Entry-level motorcycle sales make a comeback with rising rural optimism
Higher government spending on the farm community and on infrastructure, irrigation and housing in rural areas will cascade into higher consumption
Motorcycle sales, especially in the entry-level segment, are closely linked to the fortunes of the rural economy. A double-digit growth of 13.7% in motorcycle sales during FY2018, witnessed after a hiatus of five years, is largely attributable to improving incomes in rural areas.
What corroborates this is the fact that over three-fourths of the total sales accrue from the entry-level motorcycles (up to 125cc) largely sold in rural areas. A study by Icra Ltd shows that in the nine months ended December 2017, motorcycle sales in states where incomes are skewed towards agriculture rose dramatically when compared to the year-ago period. Among the ten states with high motorcycle sales, Uttar Pradesh, Bihar and Madhya Pradesh saw strong 27%, 22% and 23% growth and these are all states where dependence on agriculture is high.
On the whole, normal monsoons for two years have improved agricultural income after two to three years of drought when the farm produce and incomes had been badly affected. Apart from that, demonetisation too delayed sales recovery by a few quarters. All this was mirrored in the contraction in motorcycle sales over the last three years (see chart). Of course, one must not overlook the fact that the contraction set a low base for growth in FY2018.
Still, analysts are confident that the growth is likely to continue. Not just because a third year of normal monsoon has been forecast, but also because higher government spending on the farm community and on infrastructure, irrigation and housing in rural areas will cascade into higher consumption. After all, this segment of the population is critical given that the general elections are round the bend.
That said, the Street has already recognized this. Hero MotoCorp Ltd, which has a two-thirds market share in motorcycles with about 85% of its revenue accruing from the same, rallied 17% over a year. Likewise, TVS Motor Co. Ltd rallied twice as much. At current market prices, the stocks trade at rich valuations, limiting upsides. In fact, the next two months are also critical as any news on regional disparities in rainfall or a less-than-forecast monsoon could weigh on the stocks.
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