Marginal impact of ban on BS III sales on two-wheeler makers

Among the two-wheeler players, Bajaj, Yamaha and Eicher had upgraded all their offerings to BS-IV from January 2017.

However, market leader Hero MotoCorp, as well as TVS Motors and Honda Motorcycles and Scooters, had been upgrading in batches till the first half of March.

When the ruling came, the two-wheeler inventory at risk was at 670,000 units, amounting to Rs3,800 crore (half-a-month of sales).

However, discounts and freebies of 10-30 per cent on the vehicle price helped the dealers clear most of the stock in the last three days of March. While the original equipment manufacturers provided for the incentives, dealers also sweetened the deals by providing free insurance among others.

The total discounts provided works out to nearly Rs600 crore, where the manufacturers would be sharing the bulk of the impact (over 70% of the incentives), taking a total hit of Rs460-Rs480 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.

For passenger vehicles, with the BS-III inventory at just 16,000 units (players had transitioned to BS-IV much earlier), the impact was always expected to be marginal. On top of it, given the steep discounts offered in the last three days of the month, much of this stock is expected to have been cleared.

As for three-wheeler makers, since the BS-III inventory could not be cleared due to the limited number of permits, we expect a marginal impact for Piaggio and TVS. Bajaj would be unscathed as it had already transitioned to BS-IV.