2-wheeler: On fast recovery track

Last updated: 23 Jul, 2020 | 01:35 pm

2-wheeler: On fast recovery track
  • Industry leaders in two-wheelers HeroMotocorp and Bajaj Auto have posted a stellar recovery in June-20
  • Sales for HeroMotoCorp touched 90% of pre-Covid levels in June-20, and expectations are rife that the sales will top pre-Covid levels in July-20 on the back of strong demand from rural and semi-urban markets
  • Sales for Bajaj Auto have also recovered faster than the industry, thanks to pent-up demand. The chart below shows the sales of Bajaj Auto and HeroMotocorp since January-20
  • As seen from the above chart, “Sales for HeroMotocorp have increased more than 4-fold to reach 4.50 lakh units in June-20, while sales for Bajaj Auto saw a 120% MoM rise to 2.87 lakh units in June”
  • A combination of multiple factors, including the forecast of a normal monsoon, a bumper Rabi crop and the upcoming festive season are expected to keep the momentum going over the next few months.
  • Bajaj Auto’s sales have reached about ~73% of pre-Covid levels. April had been a washout for these auto-manufacturers, owing to the lockdown imposed on March-24th to contain the spread of the pandemic. The chart below shows domestic 2-wheeler sales numbers for Bajaj Auto

INDwealth View

  • Nearly half of Hero’s domestic sales comes from rural India. A good rabi crop forecast points to improving rural incomes, which should benefit the firm. Further, government focus on agriculture and the rural economy is likely to continue in the near- to medium-term, again a good tailwind for Hero. 
  • Demand for entry-level motorcycles has recovered faster, especially in rural and semi-urban India, following a normal monsoon, good summer crop and a shift towards personal mobility over public transport to better practise social distancing
  • According to media reports, HeroMoto and Bajaj Auto are ramping up output in line with rising demand. In fact, Hero has plans to ramp-up manufacturing to 650,000-700,000 vehicles a month 
  • In case of Bajaj Auto, the focus on premiumisation and better realisation through exports will be major positives. Notably, the two-wheeler industry has changed from 20 percent for entry-level, 60 percent in value/mid-level and 20 percent at a premium level to 30-50-20 percent. Further, it is forecasted that the industry will move toward a 35-45-25% structure, squeezing out the mid-segment. This should greatly help Bajaj Auto.  
  • Factors such as improving rural incomes due to normal monsoon, a shift towards personal mobility and consequent rise in demand should bode well for these 2-wheeler stocks  
  • “Hero MotoCorp and Bajaj Auto have been rated BUY by our model for the last two months.” Interestingly, Hero MotoCorp has outperformed benchmarks Nifty50 and Nifty Auto by rising 70% in FY21 so far. Meanwhile, Bajaj Auto has returned about 49% in the current fiscal year.
  • We continue to remain positive on these two-wheeler stocks. Do read our previous blog on two-wheeler industry.

Please find your exposure to Bajaj Auto and Hero Motocorp shares through stocks and Mutual Funds.

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