The two-wheeler industry has been slowing down for quite some time now due to sluggish demand conditions. However, there are some pockets which are doing better. With the shift in demand from low-cc vehicles to high-cc vehicles, the trend of premiumisation is underway.
Thus, companies serving the mid and high end of the two-wheeler industry are relatively better off.
Eicher Motors Limited, whose flagship brand is Royal Enfield (RE), is an example. Its market share in the above 125cc segment has been rising and stood at 31% in the nine months ended December, according to Jefferies India data. In January, RE wholesale volumes grew by 27% year-on-year (YoY), while that of Hero MotoCorp Ltd. declined by 6%, reflecting the premiumization trend. Hero primarily deals in the entry level segment, where demand is still weak. It had a market share of 3% in the above 125cc segment in the nine months ended December.
View Full Image
Despite the ongoing slowdown in the two-wheeler industry, analysts at Jefferies expect Eicher Motors to post highest ever RE volume, RE EBITDA (earnings before interest, tax, depreciation and amortization) per vehicle and consolidated earnings per share in FY2023 on the way to deliver. Apart from premiumisation, another trend among two-wheelers is the impact on margins due to Electric Vehicles (EVs).
For example, Hero faced a margin erosion of around 70 basis points in the December quarter (Q3FY23) due to the launch of its EV, Vida. One basis point is 0.01%. But RE is shielded here because it has no immediate EV launch and is also the least sensitive to potential EV disruption.
But these factors could not make Eicher Motors share the biggest gainer among two-wheeler companies in the last one year. TVS Motor Co. Ltd shares were top gainers with the stock surging up to 70%, while Eicher Motors shares were up around 22%.
Consistent margin performance at a time of cost escalation was one of the reasons that kept investor sentiment in TVS up. On the other hand, pressure on RE margins is a matter of concern. This comes on the back of an increasing share of the Hunter 350, launched in August, as the product is priced lower than its other vehicles. Furthermore, the RE monthly volume has decreased in recent months. Accordingly, Q3 EBITDA margin declined to 23.9% from Q1’s level of 24.3%. Furthermore, the lower share of exports meant a weaker mix.
In fact, the weak export market is a challenge for its peers as well, although they cater to different geographies such as African countries. This will continue to be a significant headwind in the coming months. Bajaj Auto Ltd’s earnings will be most affected given its large share from exports, which is a high-margin business.
While overall softening in commodity prices may provide some relief, investors would do well to keep an eye on the prices of key raw materials such as copper and aluminium.
Meanwhile, shares of these two-wheeler companies are down 4-15% from their respective 52-week highs. Hence, a sustained volume ramp-up is crucial for a meaningful rally in the two-wheeler shares. “We see a strong rebound in urban and replacement demand, driving a 23% volume CAGR for premium (125cc+) bikes over FY23-25E (FY23E: 30%),” analysts at Jefferies India said in a report on February 14. Are.”
To ensure this, a pick-up in the rural economy is essential, which could come from the recent budget announcements and a good harvest season. The improving rural economy will also be a key volume driver for RE as management is looking forward to exploring that market through Hunter.
Know your inner investor
Do you have guts of steel or are you a victim of insomnia regarding your investments? Let’s define your investment approach.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.