Improvement in demand for two wheelers, road tough for margins

While two-wheeler companies had expected gradual margin expansion in the fourth quarter on hopes of a price hike in January and stabilization in commodity costs, one variable is now posing a problem. Even though steel prices are stabilizing, aluminum and precious metals prices are rising from November-December lows. Higher exposure to aluminum and precious metals in two-wheelers is likely to reduce margins. True, companies can resort to price hikes, but this will impact demand and affordability.

Analysts at IIFL Securities said in a report, “We expect 2W (two-wheeler) original equipment manufacturers (OEMs) to fully pass on the recent impact and maintain gross margins at 3QFY22 levels by 2.0-2.5% in prices. will have to increase.”

So, there is some relief as analysts believe that the demand is now coming down from the bottom. Demand is set to pick up again with the economy opening up and a good Rabi crop season, which will help support rural demand. The upcoming wedding season is also likely to help in demand. The increasing penetration of two-wheelers in Indian households over the years is a testament to the fact that it is central to India’s mobility.

“The combined impact of large regulatory cost push, weak economy and COVID has resulted in a 34% decline in 2W volumes as compared to FY19-22E. We believe Indian 2W demand is poised for recovery after the worst fall in five decades. We expect the urban-led revival to drive faster growth for scooters and premium motorcycles versus sub-125 cc bikes,” said analysts at Jefferies India Pvt Ltd in a report.

Moreover, better growth in urban areas will favor Bajaj Auto Ltd. and Eicher Motors Ltd. owing to their meaningful presence in the premium segment. TVS Motor Co. Ltd is acquiring an increased share in the exports of 2W. But concerns remain for Hero MotoCorp Ltd as it primarily operates in the entry segment.

Investors justified this given the underperformance of Hero MotoCorp’s peers in the past one year. Also, Hero MotoCorp does not have a presence in the 3W segment like TVS and Bajaj and has relatively less exposure to exports.

Meanwhile, the electric vehicle (EV) segment is witnessing a surge in new entrants indicating that EV adoption is accelerating. Listed OEMs are also focusing on increasing their presence in this segment as the entire industry moves towards sustainable alternatives. TVS Motor, Bajaj Auto and Hero MotoCorp are either planning to launch a new electric vehicle in the coming years or are planning to expand their existing offering in more cities.

“The share of EVs in 2W has increased from just 0.4% in FY2011 to 3% (~9% scooters) in January-February; We expect EVs to account for 8% of 2W (25% of scooters) by FY25,” the Jefferies report added.