Zooming two-wheeler sales pave the way for improved margins
The mood on the street has been favouring auto stocks in anticipation of strong urban demand with the 7th Pay Commission and an equal if not stronger rural demand
Strong September sales numbers, the onset of festive season when sales will improve further and Monday’s bullish market sentiment together are the perfect recipe for optimism in two-wheeler stocks. Hero MotoCorp. Ltd jumped 3.6%, TVS Motor Co. Ltd was up 3.3%, Bajaj Auto Ltd by 1.8% and Eicher Motors Ltd that is fuelled by incessantly rising sales of Royal Enfield motorcycles was also up by 3.4%.
Two-wheeler sales were not just robust but were better than what the analysts had pencilled. It also closes the September quarter sales figures on a positive note, raising the bar for revenue and profit growth.
Hero’s 11% year-on-year (y-o-y) jump in sales for the month of September is the highest sales ever clocked by the motorcycle manufacturer. This takes the quarterly tally 17% higher from a year ago. Meanwhile, Bajaj Auto’s stellar double-digit jump in two-wheeler sales on the domestic front limited the quarter’s decline in sales volume, which has been largely on account of falling exports. And TVS clocked a stellar 31% y-o-y sales growth in two-wheelers during the month too.
More importantly, investors cheered higher sales because it paves the way for better profits too, during the quarter. Higher sales improves operating leverage. And, according to Nitesh Sharma, analyst, PhillipCapital India Pvt. Ltd, “Commodity prices have been stable and relatively benign, which will certainly translate into better operating margin for the September quarter.”
Of course, at this juncture it is hard to estimate the marketing costs that would be incurred given that most incumbents would be vying for a higher share of the market during the festive season. After all, other multinational players like Yamaha (India) and Honda Motorcycles and Scooters India are also racing ahead on sales. Higher marketing costs did impact profitability a few quarters ago, in spite of lower raw material costs.
Yet, the mood on the street has been favouring auto stocks in anticipation of strong urban demand with the 7th Pay Commission and an equal if not stronger rural demand, following good monsoons that will improve consumerism. This is mirrored in that the two-wheeler stocks are up by about 20% since April. Of the lot, analysts reckon that there is enough steam in TVS, whose valuation lags its peers but could improve given its outperformance in the recent past.
On the whole, the only let down would be if retail purchases that mirror actual consumer demand fail forecasts. Note that September sales in a company’s books is higher as it has built up inventory at the dealers’ end to meet anticipated demand.
Meanwhile, two-wheeler exports continue to be lacklustre, mainly due to the slump in crude oil prices that has affected oil producing economies like Africa and Latin America, some of which are large importers of two-wheelers from India. However, this will particularly weigh down over Bajaj’s stock whose exports mask the rise in domestic sales and drag profitability too.