Rural boost for two-wheeler companies

Risk-reward favourable for Hero; rising competition, commodity prices may hurt industry

Aided by a recovery in rural markets and a low base, the two-wheeler segment posted a 25 per cent-plus growth for the second month in a row. The growth was led by TVS Motor, which sold 36 per cent more two-wheelers in February over the year-ago period. Sales of Hero MotoCorp, Bajaj Auto and Royal Enfield also grew at 20-25 per cent year-on-year. After an inconsistent period of growth in the second half of 2017, brokerages said the demand for two-wheelers was coming back.

One of the reasons for higher demand in February, which is likely to sustain, is an increase in the minimum support prices (MSPs) for crops and government initiatives in rural housing, infrastructure and roads. Given that half of motorcycle volumes come from rural areas, this segment is expected to do well. Recovery in export sales, too, is a positive and mitigates some of the risks in the domestic segment, especially the weakness in urban cities. Scooter sales are also expected to be robust because of the growing women workforce, improving road conditions in rural areas, and launches in the 125cc and 150cc segments. The scooters segment continues to gain market share, which has now doubled from the FY11-levels of 17.6 per cent.

Analysts at Nomura said capacity constraints for Honda over FY19 and FY20 could hurt it. This will give Hero MotoCorp and TVS Motor an opportunity to gain market share.

But, there could be some bumps as well. Morgan Stanley had highlighted two headwind of higher competition and commodity prices. This is because of a slew of launches by Bajaj Auto, especially Hero MotoCorp, which is pricing its products aggressively to gain market share. While Bajaj Auto has launched the 110cc and 125cc Discover variants, Hero plans to launch the 125cc variants of its two scooter brands, the Duet and the Maestro Edge, to tap the executive segment further. It also plans to launch the 200cc motorcycles, Xtreme and Xpulse, to make inroads into the premium segment.

Despite headwind on the raw material front, given increasing competition, firms may be reluctant to increase prices, thereby hampering profitability, analysts said. If the December quarter performance for the sector is anything to go by, firms could see margin pressures of 200 basis points in FY19. The true impact would depend on companies’ ability to achieve higher volumes and cut costs.

For now, most analysts believe Hero MotoCorp would be a key beneficiary of the government’s increased focus on rural India. Further, its aggression to gain share in scooters and focus on premium motorcycles should be beneficial. Moreover, the stock is attractively priced.