SOARING fuel prices and a sharp escalation in interest rates is hurting India’s automobiles industry. Leading auto makers, including Maruti Suzuki, Hyundai India and Tata Motors have reported declining – or stagnating sales – for their popular models in July.

For instance, Maruti’s M800 hatchback and Omni minivan, amongst the largest-selling models, saw a 15 per cent fall in sales in July, as compared to the same month last year. Tata Motors reported a sharp 32 per cent fall in sales of Indica. Automakers expect a tough time ahead, as consumers worried about inflation – which breached the 12 per cent mark last week, with the wholesale price index for the week ended July 26 rising by 12.01 per cent – delay acquiring cars.

But sales of two-wheelers (primarily motor-cycles) are soaring as consumers – especially in smaller cities and rural areas – acquire lower-end bikes with 100 cc capacity. Hero Honda, the country’s largest seller of bikes, reported a 40 per cent jump in sales in July, while TVS Motors saw a 10 per cent increase. Bajaj Auto, the second-largest bike maker, saw sales grow by 4.5 per cent.

Entry-level bikes (with 100 cc engine capacity) give mileage ranging from 60 to 80 km for a litre of petrol, three to four times more than a sub-1000 cc car. A 100 cc bike sells for around Rs35,000, whereas the cheapest car – the Maruti 800 – is sold for over Rs200,000.

Of course, with Tata Motors planning to launch the Nano – claimed to be the cheapest car in the world – later this year for around Rs100,000, bike sales are likely to be hit.

Rising cost of raw materials – including steel, other metals and plastic – have resulted in massive pressures on margins. Bike makers raised the price of their vehicles marginally in April, and are planning to raise them again by about two to three per cent.

India is the second-largest producer of two-wheelers after China. In fiscal 2007-08, about eight million two-wheelers were manufactured in the country. The domestic market accounted for sales of about 7.3 million two-wheelers, while the rest was exported. About two-thirds of bikes sold are in the 100 cc category, dominated by Hero Honda, which also accounts for almost 50 per cent of bike sales in India. About 10 years ago, just three million two-wheelers were sold in India.

The spurt in interest rates has slowed down sales of bikes this year. The industry, which saw a double-digit growth last year, expects to expand by less than eight per cent this year.

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THE two-wheeler industry is worried that the coming months could see a deceleration in sales. Last week, some banks tightened the screws, making it difficult for borrowers to access hitherto liberal loans for two-wheelers.

ICICI Bank, the country’s largest private bank, decided to pull out its staff from the retail outlets of two-wheeler brands, indicating its reluctance to enhance its exposure to the industry. Citibank had also taken a similar decision. Frantic dealers are now on the look-out for tie-ups with smaller – including co-operative - banks.

An ICICI Bank spokesman said the bank was not exiting the two-wheeler finance business, but was only changing the model of financing. But analysts believe that banks like ICICI want to be selective while disbursing loans to those acquiring bikes. The Reserve Bank of India (RBI), the country’s central bank, worried over the growing defaults in vehicle loans, has warned banks to tighten the norms while extending loans.

Some banks have in the past used strong-arm tactics – even forcibly seizing vehicles – while trying to recover overdue loans. But this resulted in a furor, with the government having to intercede and ordering banks not to hire goons to recover their dues. Delinquent loans have been rising in the vehicle loans business, especially with interest rates touching record levels. Interest rates on loans for two-wheelers are as high as 20 per cent. Over the past one year, vehicle loans have become dearer by almost 250 basis points.

According to ratings agency CRISIL – now a Standard & Poor’s company – the explosive rise in credit from 2004 to 2007 has seen a decline in credit standards with growing exposure to high-risk customers. Gross non-performing assets in the vehicle loans business – which accounts for a third of all retail loans – are expected to touch three per cent in the current fiscal, up from last year’s 2.7 per cent.

Growing competition, both in the retail lending and two-wheeler business had seen banks extend loans to potentially risky customers as well. With interest rates continuing to gallop, many of these borrowers are finding it difficult to repay their loans.

Auto majors including Bajaj Auto and Tata Motors also have their own finance units. But even they are tightening their norms, worried over the growing incidence of delinquent accounts.

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BUT the expected slow down in the pace of growth of the two-wheeler industry has not dampened the enthusiasm of newcomers to the business. The latest to enter the fray is Indian automotive major, Mahindra & Mahindra – which manufactures a wide range of utility vehicles and tractors.

Earlier this month, the company announced the acquisition of two-wheeler-maker Kinetic Motor Company for Rs1.1 billion, and a 20 per cent stake in the new entity – Mahindra Kinetic Scooters and Motorcycles Ltd. “The acquisition will give us an opportunity to emerge as a full-range player with a presence in almost every segment of the automobile industry,” says Anand Mahindra, vice-chairman and managing director of Mahindra & Mahindra. “Kinetic is a strategic outfit with our overall two-wheeler strategy.”

Kinetic was established in 1970 and over the years it has introduced several new concepts in the personalised transport business. It launched the Luna brand of mopeds, way back in 1972, and 12 years later came out with India’s first gearless scooter. It also pioneered the concept of four-valve engines, electric start on scooters and motor-cycles, and offered top-end, world-class bikes including the Comet and Aquila.

There is a very limited market in India for higher-end bikes and few manufacturers have ventured into this segment, or are in the process of unveiling such expensive bikes. Companies like Yamaha, Suzuki, Kawasaki, Triumph, Harley Davidson, KTM, Ducati and MV Augusta have launched (or are planning to unveil) high-powered bikes in India. Consumer response, however, has been tepid.

Honda Motorcycles and Scooter India (HMSI), a wholly-owned subsidiary of Japan’s Honda Motor Co, is the latest to make a foray into this segment. The Japanese company has a 26 per cent stake in Hero Honda, India’s largest bike maker. The Hero group has another 26 per cent stake in the joint venture.

Last month, HMSI announced plans to launch two super-bike models in the million-rupee bracket. “We are targeting a niche market, which may not be that big, but is definitely very strong,” remarks Shinji Aoyama, president and CEO, HMSI. The company plans to import and sell its international best-seller, the CBR 1000 RR in India at a price of Rs1.2 million.

Honda, which has an 11 per cent share of the motor-cycle market, currently sells six models in India. But it has a 60 per cent share in the scooter market. It recently launched the CBF Stunner, a 125 cc bike. The company plans to raise its share to 15 per cent by 2010.

According to a HMSI spokesman, the company aims to sell a million two-wheelers this fiscal – 700,000 scooters and the remaining motor-cycles. Last year it sold over 900,000 two-wheelers, a 26 per cent growth over the previous year’s figure.

Two-wheeler manufacturers in the country are confident that demand for motor-bikes and scooters will continue to grow at a robust pace, despite the entry of the Nano. HMSI’s Aoyama admits that the low-priced cars like the Nano will make a dent in the two-wheeler market, but overall demand for the zippy vehicles will keep expanding.