Fiscal year 2003-04 has turned out to be another good year for motorcycle manufacturers. Riding on the back of easy availability of finance schemes and improved macro economic indicators, the segment has grown by a strong 16 per cent and further strengthened its position in the overall two-wheeler market pie.

Let us have a look at the FY04 sales trend of two of the leading players in the industry, Hero Honda and Bajaj Auto.

Hero Honda had a rather sedate FY03 where it grew at a slower rate than the industry and as a result lost considerable market share (market share declined from 50 per cent in FY02 to 44 per cent in FY03) to rivals Bajaj Auto and TVS. This could be attributed to the lack of competitive models coming out from the company stable.

The poor run continued during the first half of FY04, as the sales of the company managed to grow by a mere 2 per cent on an year-on-year basis. However, the launch of two new variants 'Splendor Plus' and 'Passion Plus' in conjunction with the onset of the festive season, augured well for the company and sales picked up post September.

In fact, the company had three occasions where the sales crossed a record 200,000 unit sales per month.

Thus, aided by strong sales during the latter half of the year, which accounted for 57 per cent of the company's total sales for FY04, the total unit sales of the company crossed the coveted 2 m mark, the first for any auto company in India in a single year.

As a result of this, the number of units sold in FY04 has grown by a healthy 23 per cent on a YoY basis. With this, the company has also managed to outperform the motorcycle industry growth rate of 16 per cent and thus improve its market share from 44 per cent in FY03 to 47 per cent in FY04. Going forward, the industry is expected to grow by around 15 per cent in the next two to three years with motorcycles accounting for 80 per cent of the total two wheeler industry pie, a positive for a pure motorcycle player like Hero Honda.

But the incremental market share will be hard to come by. Moreover, with company's technical collaborator, Honda planning to launch its own range of motorcycles in the current year, the company will have to fight hard to improve volumes. However, strong brand equity and robust cash flows are likely to remain as company's major strengths going forward.

Bajaj Auto, the second largest manufacturer of motorcycles, also managed to outperform the motorcycle industry growth rate, registering a growth of 18 per cent as compared to the last fiscal. The other two-wheeler offerings of the company (i.e. geared and ungeared scooters), however witnessed a significant fall of 31 per cent as compared to FY03.

But on account of better performance by the motorcycles segment, the total two-wheeler sales of the company registered a modest growth rate of 3 per cent.

Also, the share of motorcycles in the overall two-wheeler sales pie of the company increased to almost 80% as compared to 70 per cent a year ago. Besides, its exports grew at an impressive 66 per cent over last year and enabled the company to remain as the largest exporter in the country.

The company was highly reliant on geared scooters for growth (57 per cent of volumes sold in FY99). But it has managed to alter its sales mix significantly and the motorcycles segment has emerged as the major contributor (80 per cent of all two-wheelers sold in FY04 as compared to 70 per cent a year ago).

Going forward, with increasing penetration of motorcycles in the urban and semi-urban markets and entry of newer players, the company will find it hard to maintain the growth momentum. Moreover, the company's presence in low volume segments such as geared scooters and mopeds is likely to put pressure on margins.

As far as valuations are concerned, Hero Honda is trading at a premium to its closest peer on an annualised 9mFY04 earnings basis. The premium must be on account of the fact that the former is a pure motorcycles player and has consistently higher operating margins.

However, on account of limited growth prospects of the motorcycles industry and increasing competition the valuations appear to be at the higher end of the spectrum.

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