter to Sept. 30 after two successive falls.
Its operating margin expanded 80 basis points from a year ago. Hero Honda's profit has fallen for five quarters, although the September quarter fall was smaller than forecast and its operating margin rose to 12.4 percent from 10.8 the June quarter. "Even when overall sales fell, more premium bikes have bucked the trend, so focusing on them is a good bet," said Ashutosh Goel at Edelweiss Securities.
But there is a danger that the segment may get too crowded. "The same factors that are troubling entry-level could spill over into executive, with everyone rushing in," said Goel.
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