“Only a biker knows why a dog sticks its head out of a car window.”
Not surprisingly, one of the first things I noticed about living in India was the vast numbers of people. Mumbai may be more crowded than other areas but, to put it bluntly, in this city, hordes of people are crammed into every nook and cranny.
Londoners will appreciate the explosion of cyclists that have taken to the roads as an alternative to public transport over the last few years. Well, in India it is not just cycles that swarm the streets, but motorbikes too.
In fact, ‘two-wheeler’ volume sales have grown at an average rate of 12% in India every year for the last decade but, despite this, phenomenal growth penetration levels are still way behind other emerging economies.
According to data supplied by the Confederation of Indian Industry, there are just 55 two-wheelers per 1,000 people here, compared to 89 in China, 98 in Japan, 173 in Indonesia, and 253 per 1,000 in Thailand. Although ownership levels are low by comparison, the population base is so high that India already has two of the world’s top five motorcycle manufacturers. In this sector, the growth story is only beginning and, as an investor in Indian equities looking for simple investment ideas with bags of growth potential, these numbers start me thinking.
Why has growth in the two-wheeler market been so robust and why, as a consumption item, do bike sales behave so differently in this part of the world? In the cities, the increasing urbanisation trend is putting enormous pressure on an already inadequate (and in some cities completely lacking) public transport system. When I stop and analyse the vast array of bikers, I see college students, office workers, milkmen and families on the school run, to name just a few. With this in mind, it becomes clear bikes are not a discretionary item, but a straightforward utility piece.
My record number of ‘bodies on a bike’ spotted so far is five. The husband normally drives (wearing the helmet), while the wife and three kids ride pillion. They will all do the school run together before he drops the wife at work and then makes a beeline for his own office.
As India’s working practices rise to global standards, blaming the public transport system for habitually being late and looking thoroughly dishevelled is no longer acceptable. A bike offers multiple Indians a cost effective and reliable way to work around India’s enormous infrastructure deficit.
In recent years, the Indian government has focused much of its efforts on improving the lot of rural Indians, and this has had a profound effect on the demand for two-wheelers in the countryside. The ‘rural revival’ has led to faster income growth over urban India, albeit off a lower base. Minimum support prices for agricultural crops, an improvement in the availability of credit, and an employment guarantee scheme have combined to increase average purchasing power, which in turn has led to a positive impact on bike sales.
While almost everyone is aware of the size of India’s population, what people sometimes forget is that India is a young country, with 50% of the population being just twenty five years old or younger. It is in the young demographic that we see the strongest demand, and this will fuel future growth.
What is also exciting is that additional sources of growth are appearing. As disposable income grows, the demand for ‘leisure bikes’ has increased sharply. Here India can truthfully claim to be a global brand leader, through Eicher Motors’ ownership of the iconic Royal Enfield trademark. A legacy of the Raj and the inspiration behind Harley Davidson, the flagship ‘Bullet’ model has waiting lists of up to ten months, while the brand has solid export potential.
Having given you a taster for the investment opportunity, I will finish by highlighting some market dynamics and stock specifics.
Unlike the auto sector, which is intensely competitive, the motorcycle market has only five major players; four of these have consistently controlled over 80% of the market in the last ten years.
Honda’s recent decision to split from its Indian JV partner Hero and go it alone has added one additional player and, although there is furious competition, the size of the market allows room enough for growth. There are strong barriers to entry, and this is a key prerequisite for any investment decision.
Strong brand recall and the strength of the existing distribution and service networks make it almost impossible for any new entrant. This environment translates into reliable and transparent positive profitability metrics at the stock level. Asset turnover is high and margins are stable.
Typically, companies are debt free and funding their growth through internally generated cash. Such is the utilitarian nature of demand that the top line is resilient to an economic slowdown. Yet the sector still trades at a discount to the broader market. Fancy a ride anyone?
David Cornell is managing director at Ocean Dial Advisers Private Ltd
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