The Q3 hauled two wheelers. Will they rise?

Barring Eicher Motors Ltd’s Royal Enfield, all other major two-wheeler makers either saw flat volume year-on-year (YoY) or decline. Royal Enfield benefited from a K-shaped recovery and also received a strong response to its new launches such as the Hunter 350.

Still, there’s a price to be paid for the Hunter 350’s growing heft. This will reduce the overall margin profile of Royal Enfield as the product is priced lower than its other vehicles, such as the entry-level variant of the classic 350cc. Motilal Oswal Financial Services has cut FY23 and FY24 earnings per share estimates for Eicher Motors, driven primarily by margin contraction due to weak product mix.

However, a tailwind in the form of softening raw material costs will help margin expansion for all two-wheeler companies, including Bajaj Auto Ltd, TVS Motor Company Ltd and Hero MotoCorp Ltd. The cost of commodities like steel and aluminum have dropped from their levels. The peak and its profit will be seen in the third quarter. But given the weak volume performance of these three companies, they may not be able to benefit as much from lower costs. Apart from weak domestic demand, weak export market is also a factor which has acted as a drag on the sales front. For perspective, export volumes for Bajaj and TVS declined by 31% and 18%, respectively. Note that the export business is a high-margin business. This is a primary concern for investors in Bajaj shares, as two-wheelers accounted for nearly 57% of exports in FY12. From its 52-week high, its shares have declined 14%.

Thus, a spurt in demand in export markets is crucial. However, for two-wheeler manufacturers, there may be some respite on this front in the near future. “We remain cautious on the outlook for exports due to concerns about the economic slowdown and geopolitical issues facing the US and EU,” said a January 9 Nirmal Bang Institutional Equities report.

In the domestic markets, investors should watch for signs of revival in rural demand. This is more important for Hero, which has greater exposure to rural markets, as its portfolio mainly caters to the entry-level segment. Also, updates on its electric vehicle (EV), the Vida V1 need to be closely monitored.

For TVS, increasing EV penetration is a key risk, as its ICE (internal combustion engine) scooter portfolio is vulnerable to potential EV disruption. While its EV, TVS iCube is witnessing growth every month, further expansion in this segment is key to enable a seamless transition from ICE to EV scooters.

Meanwhile, with respect to Royal Enfield, Aditya Velekar, an analyst at Axis Securities Ltd, points out that some dealers are highlighting the cannibalism between the Hunter and Bullet models. The market seems to have taken note of this risk, given the sharp fall in Eicher Motors share price. Still, the company’s commentary on this is a significant oversight,” he cautioned. Small wonder, Eicher Motors shares are down 19% from their 52-week high seen in November. In comparison, TVS and Hero’s The shares have declined.14% and 8% from their respective 52-week highs.Better-than-expected margin performance and continued volume growth could act as catalysts for the shares in the coming days.