No Festive Cheer: A Deep Dive into the Struggles of Mid-Cap Two-Wheeler Stocks in India

No Festive Cheer: A Deep Dive into the Struggles of Mid-Cap Two-Wheeler Stocks in India

The Indian automobile industry, particularly the two-wheeler segment, has long been a vibrant and resilient sector. However, the ongoing festive season, which traditionally witnesses robust sales and growth, has brought little cheer to mid-cap two-wheeler stocks. This is a stark contrast to the past when these stocks would typically experience a festive surge, driven by increased consumer demand and seasonal offers from manufacturers. But this year, a perfect storm of economic headwinds, regulatory pressures, and changing consumer behavior has left these stocks grappling with significant challenges.

Economic Headwinds

One of the primary reasons for the struggles of mid-cap two-wheeler stocks is the economic headwinds faced by India. The country’s economy has been slowing down, with Gross Domestic Product (GDP) growth rate falling to a six-year low of 4.2% in the first quarter of this fiscal year. This economic downturn has led to decreased consumer spending, particularly on discretionary items like two-wheelers.

Regulatory Pressures

Another factor contributing to the struggles of mid-cap two-wheeler stocks is regulatory pressures. The Indian government’s push for cleaner and greener transportation has resulted in stringent emission norms, with the Bharat Stage VI (BS-VI) norms coming into effect from April 2020. The implementation of these regulations has led to increased production costs for two-wheeler manufacturers, which in turn have been passed on to consumers in the form of higher prices. This has resulted in a dampened demand for two-wheelers, particularly those priced in the mid-range segment.

Changing Consumer Behavior

The third factor impacting mid-cap two-wheeler stocks is the changing consumer behavior, which is being driven by the shift towards personal mobility solutions like cars and electric vehicles. Two-wheelers, which were once the preferred mode of transportation for many Indians, are now being seen as less desirable due to factors like increasing traffic congestion, concerns over safety, and the rising cost of ownership. This shift in consumer behavior has further dampened demand for mid-cap two-wheeler stocks.

Looking Ahead

The struggles of mid-cap two-wheeler stocks in India are not likely to abate in the near future. While there are some signs of recovery in the economy, consumer sentiment remains weak, and the challenges posed by regulatory pressures and changing consumer behavior are unlikely to dissipate anytime soon. Investors in these stocks would be well-advised to exercise caution and maintain a long-term perspective, while also keeping a close eye on any regulatory or market developments that could impact the sector.

Revving Up the Indian Two-Wheeler Industry: A Significant Player in India’s Economy

The Indian two-wheeler industry, a vital sector in the country’s economy, has witnessed robust growth over the past few decades. With more than 250 million two-wheelers already on the road, it represents about one-third of the total automobile market in India. This sector is not just a major employer but also plays a crucial role in the country’s industrial growth and exports.

Festive Season and the Indian Stock Markets

Every year, the festive season in India brings cheer to various industries. This period of heightened consumer spending typically results in a significant boost to the stock markets. However,

An Unusual Trend in 2021: Mid-Cap Two-Wheeler Stocks

This year, the story is different for mid-cap two-wheeler stocks. Despite the usual festive season surge, these stocks have not experienced a commensurate increase in value. Several factors contribute to this anomaly:

1. Supply Chain Disruptions: The ongoing global semiconductor shortage has caused production challenges for two-wheeler manufacturers, affecting their stock prices.
2. Regulatory Changes: New emission norms and safety regulations have increased production costs, affecting the profitability of two-wheeler companies.
3. Competitive Landscape: Intense competition within the industry, particularly from established players and new entrants, has put pressure on stock prices.

Looking Ahead: Challenges and Opportunities

As the two-wheeler industry navigates these challenges, it also presents opportunities for investors. Companies with strong financials and competitive advantages are likely to weather the storm and emerge stronger. It remains to be seen how these mid-cap stocks will fare in the coming months, but one thing is certain – the Indian two-wheeler industry continues to be a significant player in the country’s economy.

Background of the Two-Wheeler Market in India

Size and growth

Over the past decade, the Indian two-wheeler market has witnessed robust growth. With a CAGR (Compound Annual Growth Rate) of around 12-15%, it has become the second-largest two-wheeler market in the world, after China. According to link, in FY21, the domestic two-wheeler market sales were approximately 20.9 million units, and it is projected to reach around 34 million units by 2026. The surge in the two-wheeler demand can be attributed to increasing urbanization, growing middle class population, and rising disposable income.

Key players

Both domestic and international players have a significant presence in the Indian two-wheeler market. Some of the major domestic players

• Hero Motocorp Ltd.
• Bajaj Auto Ltd.
• TVS Motor Company
• Royal Enfield

while some of the significant international players

• Honda Motorcycle & Scooter India Pvt. Ltd.
• Suzuki Motorcycle India Pvt. Ltd.
• Yamaha Motor India Sales Pvt. Ltd.
• Kawasaki Motors India Pvt. Ltd.

Market shares

According to a link, Hero MotoCorp held the largest market share (32.6%) in FY21, followed by Honda Motorcycle & Scooter India Pvt. Ltd. (27.5%). Bajaj Auto held the third position with a 16.7% market share, while TVS Motor Company and Suzuki Motorcycle India Pvt. Ltd. had a market share of 9.7% and 8.4%, respectively.

Importance of the mid-cap segment

The mid-cap segment

(250cc to 750cc)

in the overall two-wheeler industry

is crucial due to its potential for growth and profitability. This segment caters to the rising aspirations of consumers seeking higher engine capacity, better performance, and enhanced features. Companies like Royal Enfield, Bajaj Auto (Pulsar RS200), KTM, and Honda (CBR series) have gained significant market share in this segment.

I Reasons Behind the Underperformance of Mid-Cap Two-Wheeler Stocks

Economic slowdown and its impact on consumer spending:

The Indian economy, once touted as the world’s fastest-growing major economy, has been undergoing a slowdown in recent years. This is evident from the country’s GDP growth rate, which has been declining since Q1 2018-19 and stood at just 4.2% in Q3 2019-20. Moreover, the employment levels have also been stagnant, with the unemployment rate hovering around 7%.

The economic downturn has taken a significant toll on consumer spending, particularly in sectors like automobiles and two-wheelers. According to the Society of Indian Automobile Manufacturers (SIAM), the domestic sales of two-wheelers declined by 17% in 2019 compared to the previous year. This slump can be attributed to factors like increasing fuel prices, higher insurance premiums, and reduced purchasing power due to inflation.

Regulatory pressures:

Another major reason behind the underperformance of mid-cap two-wheeler stocks is regulatory pressures. The Indian government has been pushing for stricter emission norms and safety regulations, which have increased production costs for manufacturers.

Under the new Bharat Stage VI (BSVI) emission norms, two-wheeler companies will need to produce vehicles that comply with the new emission standards by April 2020. This comes at a significant cost for manufacturers, with estimates suggesting an additional investment of around INR 15,000-20,000 per vehicle.

The financial burden of complying with these regulations is particularly heavy for mid-cap two-wheeler companies that lack the resources to do so quickly and effectively. This has led to a delay in their product launches and a loss of market share to larger, better-financed competitors.

Competition from electric vehicles:

A third reason for the underperformance of mid-cap two-wheeler stocks is the increasing competition from electric vehicles (EVs). The Indian government has been pushing for cleaner transport options through various initiatives, including subsidies and tax benefits for EV buyers.

The push towards EVs is impacting sales of traditional two-wheelers, particularly those from mid-cap companies that lack the resources to invest in R&D and production of EVs. According to a report by Crisil, sales of two-wheelers are expected to decline by 10% in FY20 due to the growing popularity of EVs.

Global trade tensions and supply chain disruptions:

Lastly, the ongoing US-China trade war and resulting global supply chain disruptions have impacted mid-cap two-wheeler companies in India. The trade tensions have led to increased component prices, particularly for those sourced from China.

Component suppliers based in India, who cater to mid-cap two-wheeler companies, have been hit hard by these supply chain disruptions. This has led to increased production costs and reduced profitability for mid-cap two-wheeler companies, further hampering their stock performance.

Case Studies of Struggling Mid-Cap Two-Wheeler Companies

Hero MotoCorp

Despite being the largest two-wheeler manufacturer in India, Hero MotoCorp has faced significant challenges in recent years. The company’s financial performance was affected by declining sales figures, narrowing profitability margins, and market share trends shifting in favor of competitors. In response, Hero MotoCorp has taken steps to diversify its product portfolio and enter new markets.

Diversification Efforts

To counter the market downturn, Hero MotoCorp has introduced several new models and expanded its presence in international markets. For instance, it launched the XPulse 200 RS adventure tourer, Xtreme 200R sports bike, and Splendor Plus commuter bike. These new offerings aim to cater to various customer segments and help the company regain lost market share.

Bajaj Auto

Bajaj Auto, another mid-cap two-wheeler company, has managed to outperform its peers through a combination of strategic initiatives. Its financial results showcase consistent growth in sales and profitability, with the two-wheeler division contributing significantly to these numbers.

Strategic Initiatives

Bajaj Auto’s success can be attributed to its focus on exports, electric vehicles, and other strategic initiatives. The company has expanded its production capacity in India and set up manufacturing facilities abroad to increase exports. Additionally, it has invested in the development of electric vehicles, such as the Chetak scooter, which is expected to compete with offerings from other major players in this segment.

TVS Motor Company

TVS Motor Company

has also faced market challenges, but its financial performance remains robust. The company’s sales growth has been steady, and it holds a strong position in the Indian two-wheeler market. To innovate and expand its offerings, TVS Motor Company has focused on electric vehicles and scooters.

Innovation and Expansion

TVS Motor Company’s efforts to innovate include the introduction of the iQube electric scooter and the NTorq 125 cc motorcycle. These new products aim to cater to evolving customer preferences for sustainable mobility solutions. By staying ahead of the competition in terms of innovation, TVS Motor Company hopes to maintain its market position and grow its share.

Possible Solutions and Turnaround Strategies for Mid-Cap Two-Wheeler Companies

Mid-cap two-wheeler companies are currently facing numerous challenges, including increasing competition, rising production costs, and shifting consumer preferences towards electric vehicles. To overcome these hurdles and regain their market position, mid-cap companies can adopt the following strategies:

Cost-cutting Measures:

One of the most effective ways for mid-cap companies to enhance their operational efficiency and reduce production costs is by implementing lean manufacturing processes. This can involve streamlining production workflows, optimizing supply chain logistics, and investing in energy-efficient machinery. Additionally, companies can consider outsourcing non-core activities to specialized third-party providers or offshoring production to low-cost countries. By reducing their overheads and focusing on core competencies, mid-cap companies can gain a competitive edge in the market.

Diversification into New Markets:

Emerging markets like Africa, Southeast Asia, and Latin America present significant opportunities for mid-cap two-wheeler companies to expand their customer base and tap into untapped markets. These regions have large populations, growing economies, and a rising middle class, all of which are key factors for the growth of the two-wheeler industry. By localizing production, setting up distribution networks, and tailoring their products to suit local preferences, mid-cap companies can establish a strong presence in these markets and mitigate the risks associated with geopolitical instability and economic volatility.

Collaborations and Partnerships:

Collaborating with other businesses or strategic partners can be an effective way for mid-cap companies to strengthen their market position and gain a competitive edge. This can involve entering into alliances, mergers, or acquisitions with complementary businesses or industry leaders. For instance, mid-cap companies could consider partnering with technology firms to develop innovative products or collaborating with logistics providers to improve their supply chain efficiency. By leveraging the expertise and resources of their partners, mid-cap companies can enhance their offerings, expand their reach, and gain a foothold in new markets.

Embracing Technology and Innovation:

Technology is transforming the two-wheeler industry, with innovations like IoT, AI, and electric vehicles disrupting traditional business models. Mid-cap companies can capitalize on these trends by investing in research and development to create connected two-wheelers or develop electric vehicle prototypes. By embracing technology, mid-cap companies can differentiate themselves from their competitors and cater to evolving consumer preferences. Additionally, they can explore partnerships with technology firms to access new technologies and integrate them into their products or services.

5. Focus on Sustainability and Clean Energy:

As the trend towards electric vehicles continues to gain momentum, mid-cap companies need to adapt and create a niche for themselves in this growing market. This can involve investing in research and development to create electric two-wheelers, partnering with battery manufacturers or charging infrastructure providers, or developing alternative fuel technologies like hydrogen or methanol. By focusing on sustainability and clean energy, mid-cap companies can attract environmentally conscious consumers, reduce their carbon footprint, and position themselves as leaders in the evolving two-wheeler industry.

VI. Conclusion

In this article, we delved into the challenges faced by mid-cap two-wheeler companies in India, a sector that was once bustling with competition and innovation. Hero MotoCorp, Bajaj Auto, and TVS Motor Company, the big three players, have been dominating the market, leaving mid-cap companies like Honda Motorcycle & Scooter India, Royal Enfield, and Mahindra Two Wheelers struggling to keep up. The primary issues plaguing these mid-cap players are:

Intense Competition from Established Players

The dominance of the big three players has made it challenging for mid-cap companies to gain market share. Their extensive distribution networks, brand recognition, and economies of scale give them a significant edge over their smaller competitors.

Volatile Market Conditions

The two-wheeler market in India is characterized by its volatility, with sales figures experiencing wild swings due to various factors like government policies, economic conditions, and consumer demand. Mid-cap companies lack the financial stability and resources to weather these market fluctuations effectively.

Inability to Innovate Quickly

The rapid pace of innovation in the two-wheeler sector leaves mid-cap companies scrambling to keep up. The failure to introduce new models, technologies, and features on par with their competitors has resulted in declining market share for many mid-cap players.

Despite these challenges, there is hope for mid-cap two-wheeler companies in India.

Potential Solutions and Strategies

Collaborations and Partnerships

Mid-cap players can form strategic alliances with each other or larger companies to pool resources, share technologies, and expand their reach. Collaboration can help them overcome the economies of scale barrier and reduce development costs.

Focusing on Niche Segments

Mid-cap companies can target specific niches within the market, like premium motorcycles or electric scooters, where they have a better chance of differentiating themselves from their larger competitors.

Diversification

Mid-cap players can explore opportunities in related industries, such as electric vehicles or motorcycle accessories, to generate additional revenue streams. This diversification can help them weather market fluctuations and mitigate the risks associated with relying on a single product line.

Building Strong Distribution Networks

Strengthening their distribution networks through strategic partnerships, acquisitions, and investments can help mid-cap companies reach more customers and compete effectively with the big players.

By adopting these strategies, mid-cap two-wheeler companies in India can bounce back and regain their market position. The future of the sector is uncertain, but with determination, innovation, and a smart business approach, mid-cap players can overcome the challenges they face and thrive in the competitive Indian two-wheeler market.

Final Thoughts

In conclusion, the challenges faced by mid-cap two-wheeler companies in India are significant but not insurmountable. By embracing collaboration, targeting niche segments, diversifying their businesses, and building strong distribution networks, mid-cap players can position themselves for success in the face of intense competition and volatile market conditions. The future of the Indian two-wheeler sector is promising, and mid-cap companies that can adapt and innovate will be key players in shaping its trajectory.