Markets
Two-wheelers kick into high gear
Summary
After many months, all the listed two-wheeler companies clocked growth both year-on-year as well as sequentially in their wholesale volumes in May aided by wedding demand.
Two-wheeler auto companies are finally having their moment in the sun, show the wholesale volumes in May. After many months, all the listed two-wheeler companies clocked growth both year-on-year as well as sequentially in their wholesale volumes in May aided by wedding demand. In fact, Hero MotoCorp Ltd even surpassed analysts’ estimates, clocking volume growth of nearly 7% year-on-year.
While this is encouraging, the pace of recovery has been a letdown. On a four-year compound annual growth rate basis (CAGR), two-wheeler volumes of Hero and Bajaj Auto Ltd have fallen by 4-6% over May 2019-2023. The measure for TVS is 2%. Eicher Motors Ltd-Royal Enfield’s volume, which has a strong presence in premium segment, grew by nearly 6% on a 4-year CAGR basis. What is worth watching now is whether demand momentum fades away with the end of wedding season. In its March quarter earnings call, TVS noted slow recovery in rural economy and expects the process to be gradual. However, premium products for two-wheeler companies are faring well.
As such, demand revival in the rural market is crucial to support volume growth ahead. For now, it is not clear if the weakness has bottomed out. Demand in export markets is yet to gather pace.
Meanwhile, the rising mix of electric vehicles (EV) is set to dilute the overall margin. But there could be some near-term respite as volumes are likely to take a hit on the back of a cut in EV subsidy from 1 June. Companies such as TVS and Ola Electric have announced price hikes in their EV portfolio in the range of ₹15,000-22,000 per vehicle.
“Subsidies are likely to be completely withdrawn from March 2024," said analysts at Nomura Financial Advisory and Securities (India) in a 1 June report. Original equipment manufacturers with production-linked incentive benefits are likely to be key beneficiaries, they added. Led by pre-buying, electric vehicles’ share in two-wheeler segment was around 7% in April. The adoption pace is likely to slow down going forward.
Another segment which bore the brunt of pre-buying is the commercial vehicles (CV) segment. However, given the CV upcycle, the segment may gain traction. In the passenger vehicle (PV) segment, Maruti Suzuki India Ltd and Mahindra & Mahindra Ltd (M&M) highlighted the shortage of electronic components. “Waiting periods have started to come down for Tata Motors, while it remains elevated for M&M," said Antique Stock Broking analysts in a report on 2 June.
The chip shortage situation is gradually improving and that augurs well. Premiumization continued in the PV segment and Maruti’s 10% volume growth was driven by sport utility vehicles. Automaker’s market share stood at 42.5-43% in May versus 41.2% in April, according to Kotak Institutional Equities’ estimate.
“We believe wholesale growth across PVs/ CVs/ 2Ws should remain in check in June quarter on pre-buying of March quarter," said Motilal Oswal Financial Services. With flow-through of benefits from softening of commodity costs and favourable mix, auto companies have seen decent margin performance in the March quarter. “Commodity cost index has stabilized (some increase possible in steel prices) and margin trajectory from now will depend on dynamics of price hikes and advertisement and promotional spends," said Nomura. So, shares of most automobile companies are flirting with 52-week highs, suggesting investors are factoring in the optimism adequately. Further meaningful upsides in auto stocks will be led by rise in margin, sustained volume growth and increase in market share.
