Can 2-wheeler export surge in Feb sustain?

In the automobile sector, the twowheeler segment has been leading the pack for quite some time now, driven mainly by a revival in domestic demand. Exports were a worry. But in February, exports by twowheeler makers grew substantially yearon-year in terms of volume, although helped by a low base. Sequentially, too, the growth rates surpassed estimates.

TVS Motor Co. Ltd’s two-wheeler export volume in February grew sequentially by about 46%, and Bajaj Auto Ltd’s by about 8%. A similar trend was seen for Hero MotoCorp Ltd and Eicher Motors Ltd’s Royal Enfield motorcycles.

But this could be a one-time boost. “We expect this volume (growth in exports) to be one-off due to aggressive inventory built up in anticipation of increasing freight costs ahead due to the Red Sea crisis,” Antique Stock Broking analysts said in a report on 4 March.

Export markets continue to be plagued by high levels of inflation and currency availability issues. Thus, the trajectory of export volumes for twowheelers needs to be keenly watched.

In any case, the domestic market for two-wheelers is on a strong footing.

The entry-level segment is reviving, evident from Hero’s nearly 17% year-onyear growth in its domestic volumes in February. Hero’s portfolio primarily caters to the mass segment.

Overall, Kotak Institutional Equities estimates the domestic two-wheeler segment volume to have grown over 20% year-onyear in February.

On the other hand, Kotak estimates the domestic passenger vehicle industry to have grown in low double digits in February, led by utility vehicles.

Mahindra & Mahindra Ltd clocked the highest growth rate of nearly 40% yearon-year (domestic) among publicly listed makers of passenger vehicles. While Maruti Suzuki India Ltd saw a nearly 83% jump in its utility vehicle volumes, the mini and compact segment saw a 15% drop.

Overall, “we estimate industry inventory at about 300,000, with some more scope for further channel filling until March-24. Thus, discounts have also started inching up earlier this year,” said Nomura Financial Advisory and Securities (India) in a report on 1 March.

Channel filling refers to sales of vehicles by companies to retail dealers.

Meanwhile, commercial vehicles and tractors continued to be a drag. In February, commercial vehicle volumes of Tata Motors Ltd and Ashok Leyland Ltd fell by 4% and 6% year-on-year, respectively. This segment is likely to be under pressure until the general election and may see a pickup thereafter.

In the case of tractors, agriculture activities were impacted by insufficient monsoon. Mahindra’s and Escorts Kubota Ltd’s tractor volumes in February fell by 16% and 17%, respectively.

However, Mahindra expects demand for tractors to recover on the back of positive outlook for rabi crops as well as government support for the agriculture sector.

On the margin front, the commodity cost environment continues to remain favourable. Thus, further margin upsides would be company-specific and come from operating leverage, price hikes or cost-efficiency measures.

Meanwhile, investors in stocks of two-wheeler companies are riding high. Shares of Bajaj, TVS, and Hero are up by 87-120% over the past year. This suggests that most positives appear to have been factored in, thus limiting significant upsides hereon.

Shares of Tata Motors, Mahindra and Maruti are flirting with their 52-week highs, while that of Ashok Leyland and Escorts are down by 10% and 15%, respectively, from their 52-week highs.