Hero sounds first warning on CAFE's emerging risk to two-wheeler firms

New Delhi: Hero MotoCorp Ltd has become the first two-wheeler maker to flag the government's proposed corporate average fuel efficiency (CAFE) norms for motorcycles and scooters as an “emerging risk” to business, warning that tougher fuel-efficiency rules could raise costs in India's highly price-sensitive market.

The disclosure in the company's FY26 annual report comes as the government prepares to roll out fleet-wide fuel-efficiency targets for India's two-wheelers, world's largest market for the segment, from April 2028.

The country's largest two-wheeler maker said it plans to mitigate the impact of the proposed fuel-efficiency norms by increasing the use of lightweight components, improving vehicle efficiency and expanding its electric vehicle (EV) portfolio.

The warning could indicate a sign of a pushback from the industry on the view that the price hikes resulting out of the emission upgrades could cost the companies growth. Other sector majors Bajaj Auto and TVS Motor have not flagged CAFE norms as a risk yet.

“We are engaging with policymakers through the Society of Indian Automobile Manufacturers (SIAM) to advocate for realistic and technically feasible targets specifically for the 2-wheelers segment,” Hero said in its financial year 2026 annual report.

The company highlighted that while the introduction of these norms has become necessary in a bid to reduce emissions and promote energy security, there is a material risk to business.

“Abrupt implementation, potentially due to geopolitical tensions, could leave 2-wheeler OEMs unprepared, forcing rushed redesigns, incurring higher compliance costs, and risking penalties,” the management noted. A 2028 deadline could be stiff as the emission targets have still not been set and the companies do not their ask. Product development cycle are typically two-four years long.

“In a price-sensitive market, passing these costs to consumers is difficult, threatening profitability and competitiveness. Regulatory non-compliance could lead to financial penalties, product recalls and reputational damage,” the disclosure on emerging risks said.

The warning on impact of price sensitivity holds particular importance for Hero MotoCorp, for which around 5.4 million sales of its total 6 million in FY26 came from the entry-level motorcycle range of an engine capacity between 75cc and 125cc.

CAFE norms impose a fleet-wise emission target for automakers that are calculated according to average fuel consumption and emission of CO2 from the vehicle. For the four-wheeler passenger vehicle market, these norms have been in place since 2017, with the third iteration set to be introduced next year, but two-wheelers were not subject to any regulatory oversight on pollution so far.

None of the car companies have so far identified CAFE norms as a key business risk in their annual reports.

Given India's worrying pollution levels, and given that over two-thirds of the country's auto sales come from scooters and motorcycles, the government has started targeting two-wheelers as well.

Mint reported on 1 July that the Bureau of Energy Efficiency (BEE) under the Union power ministry is holding discussions with two-wheeler manufacturers and the lobby groups Society of Indian Automobile Manufacturers (Siam) and the Automotive Component Manufacturers of India (Acma) on an accommodative methodology to measure emissions across powertrains.

The proposed norms could cover all engine categories, such as 75 as 100cc, getting linked to carbon emissions while electric vehicles' motor capacity and battery efficiency would be as per the emission norms of EVs.

With EVs having considerably lower emissions than traditional fuel-run or internal combustion engine (ICE) vehicles, introduction of more models in the segment will help manufacturers meet the norms effectively without incurring penalties. The likely fine on every non-compliant model sold will typically be much higher than a long-term investment in EV technology.

Legacy two-wheeler makers Bajaj Auto and TVS Motor lead the EV market with their electric scooter portfolio boosting the share of EVs in their total retail sales to 12% and 8%, respectively, as per the Federation of Automobile Dealers Association (FADA).

The country's largest two-wheeler maker Hero MotoCorp lags the EV market, having only a 3% share in its total sales that could worry the company if stringent emission targets kick in.

In 2026 so far, shares of Hero MotoCorp have fallen 16% as against rival TVS's decline of 4% and Bajaj Auto's gain of 6%. The Nifty Auto index has fallen by 6%. While TVS and Bajaj lead the two-wheeler EV market which has gained in the wake of the West Asia war, Hero has lagged, but investors see it catching up.

“In EVs, the Vida VX2 (electric scooter of Hero) has been well-received by customers. Its removable battery feature, which can be charged at home using a normal plug, is likely to be one of the key USPs of this product,” analysts at Motilal Oswal said in a note on their meeting with Hero MotoCorp. “Market share has increased from just 4% as of 4QFY25 to 11.1% by 4QFY26. VIDA has achieved over 20% market share in 28 towns and over 10% share in 79 towns, while ranking among the top two EV players in 37 towns.”

The analysts noted that healthy ramp-up in EV scooters. along with ICE, should help the company this fiscal year.

Electrification nudge

While flagging the risks, Hero is also gearing up for the looming rollout of emission regulations by noting electrification as a priority.

"We remain focused on strengthening our core business, accelerating growth in premium and electric mobility, expanding our global footprint and building a more agile, future-ready organisation,” said Harshavardhan Chitale, chief executive at Hero MotoCorp, who took over in January, said in his first annual letter to shareholders.

Experts have noted that the impact on the price-sensitive two-wheeler market has to be factored in before introduction of such norms.

"The norms need careful sequencing, a fuel-baseline correction for E20, a realistic glide path, so the cost doesn't fall hardest on the rural, cost-conscious buyer who isn't the one driving the urban pollution problem,” Ravindra Patki, managing partner at Vector Consulting Group, earlier told Mint.