Q3 dragged two-wheelers. Will they rev up?


Two-wheeler companies kick-started the December quarter (Q3FY23) on a good note, helped by the festive season. Unfortunately, the momentum did not sustain, eventually weighing on overall sales volumes during the quarter.

Barring Eicher Motors Ltd’s Royal Enfield, all the other key two-wheeler makers saw either flat volumes year-on-year (y-o-y) or a drop. Royal Enfield benefitted from the K-shaped recovery and also garnered strong response for its new launches, such as Hunter 350. Royal Enfield’s volume in Q3 rose by 30.6% y-o-y and 6.6% sequentially.

Graphic: Mint

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Graphic: Mint

Even so, the rising share of Hunter 350 comes at a cost. It would dilute Royal Enfield’s overall margin profile as the product is priced lower compared to its other vehicles, such as entry-level variants of Classic 350cc. Motilal Oswal Financial Services has cut Eicher Motors’ FY23 and FY24 earnings per share estimates largely driven by margin contraction due to a weakening product mix.

Nonetheless, the tailwind in the form of softening raw material costs would aid margin expansion for all two-wheeler companies, including Bajaj Auto Ltd, TVS Motor Co. Ltd and Hero MotoCorp Ltd. Costs of commodities such as steel and aluminium have dropped from their peaks and the benefit of this would be reflected in Q3. But given the subdued volume performance of these three companies, they may not be able to gain as much from lower costs. Besides weak domestic demand, the subdued export market is also a factor that has acted as a dampener on the volume front. For perspective, export volumes of Bajaj and TVS have declined by 31% and 18% y-o-y, respectively. Note that the export business is a high-margin one. This is a primary concern for investors in Bajaj’s shares, as exports formed about 57% of the two-wheeler volumes in FY22. From its 52-week highs, its shares are down by 14%.

Thus, demand pick-up in export markets is crucial. However, there could be little respite in the near term on this front for two-wheeler makers. “We remain cautious about the outlook for exports due to concerns about the economic slowdown and geopolitical issues confronting the US & the EU,” said a 9 January Nirmal Bang Institutional Equities report.

In domestic markets, investors would do well to watch out for signs of a revival of rural demand. This is more crucial for Hero, which has a higher exposure to rural markets, as its portfolio predominantly caters to the entry-level segment. Further, updates on its electric vehicle (EV), Vida V1, require closer tracking.

For TVS, increasing EV penetration is a key risk, as its ICE (internal combustion engine) scooter portfolio is vulnerable to a potential EV disruption. While its EV, TVS iQube, is seeing increased traction every month, further expansion in this segment is crucial to enable a smooth transition from ICE to EV scooters.

Meanwhile, with respect to Royal Enfield, Aditya Welekar, an analyst at Axis Securities Ltd, points out that some dealers are highlighting cannibalization between Hunter and Bullet models. “The Street appears to have factored in this risk given the sharp fall in Eicher Motors’ share price. Even so, the company’s commentary around this is a key monitorable,” he cautioned. Small wonder, shares of Eicher Motors are down by 19% from their 52-week highs seen in November. In comparison, shares of TVS and Hero are down by 14% and 8% from their respective 52-week highs. Better-than-expected margin performance and sustained volume growth could act as catalysts for the stocks in the days to come.


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