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Margin pressure force bike cos to cut ad spend

13-October-2005
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Margin pressure force bike cos to cut ad spend

Smaller two-wheeler players have begun cutting advertising and marketing (A&M) costs in a competitive market. TVS cut its A&M cost by 20% in FY05. In contrast, for the top two players, the A&M costs rose by 10% for Bajaj Auto (BAL) and by 16% for Hero Honda. Incidentally, both Hero Honda and BAL's sales have been going up substantially in the past few years. In FY05, Hero Honda's and BAL's sales went up by 29% and 21% to Rs 7,422 crore and Rs 6,671 crore, respectively. TVS has not had too many launches in the recent past, forcing it to trim A&M costs in FY05, analysts said.

The smaller two wheeler players have had to incur losses, with shrinking margins over the past few years. Manufacturers indicate that in case of a price war, margins of smaller players are likely to see more pressure than a player with a higher marketshare. Analysts attribute the growth in sales to new model launches like the TVS Star City, Victor Edge and Hero Honda Glamour.

If the present sales trend is any indication, growth is expected to be even better in the second half of FY06 due to a spate of festivals and a slew of promotions launched by companies as they scramble to beat sales targets at end of the fiscal. In FY05, for instance, the second half sales were 54% of total volumes.

Driven by a slew of new launches and a 8% GDP growth leading to higher disposable incomes, Hero Honda, BAL and TVS have reported an average growth rate of 20% in the first half of '05-06 and expect the same momentum in the second half.

BAL has recorded the fastest growth with volumes jumping 34% to 9.39 lakh units during April-September '05. It is followed by Hero Honda at 16.84% at 14.29 lakh units and TVS Motor at 15.5% at 6.32 lakh units for the same period under review.

Two wheeler manufacturers are also increasing capacity to meet the increased demand. BAL is raising its production capacity to 2 lakh vehicles per month from the current 1.5 lakh per month.

TVS Motor is raising capacity from 1 lakh units to 1.6 lakh units per month and Hero Honda, which is lining up a 150-cc model, is hiking capacity at its existing plant from around 2 lakh vehicles a month to 3 lakh units a month.

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