Rural gains ahead for two-wheeler stocks

Double-digit volume growth led by rural demand and recovering exports are key triggers for companies

After ending FY18 on a strong note, listed twowheeler majors are looking at a second consecutive year of double-digit growth in sales volume. The sector recorded a growth of 15 per cent in FY18 after two years of muted performance. The trend is expected to continue in FY19 if April numbers are anything to go by. Volumes of most two-wheeler majors were up 20 per cent year on year on higher rural demand.

Bharat Gianani of Sharekhan expects 10 per cent growth in twowheeler sales in FY19. He believes, strong rural demand due to normal monsoons (as per forecast) for the third year in a row, high farm incomes on the back of increased crop output and minimum support prices will drive demand for two-wheelers. In addition, focus on new rural housing and infrastructure such as roads should add to demand.

Analysts expect rural twowheeler growth to outpace urban growth by 200-300 basis points in FY19. With higher rural growth, analysts expect the entry-level or economy segments to do well as was the case in FY18 when the economy segment grew 23 per cent outpacing the 20 per cent volume growth recorded by the scooter segment.

Within two-wheelers, scooters will continue to outperform. They did better than the industry with 20 per cent growth in FY18 as compared to motorcycle growth of 13.7 per cent. The share of scooters in industry volumes increased by 140 basis points to 33.3 per cent in FY18.

Kapil Singh and Siddhartha Bera of Nomura expect this trend to sustain due to rising female literacy and improving per capita income levels in states. This should help scooters improve its share to 40 per cent by FY22, they add. In addition to the domestic demand, two-wheeler exports are on a strong wicket. Anupama Arora, vice-president and sector head - corporate ratings, ICRA, says, “The recovery in oil prices has resulted in higher demand from select international markets, which coupled with new markets explored by automakers would drive export growth in the current fiscal.”

Given strong demand across segments, two-wheeler stocks which have underperformed the markets for the major part of last year should do well. Among them, Hero MotoCorp, Bajaj Auto and TVS Motor are seen as key beneficiaries of rural recovery. Though Eicher Motors would also gain, it is more of an urban play. The only headwind is high raw material costs, which would weigh on profit margins of companies.

Hero MotoCorp

Given its dominant share in entrylevel motorcycles and higher exposure to rural-market driven states, the company would be a major gainer. What would add to volumes are new launches in fastgrowing segments of premium motorcycles (Xtreme and Xpulse bike in the 200cc segment). Hero MotoCorp’s scooter sales revived in the second half of FY18 post the launch of refreshed Duet and Maestro Edge; new variants (125cc) of these scooters will drive growth going ahead. Given rural trigger and potential market share gains in these segments, most analysts have a buy on the stock.

Bajaj Auto

Bajaj Auto underperformed the domestic market posting a five per cent volume growth in FY18. It has started FY19 on a strong note with motorcycle volumes up 19 per cent, and three-wheeler growth at a strong 83 per cent. What should help the company going ahead, is growth revival in export markets, continuing threewheeler demand and a major presence in the faster-growing premium motorcycle segment. However, for the stock, which has been the worst performer in the two-wheeler pack over the last year, major rerating hinges on market share gains in the overall domestic motorcycle space where it has trailed peers.

TVS Motor Company

The company has gained market share over the last three years by filling its product gaps. Volumes in April, too, were strong led by the launch of the refreshed version of Apache. While the company is moving up the market share ladder by focusing on the growth segments of 150cc and above segment in motorcycles, higher three-wheeler sales and scooters are positives, both for revenue growth and margins.