Two-wheelers are having their moment in the sun

Two-wheelers led volume performance of automakers in the December ended quarter. (Photo: PTI)
Two-wheelers led volume performance of automakers in the December ended quarter. (Photo: PTI)

Summary

  • For two-wheelers, the trend will continue aided by gradual recovery in rural demand. Commercial vehicles, however, are expected to go through a rough patch amid elections, and for tractors, too, it is a bumpy road ahead

The automobile industry played a pivotal role in boosting overall corporate earnings growth during the December quarter (Q3FY24), with most automakers experiencing a year-on-year increase in sales volumes last quarter, positively impacting their revenue performance.

Sure, growth rates varied across companies, but the path was led by the two-wheeler segment with Bajaj Auto Ltd, TVS Motor Co. Ltd, and Hero MotoCorp Ltd seeing revenue growth of 21-30%. This show was the result of superior volume performance in the segment. However, Eicher Motors Ltd, the listed parent of Royal Enfield, bucked the trend as weak exports took a toll on its volumes.

Next in line was the passenger vehicle segment, where companies with a significant portion of utility vehicles in their portfolio such as Mahindra & Mahindra Ltd (M&M) benefitted given the rising preference for premium vehicles. M&M reported a 24% revenue growth in the auto segment, while Maruti Suzuki India Ltd, with a portfolio dominated by mini and compact cars, clocked a 15% revenue growth in Q3.

The commercial vehicle and tractor segments followed at the lower end of revenue growth band, as poor demand weighed on their Q3 earnings.

Now, for better or worse, these trends are expected to continue. Two-wheelers are likely to clock better volume aided by a gradual recovery in rural demand, followed by passenger vehicles. Commercial vehicles are expected to go through a rough patch amid elections, and for tractors, too, it is a bumpy road ahead.

Tata Motors Ltd anticipates a single-digit year-on-year drop in commercial vehicle volumes in Q4 and a subdued first half of FY25. Similarly, M&M has adjusted its forecast for the domestic tractor industry volume, expecting a 5% decline in FY24 compared to its previous forecast of low single-digit growth.

On the margins front, with commodity costs remaining stable, major challenges seem unlikely. However, the Red Sea crisis poses a potential risk. “While the Red Sea crisis hasn’t had any material impact on any of the coverage companies so far, we expect logistics costs to rise in Q4 and shipping times to increase by about 3-4 weeks," said analysts at Motilal Oswal Financial Services in a Q3 review report.

Moreover, exports could take a hit. Here, Bajaj Auto is more vulnerable as exports formed 48% of its FY23 volumes. Due to this crisis, Bajaj now expects export volume to improve by 2-5% sequentially in the coming quarters versus the earlier estimate of 10%.

For FY25, a high base and moderating demand present significant challenges. Motilal Oswal believes two-wheelers and SUVs will likely outperform the auto pack with an 8-10% year-on-year growth in FY25.

As such, the stock performances of the automakers reflect these variations across segments. Shares of two-wheeler companies: Bajaj Auto, TVS and Hero MotoCorp have risen 84-113% in the past one year. “While the two-wheeler segment would lead the automobile pack going forward, this has largely been factored in by investors evident from the recent run up in stock prices," said Himanshu Singh, an analyst at Prabhudas Lilladher. Thus, significant upsides may be capped for shares of two-wheeler companies.

Meanwhile, passenger vehicle makers such as Maruti and M&M have seen their stocks rise 32-38% in the last year. Tata Motors has enjoyed a much higher 109% increase, buoyed by the improved performance of its subsidiary, Jaguar Land Rover Automotive Plc. Conversely, Ashok Leyland Ltd, focusing exclusively on commercial vehicles, has seen a modest 16% increase in its stock price.

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