There has been some considerable enthusiasm for automobile stocks over the past week as companies declared strong monthly sales in September. Chatter has commenced about the worst being well behind us.
Having served as an analyst and journalist myself, I can relate to the propensity to arrive at such conclusions. Generally, these assessments are wildly wrong after which analysts "revise" their forecasts.
Nobody looking at the September numbers would say they are spectacular numbers. They are merely better numbers in comparison to a weak forecast. If the numbers had been worse than those low estimates, the sector would have been written off until December.
Also read: Automobile sector: Awaiting the festival cheer, says Angel
Fortunately, good monsoons and the festive season meant companies pushed higher despatches to the dealerships. Unless dealers celebrate, remember there is no recovery in sight.
In this entire slowdown, in fact, it has been the dealerships that have had to bear the major brunt of a slowing economy and the demand of aggressive car makers to push vehicles their way.
You would think that someone owning a Maruti dealership would be happy that more cars are coming his way since he makes money through selling cars only. Wrong. In fact, commission from sale of cars make up less than 20 percent of a dealership profits.
Sale of spare parts yield higher profits while the maximum is derived from workshop related activities like servicing of a car etc. Besides keeping a car standing at a dealership occupies space for the dealership owner.
That is why it is prudent to come to an optimistic conclusion on recovery only if despatches remain strong for a period of time as a pile-up in inventory at the dealership gets adjusted in company despatches within 3 months. Eg: If despatches to a Maruti dealer are high in September and October and retail sales are slow, the inventory build-up at the dealer will ensure that in November despatches are slashed by the company.
Does this profit composition hold true across the industry? No. Not at all. Infact, it's the opposite for two-wheeler dealership owners. Two-wheeler makers derive 90 percent of their profits from sale of the bikes/scooters. Spare parts and servicing are negligible contributors to profits. That's easily understandable, since two-wheelers in India are designed in such a way that maintenance is hardly an issue.
Once the bike is sold to the customer, it is unlikely you will ever see that customer again whereas if you would buy a car from a dealer it is almost certain you would see him again when he comes for servicing or spare parts.
The big story in the two-wheeler segment has actually been Honda's impact on Hero than the volume growth in the segment. While Honda (HMSI) has been gaining market share at the expense of Hero ever since they parted ways, there has always been the challenge of whether they could cause significant damage as creating a network of dealerships and sub-dealerships in smaller towns is a difficult task.
So the key question presents itself.
If sale of two-wheelers is the primary source of profits for a dealership, why would someone opt for a Honda dealership instead of a Hero or Bajaj dealership? There are two reasons why.
1) In many locations, Hero and Bajaj already exist but Honda does not. So, the only option for someone venturing into that business can come from Honda and he will opt for it if he is confident about Honda's volume growth prospects. 2) Honda offers superior commission as compared to Hero and Bajaj. Honda has been doing that already.
While Hero and Bajaj offer about three percent commission to a dealer on sale of a two-wheeler, Honda dealers receive as much as four percent. So, for a sale of a Splendor at Rs 50,000 - the Hero dealer will make about Rs 1500 as commission while for a Dream Yuga sale, the Honda dealer will make about Rs 2000.
While domestic Honda sales have exceeded that of Bajaj Auto, a dealer would still like to have a Bajaj Auto dealership since they sell premium bikes where commission is higher for the dealer.
Ofcourse, there is a long-term strategy at work here by HMSI. Penetration into the two-wheeler market by a new brand is extremely difficult. The top 4 selling brands today have been around since a while.
| Model | Launch |
| Hero Splendor | 1994 |
| Hero Passion | 2001 |
| Bajaj Discover | 2004 |
| Bajaj Pulsar | 2001 |
So HMSI's approach is clear. To ensure more and more Dream Yuga and Dream Neo bikes are seen on the road. You could argue that's the ambition of every bike maker. And you would be right. Except that Honda is slashing prices through a continuous period of discounts, offering subvention schemes etc.
Currently, discounts are being offered and the company also has an exchange policy. It's quite simple really. Sell your old bike to the Honda dealer and buy a new Honda motorcycle and you will get Rs 2500 over and above the resale value of your bike.
Doesn't this mean profits for HMSI will shrink? Ofcourse it does. But the company has its focus on volumes for the time being. The psychology of a typical consumer in India is quite uniform.
If he sees a product used by others, he considers it safe for his own purchase. So - if there are enough Dream Yuga and Neo on the road, more people (especially in rural and semi-urban areas) will feel inclined to opt for it.
So far - despite the market share erosion, Hero has not resorted to any major incentives of its own. That is perhaps since it is keen on seeing how long the incentive game of HMSI will last. When Hero starts responding with its own schemes, it will be clear that Honda has made a sustained dent on a prospective Hero customer.
A former journalist and research analyst, Vishal is currently President, Achelous Advantage.
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