The woes of two-wheeler companies are far from over, with the industry facing risks from weak rural demand, rising commodity prices, chip shortages and market disruptions. the supply chain.
While two-wheeler manufacturers were hoping for a sequential expansion of margins in the fourth quarter due to price increases in January and the expected stabilization of raw material costs, one variable is now at issue. Even as steel prices stabilize, those of aluminum and precious metals are rising from November-December lows. The increased exposure of two-wheelers to aluminum and precious metals is expected to weigh on margins. Certainly, companies can resort to price increases, but this would have an impact on demand and accessibility.
“We estimate that 2W (two-wheeler) original equipment manufacturers (OEMs) would need to increase prices by 2.0-2.5% to fully pass on the recent impact and maintain gross margins at 3QFY22 levels. “, said analysts at IIFL Securities in a report.
As such, there is a slight relief, with analysts believing demand is currently bottoming out. Demand is expected to rebound with the opening of the economy and a good rabi harvest season which should support rural demand. The upcoming wedding season should also contribute to demand. The increased penetration of two-wheelers in Indian households over the years is proof that it is paramount to India’s mobility.
“The combined effect of the sharp push in regulatory costs, weak economy and Covid caused 2W volume to decline by 34% from FY19-22E. We believe Indian 2W demand is ripe for a recovery from the worst slump in five decades. We expect an urban revival to lead to faster growth in scooters and high-end motorcycles compared to sub-125cc bikes,” Jefferies analysts said. India Pvt Ltd in a report.
Additionally, better growth in urban areas will favor companies like Bajaj Auto Ltd and Eicher Motors Ltd due to its significant presence in the premium segment. TVS Motor Co. Ltd gains increased share in 2W exports. But concerns persist for Hero MotoCorp Ltd as it mainly operates in the entry segment.
Investors seemed to be pricing this in due to Hero MotoCorp’s stock underperformance relative to its peers over the past year. In addition to this, Hero MotoCorp is not present in the 3W segment like TVS and Bajaj and it also has relatively less exposure in exports.
Meanwhile, the electric vehicle (EV) segment is seeing an increase in the number of new entrants, reflecting the accelerating adoption of EVs. Listed OEMs are also focusing on expanding their presence in this segment as the entire industry shifts towards sustainable options. TVS Motor, Bajaj Auto and Hero MotoCorp plan to either launch a new electric vehicle in the coming years or expand their current offerings to other cities.
“The share of EVs in 2W increased from just 0.4% in FY21 to 3% (~9% of scooters) in Jan-Feb; we expect EVs to form 8% of 2W (25% of scooters) by FY25,” the Jefferies report added.
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