Rural revival, margin uptick key to sustaining gains for two-wheeler stocks

Two-wheeler stocks ride the wave of EV adoption, launches, and premiumisation

Two-wheeler stocks, led by Bajaj Auto and TVS Motor Company, have been among the top performers in the automotive (auto) space over the past year. On Friday, Bajaj Auto gained nearly 5 per cent, while TVS Motor rose by 2.25 per cent. Both stocks have more than doubled, with Bajaj Auto leading the charge with a 123 per cent gain. Hero MotoCorp has also performed well, posting an 83 per cent return, while Eicher Motors has lagged behind, with gains of 43 per cent.

The recent uptrend in these stocks has been driven by market share gains in electric vehicles (EVs), product launches, premiumisation trends, and strong domestic demand. However, looking ahead, the sector’s growth momentum is expected to be sustained by a rural revival, further premiumisation, and continued launches.

The two-wheeler segment is the only category in the auto sector expected to grow in double digits in 2024-25 (FY25). The growth momentum in both retail and wholesales remained strong in July, with the segment registering a 13-15 per cent uptick.

 

Industry volumes in FY25 are projected to grow at an early double-digit rate, approaching the industry peak of 24.5 million units, last observed before the pandemic in 2018-19. This suggests major growth potential for the two-wheeler industry, primarily driven by the expected rural recovery and ongoing premiumisation, according to Shridhar Kallani, research analyst at Axis Securities.

Listed two-wheeler companies expect continued momentum in the second half of FY25, supported by rural sector recovery, the festival season, and rising demand in international markets.

Hero MotoCorp is expected to benefit from the rural revival and premiumisation, particularly in the entry-level and 125cc segments.

In addition to volume growth, profitability trends will be closely monitored by the market. In the April-June quarter, Bajaj Auto reported an 8 per cent year-on-year (Y-o-Y) increase in its average selling price, driven by a favourable product mix, premiumisation, and higher contribution from spare parts.

Operating profit per vehicle hit an all-time high of Rs 21,900, up 1.5 per cent, while margins of 20.4 per cent exceeded expectations. Though domestic demand remains strong, export sales are gradually recovering.

JM Financial Research analysts Vivek Kumar and Ronak Mehta expect margins to be supported by a favourable mix and higher operating leverage. Given Bajaj Auto’s successful track record of product interventions, the brokerage remains positive on the stock.

Hero MotoCorp’s operating profit margin stood at 14.4 per cent, including a 198-basis-point impact from EV-related expenses. This is expected to improve as operations scale up, product localisation advances in the EV segment, and cost engineering initiatives are implemented.

While operating leverage is expected to improve with volume growth and an increased mix of premium products, HDFC Securities remains cautious due to the drag on profitability from EVs. Equity research analyst Maitreyee Vaishampayan maintains a ‘reduce’ rating on Hero MotoCorp, awaiting a sustained recovery in the entry-level segment.

TVS Motor’s profitability improved by 90 basis points (bps) Y-o-Y to 11.5 per cent, driven by lower raw material costs, price increases, and an improved product/geography mix. The company is targeting a long-term margin of 14-16 per cent. With more launches planned in both the EV and internal combustion engine segments in FY25, TVS Motor could continue to outperform its peers. “Despite no significant launches in 2023-24 compared to its competitors, TVS Motor was able to increase its market share by 120 bps Y-o-Y to 17.6 per cent,” according to analysts at Elara Securities, led by Jay Kale.

Eicher Motors’ operating performance met Street expectations, with average selling prices rising 9 per cent Y-o-Y, despite a 1 per cent decline in volumes. Thanks to a richer product mix, the company’s margins remained stable despite muted volume growth. However, Motilal Oswal Research has lowered its FY25/2025-26 earnings forecasts by 3-5 per cent to reflect weaker-than-expected volumes so far this year. The brokerage has a ‘sell’ rating on the stock, arguing there is no justification for premium valuations, given the slower growth.