Will the extra cost of insurance hurt two-wheeler stocks?

Publish Date: October 03, 2018

Anybody who recently bought a bike after dilly-dallying with the decision for months will tell you the story. The pricing of two-wheeler models has increased by up to 16% in the last two months due to the rise in insurance costs.

The prices of two-wheelers are likely to rise further as ABS/CBS (anti-lock braking system/combi-brake system) will become compulsory by April 2019. When the BS-VI norms come into effect by April 2020, the rates will shoot up further. Would you buy a two-wheeler if the prices rise? Many people would rather not. Such a trend could slow down volume growth for two-wheeler, hitting earnings in the sector.

Extent of price hikes

It is a not a question of a few hundred rupees. In August, the on-road price (Mumbai) of the Bajaj Auto entry segment bike CT 100 Alloy ES was Rs 52,790. In October, the same model costs Rs 61,017.

The new model of TVS Apache RTR 160 similarly cost Rs 90,450 in August. In October, the same bike costs (on-road) Rs 98,650, marking an increase of around 10%.

In the high-end segment, the absolute increase in prices is much larger. For example, the on-road price of Royal Enfield Classic 350 (rear disc) has risen from Rs 1.68 lakh to Rs 1.80 lakh. Scooters, which are popular for city commutes, are getting expensive.

The Honda Activa 5G DLX will cost you Rs 78,010 in Mumbai compared to Rs 69,810 in August.

If you consider on-road cost vehicle cost including financing, fuel cost, annual maintenance cost and insurance cost for five years, you can get a fair idea of total cost of ownership.

The total cost of ownership could increase by 7-12% between August 2018 and April 2019, we estimate. Ownership cost of entry and mid-segment motorcycles, for instance of Hero Deluxe and Hero Super Splendor models, will increase by around 7% between August 2018 and April 2019. Ownership cost of premium motorcycles, like Bajaj Pulsar and Classic 350, will350, will increase by around 10-12% between August 2018 and April 2019. This rise can be attributed to swelling insurance costs, ABS/CBS compliance norms cost and retail oil prices increase.

Also read - Fuel prices on fire: The what, why, how, and what now

Regulatory pressure, oil spike

As you can see, for the end-customer, the cost of ownership is slated to increase sharply due to regulatory pressures and the spike in oil prices. The sharp increase in insurance costs will have an immediate effect too.

All motor policies will now include an enhanced personal accident protection that will cover the owner-driver, including for two-wheelers, for Rs 15 lakh in case of death due to accident while driving. This will be for an additional premium of Rs 750 for the annual policy. An earlier order already makes it mandatory for insurers to offer long-term third-party liability cover of five years for two wheelers.

Additionally, ABS will become mandatory from April 2019 for two-wheelers with less than 125 cc engines. CBS will become mandatory for two-wheelers with more than 125 cc engines.

On top of all this, there has been a 7% increase in retail oil prices in the past two months. While one may argue that the increase in costs cannot be felt due to the use of auto loans, there will be a perceptible effect.

Also read - All you need to know about India’s largest insurance scheme

We have reduced our two-wheeler industry volume assumptions sharply and now expect only a 5% compound annual growth rate (CAGR) in volume growth over FY2019–21. Also, we estimate that finance penetration in the two-wheeler segment may not see a significant increase from the 35% of two-wheelers currently being financed.

The two-wheeler financing segment is mainly served by non-banking financial companies (NBFCs), which are going through some issues at present. Do note that banks are more comfortable lending to the premium motorcycle segment.

We have reduced our earnings estimates by 2–18% over FY2019-21E for Bajaj Auto, Eicher Motors, Hero Motocorp, and TVS Motor. This is led by a 2–9% cut in our volume assumptions. We have thus reduced our stock target prices on two-wheeler firms by 4–14%.

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