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  • Two-wheeler industry’s in the fast lane, but will it hit a bump?

    Publish Date: October 01, 2018

    The last few months have been a smooth ride for the two-wheeler industry. The sales numbers have grown consistently each month this financial year.

    September is likely to be no different. Bajaj Auto already announced a surge of 12% in its two-wheeler sales in the Indian market. The other leading players — Hero Motorcorp, TVS Motors and Eicher — are expected to follow cue.

    But is the momentum likely to last going forward? It doesn’t appear so.

    We feel Indian automakers face stiff headwinds in the near future to maintain its high standards. The main reason being increase in on-road price of a two-wheeler. So, let’s deep-dive to understand why two-wheelers are set to cost more in the next 12 to 24 months:

    Introduction of premium safety features

    Installation of anti-braking system (ABS) or combined brake system (CBS) in a two-wheeler has become compulsory from April 2019. The government mandates that all two-wheeler makers need to abide by the new regulations.

    However, fitting premium safety technologies in two-wheelers in a cost-sensitive market is likely to have an impact. That’s because ABS fitting can push up the final price by up to Rs 15,000. Installing a CBS unit, meanwhile, can make two-wheelers costlier by up to Rs 2,000.

    For instance, the mandatory ABS will make Bajaj Pulsar more expensive by Rs 10,000, while Royal Enfield Classic 350 on-road price is expected to shoot up by Rs 12,000.

    Honda Activa, which will have to install CBS, will cost around 6% more from April 2019.

    High insurance cost

    Insurance Regulatory and Development Authority of India (IRDAI) has increased the personal accident insurance amount. Now, people driving two-wheelers will have to take an insurance of Rs 15 lakh. Earlier, the insurance amount was Rs 1 lakh.

    The manifold increase in sum insured will drive up the final price of a two-wheeler. In fact, the insurance regulator’s decision to increase owner-driver insurance has driven up prices of two-wheelers by 7%-16% in the last two months.

    Bajaj Auto’s entry segment two-wheeler (CT 100 Alloy ES) is now about 15.6% more expensive due to the high insurance cost. Prices of Hero’s Deluxe i3S and TVS Jupiter ZX have spiraled by 14.1% and 12.2% respectively. Eicher’s Royal Enfield models have also been bumped up by 6.6% to 7.2%.

    Impact of BS-VI norms

    The government’s decision to jump from BS-IV to BS-VI norms in one swoop from April 1, 2020, will adversely impact the automobile sector. The two-wheeler segment won’t remain immune either.

    Tighter emission norms are expected to increase cost of two-wheelers since automakers will have to upgrade its engines and invest significantly in research and development (R&D).

    The final price of two-wheelers are expected to increase by Rs 4,000-7,000 once the BS-VI norms are introduced in India. Companies like Honda and Eicher — Royal Enfield-makers — have publicly admitted that stringent emission norms will ratchet up two-wheeler prices.

    The BS-VI norms loom ominously, so much so that two-wheeler manufacturers are reticent to launch new models in the market. Instead, they are accruing money and spending more time on research so that they can comply with the strict BS-VI norms.

    Immediate threat of oil prices

    Retail oil prices have increased by 7% in the last two months on the back of soaring global crude prices. If analysts are to be believed, global crude prices may touch $100 per barrel in the near future and is likely to hover around that figure for a while. This means that fuel prices will remain high in India for a few months, unless the Indian government decides to reduce taxes.

    Related read - Fuel prices on fire: What now?

    High fuel prices, which have already hit the Rs 90 mark in several parts of the country, will expectedly dilute the two-wheeler demand in a cost-sensitive country.

    While the going may be good right now, the demand for two-wheelers is expected to wane in future. It’s not likely to grow more than 5% (CAGR) in the next three years. As a result, companies like Bajaj Auto, Hero Motorcorp, TVS Motors and Eicher will see its earnings slashed by 2%-18% in the same period.

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