Citigroup -India – 2 Wheeler Majors

Citigroup in their report on 2 Wheeler Majors say,

Growth Rates Decline — Two-wheeler majors' May sales declined c10%Y/Y – motorcycle sales were significantly lower – down 13%Y/Y, as rising interest rates continued to curb growth. Market leader Hero Honda motorcycle sales also declined 6% Y/Y after positive growth in April 07. Bajaj Auto and TVS' sales degrew ~15% and ~37% respectively.

Rising Interest Rates to Moderate Growth — Interest rates have risen sharply over the last few months (~18-20% IRR at present) and should continue to remain at these levels over the near term. We believe this will moderate volume growth in FY08. BJAT has already guided to c10% volumes growth in FY08E – far lower than its previous guidance of >20%.

HROH market share gains continues — Hero Honda's market share has improved by 495bps in May 07 from Jan 07 which we believe is on back of its success in the entry level segment driven by aggressive promotions and discounts. This segment has little product differentiation (with price being the key driver) hence we don’t think these gains are sustainable.

New Model Launches — Key model launches next fiscal are TVS' relaunch of the Victor in early FY08E), BJAT's launch of a new motorcycle platform in 2QFY08E. These are the most eagerly awaited new product launches for FY08E, and the market response to these will be keenly monitored.

Relative Performance — Over the past month, the sector underperformed the market by 790bps, largely due to strong underperformance of Bajaj Auto on the back of demerger announcement. In relative performance, Hero Honda was the best performer over the month.

Concerns Persist — We believe the two-wheeler segment is witnessing intense competition and a challenging cost environment. We maintain our negative view on
the sector. We reiterate our Sell recommendations on Hero Honda (HROH.BO - Rs717.10; 3L) and TVS Motor (TVSM.BO - Rs69.20; 3M), and Hold rating on Bajaj
Auto (BJAT.BO - Rs2,235.00; 2L).