We met both Hero and Honda 2W managements; near-term strong pick-up in demand was a consistent message. However, over the coming years Honda believes its expansion of reach and brand in rural India along with better penetration of scooters will help it gain further market share. Honda is better prepared for emission/safety norms; we continue to like Eicher (buy) in 2Ws followed by HMCL (hold).
The key takeaways of the meetings were:
(i) robust industry growth in the near term; (ii) HONDA’s strong push to improve its rural reach and brand awareness; (iii) improving “Scooterisation” in rural India to help HONDA gain traction (over the long term); and (iv) Honda’s belief that it is ahead in emission norms. Overall near-term demand momentum and upside risk to margins is positive for HMCL. However, long-term competitive risks and premium valuations now restrict the upside.
Industry revival hopes run high: This is led by “likely” rural pick-up, 7th pay commission, and overall improvement in macro sentiments. Both Hero and HMSI expect robust volumes in the coming months. However, bunching up of festivals this year (in September/October) would mean a cliff in November unless rural demand accelerates due to a good harvest and marriage season. Consequently, November growth will be a real test of demand sustainability. We expect 14% growth in Q2 and 8% in Q3 for HMCL. Full-year we continue to expect 10% in FY17 and in FY18.
Honda’s positioning in urban India continues to strengthen: This is due to growing scooter penetration in urban India. Management claimed to be the No 1 OEM in the top 100 cities of India, which contribute to more than 50% of the India volumes. As seen in chart, scooter penetration in “high earning states” like Delhi is much higher than the country average (50-60% in urban India, but just ~5-10% in rural India).Not surprising, HMSI is pushing hard to improve its brand awareness and reach in rural India. Smaller dealerships, mobile service VANs, micro initiatives like participation in advertising fairs/carnivals are some initiatives for improving rural reach. Increased availability of scooters with expanded capacity will help Honda reach the hinterland as well, according to management. However, while the intent and strategy seems right, the transition to scooters may be slow in rural India. A conservative consumer mind-set, social beliefs, and road conditions are multiple limiting factors for scooters in rural India. Also, Hero believes that the revival in rural India demand for 100cc motorcycles will be back and that would make it tougher for scooters to further gain share of the overall 2W market. This will be a constraint for Honda to gain share as well from Hero.
Not going after Royal Enfield (RE)
Honda remains focused on expanding capacity of existing products and is not looking to target the RE segment, as of now. This corroborates our understanding of benign competition for RE over the foreseeable future. Honda currently has total capacity of 5.8 m units, which is around 480,000 per month. This includes the second phase of Gujarat as well, which has a dedicated capacity of 100,000 scooters per month. Over the next 12 months the company expects to expand another phase of its Bangalore operation adding 600,000 units to the total capacity.
Honda and RE likely to have the least price impact due to regulation and safety norms
Honda believes it’s ahead of the competition in terms of achieving impending emission and safety norms, providing it with a competitive edge in 2019/20. A large part of HMSI’s 2W portfolio already have combined braking systems installed; thus the incremental costs due to safety norms in April 2019 to be less for HONDA. Overall, we expect HMCL to have nearly 5-6% higher cost impact vs. HONDA, on account of the impending safety and emission norms. RE may see a similar level of cost increase as HONDA owing to its premium portfolio and high average selling price.