2-wheeler stocks in top gear as chip woes ease; EV transition key: Analysts

Two-wheeler (2W) companies are witnessing a positive upturn as chip shortage eases, and production levels return to normal levels on healthy demand. The pick-up in rural sales on the back of improved crop prices, too, is boosting demand for two-wheelers across India, believe analysts.

Going forward, analysts expect 2Ws to reflect strong volumes in Q2FY23 amid strong pent-up demand, and improved mobility in June quarter 2022 (Q1FY23).

"Several factors like the reopen theme, uptick in demand, and improved mobility are expected to drive demand for 2Ws. We expect the 2W segment to perform at par with the four-wheeler (4W) space in the coming quarters," said Ajit Mishra, VP – Research, Religare Broking.

Gaurang Shah, Head Investment Strategist at Geojit Financial Services, too, believes that revived demand from semi-urban and rural areas will boost auto volumes, thereby driving healthy sales momentum on a month-on-month (MoM) basis. "We are bullish on TVS Motor, Hero MotoCorp, and Eicher Motors, and reiterate an equal-weight stance on both 2Ws and 4Ws," he added.

Two-wheeler retail sales saw a positive growth of 20.6 per cent year-on year (YoY) in June, but they fell 8.5 per cent MoM to 11.1 lakh units. Hero MotoCorp led the segment in sales, followed by Honda, and TVS Moto. Hero MotoCorp sold 4.6 lakh units, whereas, Honda sold 2.8 lakh units, and TVS 1.6 lakh units in June 2022.

Going forward, analysts at IIFL Securities expect the sharp fall in metal prices to lift consensus earnings-per-share (EPS) among the 2W original equipment manufacturers (OEM) players even as they anticipate the commodity cost pressure in Q4FY22 to trickle in Q1FY23. "We expect good volume traction for OEM players except Bajaj Auto and Jaguar Land Rover (JLR). However, we expect strong margin improvement in M&M and Hero MotoCorp due to recent price hikes, operating leverage, and currency benefits," they wrote in a note.

Shares of 2W companies have been on the rise in an overall weak market. So far this calendar year, shares of Hero MotoCorp, TVS Motor, Eicher Motors, Bajaj Auto have surged in the range of 9 per cent to 36 per cent. The Nifty Auto and S&P BSE Auto indices, too, have outperformed the benchmark indices as they rose over 9 per cent and 10 per cent, respectively, year-to-date (YTD). In comparison, the Nifty50 and the S&P BSE Sensex have bled 9 per cent each, during the same period.

The EV transition

Governments across the globe are pushing for automotive electrification in order to reduce carbon emissions. Faster transition to electric two-wheelers from ICE two-wheelers, analysts believe, gives an edge to Hero MotoCorp and Bajaj Auto as they ramp up new facilities to roll out electric 2Ws.

"Hero is the best play on EVs after their tie-up with Ather Energy and other several brands. Bajaj Auto, too, is making progress in the EV space as they ramp up to launch new EV facilities across India," said Vinit Bolinjkar, Head of Research, Ventura Securities.

That said, a report by Jefferies cautioned that the new entrants in the EV 2W segment hold a significant market share whereas the listed peers are yet to expand their footprint. In Q1FY23, market share of Ola Electric, Ampere, Okinawa stood at 23 per cent, 14 per cent, and 22 per cent, respectively. In comparison, Bajaj Auto and TVS Motor market share stood at 3.5 per cent and 4 per cent, respectively.

Despite the strong presence of new players in the EV market share, Nishit Master, Portfolio Manager, Axis Securities believes that the existing players will soon play catch up to the new entrants after reports of mishap, quality, and service issues.