What goes up must come down. Yet for the past two years, it almost seemed as if this axiom didn't apply to the two-wheeler industry. The industry grew at a rate of over 17% every year, with sales doubling between 2002 and 2006. But now, for the first time, the script is changing: there's a clear hint of a demand slowdown. And two-wheeler dealerships across the country are feeling the heat.
It isn't time for the alarm bells to go off yet. In fact, offtake for both Hero Honda and Bajaj Auto has actually been higher than last year. But one thing is pretty clear: pushing up growth rates would require plenty of effort if anecdotal evidence is anything to go by.
In the West, dealers say they are saddled with more than five weeks of stocks as opposed to the usual three weeks. In some cases, the overstocking is far higher. For instance, one of the biggest Mumbai-based dealership for Hero Honda, the market leader for bikes, holds 1,500 units, nearly three times his normal level.
While another Hero Honda Mumbai dealer reckons that a spate of buying during Gudi Padwa - which also marks the onset of the wedding season - will help them liquidate stocks. Said a Bajaj Auto dealer in the capital: “The peak season is over and buying has been postponed owing to a number of factors including the Budget. We are currently carrying five weeks of inventory as opposed to three weeks of stock.”
But the overall picture is far from rosy. According to sources, Hero Honda has over 2.5 lakh vehicles lying with dealers while Bajaj Auto has over 2.25 lakh unsold bikes in various dealerships. That's almost double the industry standard of inventory stocking at dealerships. When contacted, Hero Honda responded by saying the inventory figures were overstated. However, the company refused to give out actual numbers.
“The current inventory levels at Hero Honda's dealer outlets are strictly as per our business plan. There are no unplanned changes in our inventory levels.” Despite repeated attempts, the Bajaj Auto spokesperson could not be contacted. An e-mailed query also went unanswered.
Says HDFC Bank EVP Ashok Khanna: “There is excess capacity and meeting annual targets is looking stretched. The current scenario is likely to continue for the next couple of months. There are too many vehicles being dumped in the market.” The reason behind the pile-up of stocks is reasonably intuitive.
For one, market watchers say that sustaining the breathless growth was always likely to be tough. But that's just one part of the story. Bank officials say that interest rates have been gradually creeping up. In the past two months, interest rates have gone up by around 2%.
In major metros, banks normally charge 21% a year for a two-year two-wheeler loan. In smaller cities, the interest rate is at least 2% higher. This, say bankers, is acting as a mild deterrent for consumers. ICICI Bank's executive director V Vaidyanath, in charge of retail banking, has another interesting observation. He says that a growing number of first-time buyers are directly going for a car than a two-wheeler.
Changing income levels, thanks to the IT and ITES boom, has ensured that a large segment of young consumers have money to spend. And they'd rather zip around in a snazzy new car. Bankers like him are seeing car loans grow by 25-30% every year, while the growth in two-wheeler loans are about half that number.
“The availability of a large number of used cars at affordable rates in A & B segments is luring customers. With added traffic chaos on the roads a customer also looks at safety and family comfort.
With financers ready to oblige, customers finds it a better option. Used cars are attracting a lot of two-wheeler customers. This market has a potential to grow at 25-30% per annum and rob two-wheelers of some of their glory,” adds Mr Khanna.
In fact, some banks like ICICI Bank and HDFC Bank have been reducing their exposure to loans for two-wheelers in UP which accounts for nearly 10-12% of industry sales. Bankers have put a lid on two-wheeler loans because of losses from a rising tide of delinquencies.
“Dealers do not register the vehicles and give it to customers on temporary registration. Financiers do not receive support from dealers, manufacturers or the government and hence the customers feel that they can get away without paying instalments. This is driving financiers away. The problem has been going on for the last one-and-a-half years,” said a senior banker.
Most dealers are hoping that banks will bail them out through higher levels of dealer financing. “There is a pile up in inventory among dealers across the country. Many of these dealers have approached us for increasing their limits on inventory financing,” said a senior private sector banker. But so far, financiers aren't playing ball.
They feel that dealers could end up over-leveraging their positions. If speculation is to be believed, sundry debtors (money receivable from dealers) at one of the bigger two-wheeler manufacturers has ballooned to Rs 700 crore.
This has resulted in some bike makers approaching financiers and asking them to bypass dealers and disburse loans to manufacturers. Yet, so far, both Bajaj and Hero Honda are still in denial mode. Privately though, they admit that stock levels are far higher than last year, and that things could get better by end March-April as festival season kicks in. Till then, dream run of two-wheeler dealers may take an unscheduled break.