BS 3 fire sale: 2-wheeler makers' loss estimated at Rs 300 cr, Hero likely worst hit

Employees work on an assembly line of Hero Motocorp during a media tour to a newly opened plant in Neemrana, in the desert Indian state of Rajasthan, October 20, 2014. REUTERS/Anindito Mukherjee (INDIA - Tags: BUSINESS TRANSPORT) - RTR4ATDG

The two-day stock clearance bonanza announced by all two-wheeler makers who were desperate to get rid of their BS-III inventory may have incurred a collective loss of a minimum of Rs 300 crore.

An inventory of at least 400,000 two-wheelers made up the two-day fire sale (March 30-31) which saw a minimum discount of Rs 8,000. The discount levels ranged from Rs 5,000 on fast moving popular products to as much as Rs 300,000 on low volume premium sports bikes.

The country’s two biggest motorcycle and scooter makers Hero Motocorp and Honda, who saw maximum discounting going up to Rs 45,000, took the biggest hit due to the unusually high levels of discounting. The two companies made up 75 percent of the BS-III inventory of the industry.

BS-III stocks were sold out within 45 minutes of the dealers opening their showrooms on the morning of March 31 with many giving preference to buyers paying in cash or cheque. Before noon many dealers had downed shutter to avoid backlash from disappointed consumers.

While mails sent to Hero Motocorp seeking details about the financial impact on the company remained unanswered an analyst tracking the two-wheeler industry said he was expecting a margin compression of 45-75 bps for the quarter due to the steep discounting.

Others who were also hit were Bajaj Auto, TVS, Yamaha, Suzuki, Mahindra, Harley-Davidson, Ducati, Hyosung and Triumph. Discounts given to consumers were a mix of company-sponsored and dealer-allotted amount.

Impact on Bajaj Auto, the country biggest bike exporter and the most profitable two- and three-wheeler company, was minimal as the Pulsar and Avenger range carried a discount of between Rs 7,000-10,000 on a comparatively lesser inventory than its peers.

The Pune-based company had raised its prices in the region of Rs 2,000-7,000 depending on the model following the upgradation to BS-IV emission standard.

TVS Motors, who did not disclose its BS-III inventory, was giving discounts of Rs 20,000 on the affected models which included high selling models like the Jupiter scooter.

“I purchased 10 bikes for my staff at a discount of Rs 18,000 per bike for Rs 40,000 per bike. They were all Hero bikes,” said a prominent commercial vehicle dealer based in West Bengal.

The two-wheeler industry had been reeling under pressure since November when the government announced demonetization. This coupled with low off-take from the rural pockets has severely crippled two-wheeler sales. Such discounting has further aggravated losses, fear analysts and market watchers.

Economy segment models like the Hero Splendor or Passion carried wafer-thin margins before discounting happened. While the final quarter (Jan-March) financials will be under pressure for all companies, Hero MotoCorp will likely see maximum impact.

“The total discounts provided work out to nearly Rs 600 crore, where the manufacturers would be sharing the bulk of the impact (over 70% of the incentives), taking a total hit of Rs 460-480 crore. This would cause a 150-200 bps erosion in the aggregate fourth-quarter EBITDA margins of listed players (Hero, Bajaj and TVS) in fiscal 2017, with the industry leader taking a higher impact due to its large BS-III inventory. The impact on Bajaj’s profitability will be much lower because of lower inventory and lower discounts offered considering the export option,” said a CRISIL report.