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MOSL: Automobiles - Two-wheelers - Re-Activa-ted - Value migrating to scooters




Motilal Oswal Securities Ltd.


17 Dec 2013





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AUTOMOBILES: Two-wheelers | Re-Activa-ted: Value migrating to scooters HMCL, TVSL well seated; BJAUT chooses to stay out Value migrates from outmoded business designs to new ones that are better able to satisfy customers' most important priorities. Developing a strategic understanding of how current and prospective customers change through time could serve as a compass that would point to the best direction for any company seeking to create value growth. Changing customer priorities trigger the value migration process, creating opportunities for new business designs. Incumbents frequently ignore or overlook such opportunities, presenting significant openings for newcomers. In this report, we present the process of value migration in India's two-wheeler industry over the last two decades and the changing trend for the coming decade. Value migrating to scooters, led by changing customer priorities Industries evolve, driven by changing customer priorities, challenging incumbents and opening opportunities for proactive business design, in turn resulting in a new industry order. Lack of proactive business design from Bajaj Auto (BJAUT; incumbent leader in geared scooters) had allowed Hero Honda (now Hero MotoCorp; HMCL) to capture a large part of the value outflow from scooters to motorcycles. Geared scooters became extinct in India by the mid-2000s. We are witnessing early signs of value outflow from motorcycles in the urban markets to automatic scooters, with scooters growing at ~23% CAGR (twice the growth rate for motorcycles) over the last five years. Estimate share of scooters at 37% by 2020 Based on our multi-model analysis, we expect scooter industry volumes to grow at ~20% CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-wheeler industry volumes are likely to grow at 12% CAGR during this period. The share of scooters would increase to 37% by 2020, with annual sales of 10.7m units (equal to the current market size of the domestic motorcycle industry). While the share of scooters is likely to increase, we expect the dominance of motorcycles to continue, driven by increasing penetration in rural markets. Motorcycles fare better in rural areas, where road infrastructure is relatively poor, are more suitable for longer distance travel, and offer higher mileage (an important factor for cost conscious customers). HMCL, TVSL well-seated Despite its late entry into the segment, HMCL is the second largest scooter player, helped by its differentiated positioning aimed at the youth. It plans two new launches in FY15, coupled with 25% capacity expansion to 900,000 units per year. Buy with a target price of INR2,680 (14x FY16E EPS). TVSL is getting its act together, with multiple launches in both the scooter and motorcycle space. Post the recent launch of Jupiter, TVSL has a complete portfolio of scooter offerings. The upcoming launch of Scooty upgrade would further strengthen its position. Initiating coverage with Buy and target price of INR85 (9x FY16E standalone EPS) For now, BJAUT would lose out due to this migration, as it has taken the strategic position of being 'a global motorcycle specialist'. Buy with a target price of INR2,255 (14x FY16E EPS).

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