See 10% sales growth in 2-wheelers: Anand Rathi

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Automobile major Bajaj Auto has cut motorcycle production by 10%. And  Hero Honda 's June sales are expected to be lower this month again by about 10%. What impact will it have on the auto sector ?

Deepak Jain, Analyst with Anand Rathi Securities attributes the production cut to new products being introduced into the market . He believes that the cutback in production is majorly due to product alignment . The product lifecycle of the two-wheelers is hardly two months now and every two months, they come up with a new product, which is supported with advertisements as well as with the availability of the product.

Overall, for the year, he predicts a sales growth of around 10% in the two-wheeler side, while for the passenger cars , he sees a sales growth of around 12-15%.

Excerpts from CNBC-TV18's exclusive interview with Deepak Jain:

Q: How serious is this? We hear this even in the four-wheeler segment; we spoke to Ceat Tyres yesterday and they said that the demand from the Original Equipment Manufacturer, or OEM, segment has fallen by 15-20% in the April-June period. Do you think that the demand slow down in the four and two-wheeler space is now a cause for worry that?

A: We need to consider two factors over here. One is the dealer pipeline inventory; the level of inventory there at the dealer level. We have just spoken to Bajaj and TVS to check out what is their pipeline level. For Bajaj it is two weeks and for TVS Motor it is three weeks. I believe this is fairly normal, because TVS is a south-based player; so you would need one week as transit time as well.

Q: How do you explain this cut back in production?

A: This cut back in production is majorly due to the product alignment. If you see the product lifecycle of the two-wheelers, it is hardly two months now; every two months they come up with a new product, which is supported with advertisements as well as with the availability of the product. So, if you are bringing a new platform or a new variant, then you have to make them available and probably take up production cut of the old models. So, I believe that it is more of a product alignment.

Yes, interest rates have caused some worries, no doubt about that, but the cause of the cut cannot be attributed purely to them. It is all three factors that we need to look at it.

Q: How will you look at the four-wheeler space in that case? One hears of a slowdown in that space as well?

A: As far as the four-wheelers are concerned, I would look at their financing pattern. If we see the trucks, almost 95% of the medium and heavy-duty ones, are financed. In the car segment, it is as high as 85%. So, if financing gets expensive , definitely there will be at least the lapse in the demand to the subsequent months. I believe it is a slackness , which may remain for the next two months or so, by which time things may even out.

Even the customers, when we do a channel check, most of them are very positive. For example, they say that they will add around 20-25% fleet, because of the robustness in the freight rates and all. But they are just waiting for the right time; now the right time could be the positive interest rates , or at least this surety that the interest rates will not move up from here.

Q: What about the passenger car segment, because many of these companies are now laying a lot of emphasis, bringing about new variants? Do you think this kind of production cut can come by a spillover into that segment?

A: Obviously, the production cut will happen because the new variants and the new products are being evolved; we just need to focus on the product lifecycle. Earlier, one car used to have a lifecycle of two to three years, which is not the case right now. For example, Maruti is seeing a very good demand for Swift, but cannot produce more than 7000. They had not anticipated that Swift will sell so well. So it is just that product shift or re-alignment is happening; many of those customers who were earlier buying WagonR or Zen are moving to Swift.

Q: What kind of sales growth are you looking at in the two-wheeler and passenger car space?

A: I believe that there will be a slight slackness in the next two months. So it will definitely have an impact in this quarter. But overall, for the year, I do see a sales growth of around 10% in the two-wheeler side. For passenger cars, I do see a sales growth of around 12-15%.

Q: Compared to what last year?

A: Overall, across categories, they have grown by around 20-25%; last year has been very well.
 
Q: Individually, in terms of stock performances, is there something that you believe can insulate any company to the kind of production cuts or the kind of market cycle that is being witnessed in the vehicle space?

A: I believe production cut is something that every company needs to take on, because of the new products or old products getting back. So that is a reality that every company has to take.