>MOTOGAZE (ICICI DIRECT)

OEMs find it difficult to continue strong March momentum
Barring Bajaj Auto, major original equipment manufacturers (OEMs) failed to continue their strong growth momentum in April and have slowed down their speed. Most of the companies have reported de-growth in sales volume from March but the April effect cannot be ignored. Generally, April is always a subdued month after March historically. Comparatively, April 2010 was better compared to earlier years.

Rising raw material prices and supply constraint worrying factor
Rising steel and rubber prices that are trading at peak levels are a cause for concern in sustaining the EBITDA margins. Though many companies have taken a price hike of 3-6% in the near past it will not be sufficient to cover rising raw material prices. These would call for another price hike in
the near future making vehicles dearer leaving an impact on demand. Month on month, they have witnessed a short supply of batteries and components, which has also disturbed the supply despite the robust demand.

Postponement of deadlines for implementing cleaner emission norms
The government has extended the deadline for implementing cleaner emission norms for two-wheelers from April 1, 2010 to July 1, 2010 to upgrade their vehicles to Bharat Stage (BS) III from BS II in 13 cities and October 1, 2010 in the rest of country. The implementation of emission
norms for all segments would inflate the price by 5-6%, bringing demand growth under pressure.

Rise in interest rate
FY10 has seen a spurt in volumes on the back of an increase in liquidity from financial institutions and incentive schemes with lower interest rates (as low as 8%). However, many financial institutions have increased their lending rate by 25–50 bps. We feel these may rise further according to the guidelines from the Reserve Bank of India. The rise in interest rate is likely to mute the growing demand.

Going forward,
FY10 has been a year wherein all segments reported a stellar performance. We believe the trend will continue in the near short-term with improving economic conditions, increase in disposable income and competitive pressure that would result in the launch of best performing models at competitive prices. The outlook for FY11 is strong though we believe the growth in percentage terms will trim down on a high base. The rising commodity prices would be the key concern and would continue to bring profitability under pressure.

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