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Two-wheeler companies may be entering the slow lane. Volume growth is showing signs of shifting down a gear as buyers move towards passenger vehicles. Two-wheeler stocks could decelerate having run up 4-10% in the past month.

The drop in two-wheeler registrations by about 21% year-on-year in November, as per data from the Federation of Automobile Dealers Association, is a concern. Festive season sales also shrunk about 6% y-o-y during the 42-day festive period, points out FADA.

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“With the pent-up demand now exhausted, demand is expected to moderate in the coming months. Scooter demand is still slow in urban centres, while rural bike sales is also moderating. There is a shift towards four-wheeler demand," said Abhishek Jain, analyst, Dolat Capital Markets.

That said, inventory levels for two-wheelers continued to remain high. FADA notes that inventory is high, in the range of 45-50 days, which is above the usual levels of 30-40 days. This also shows that sales are not moving fast enough, while supply-side has normalized.

This inventory could take a while to wind down. Further, the shift towards down trading seen after the lockdown is also slowing. Entry-level bike sales have reduced by about 210 basis points in the overall product mix to 26.5% year-to-date over FY20, added analysts.

But post-lockdown improvement in bike sales helped Hero MotoCorp Ltd gain market share.

Scooters are losing momentum as they are more urban-centric products.

“This trend has benefited Hero MotoCorp. Its market share is up 280bps to 38.6% in the overall two-wheeler industry. The market leader is at a multi-year high share," said analysts at HDFC Securities in a client note. Bajaj Auto Ltd is expected to continue to see good export sales.

Still, stocks of two-wheeler companies such as Hero MotoCorp, Bajaj Auto and TVS Motor Ltd are already factoring in the post-lockdown pick up in volumes. Besides, the one-year forward valuations of these stocks have gained over the past few months and look stretched.

Both Bajaj Auto and Hero MotoCorp are trading at a one-year price-to-earnings multiple of 19.4 times earnings, while TVS Motor quotes at 38 times, according to data from Bloomberg.

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