Financial Daily from THE HINDU group of publications
Wednesday, May 28, 2003
Industry & Economy
2-wheelers likely to see value pricing for 2-3 yrs
KOCHI, May 27
WITH auto and auto ancillary stocks being the current flavour in the market, the recent price cuts by major manufacturers have brought into focus concerns of a price war and going ahead its possible impact on company earnings.
While allaying fears that the two-wheeler industry may be plunged into a price war, analysts believe that with the emerging clarity on domestic demand and exports, the re-rating of two-wheeler stocks is imminent.
"With increasing number of successful models competing for limited incremental volumes, the first victim has been pricing power," a leading sector analyst said.
Analysts said that historically, price cuts have not yielded any increase in volumes.
"We do not perceive the recent price cuts announced by two-wheeler manufacturers as a price war. Companies cut prices only under two scenarios - when the product is at the and of its life cycle or as a tactical tool to weed out seasonal factors and manage inventory size," an analyst from a leading domestic broking house said.
He added: "Bajaj Auto learnt lesson the hard way, when it lost volumes in Caliber, TVS Motors with Max and Hero Honda in Street. On the contrary, the perceived value of a product goes down with price cuts and this creates room for competition. Besides, incremental volumes required to compensate for price reduction are too steep and the resultant market share is also unachievable."
While history may suggest that price cuts do not necessarily bring in volumes - Caliber is a good example - there is a perception that value pricing as a strategy will be witnessed for the next 2-3 years till the price table reaches a stable equilibrium.
There is a belief that while Hero Honda could bring down the prices of its products, it is very unlikely that Bajaj Auto and TVS Motors would respond to the price cuts.
"We expect Hero Honda to bring down prices for two reasons. One, its product portfolio is one of the oldest, especially its largest selling Splendor and CD 100. Even the recently launched products are variants of older products," an analyst said.
"Two, its oldest and best-selling products - Splendor and Passion - are not comparable to peer products offered by Bajaj Auto and TVS Motors. As rival products further penetrate the market, Hero Honda may take a relook at pricing its products."
Thus, given the changing industry landscape, there is a perception that market share would shift towards Bajaj Auto and TVS Motors, but Bajaj Auto is perceived to be the best positioned.
"Bajaj Auto has the most impressive product line up to capture the emerging opportunities with Caliber 115 (new) already been launched and with two new products, Bajaj K60-World Bike and Bajaj 612 in the pipeline," a leading sector analyst said.
"Hero Honda may lose market share because of its older product profile in the premium segment and this may further benefit Bajaj Auto. In the other two segments, economy and luxury, Bajaj is already a leader. Its leadership in the economy may be challenged but in the luxury segment, it is expected to retain its leadership for at least another 18 months, which competitors would find difficult to match."
Benchmarking the penetration of two-wheelers in India against China and the GDP differential of the two countries, a recent report by a reputed domestic broking house has said that the sustainable growth rate for two-wheelers in the domestic market should be around 9.5 per cent.
"However in the interim, demand would overshoot because of lower penetration. Therefore on a conservative basis, a 11-12 per cent demand growth looks sustainable. In addition to domestic growth, exports should also pick up," it added.
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | Home |
Copyright © 2003, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line