Why two-wheeler industry's prospects look bright?

Last updated: 10 Jun, 2020 | 08:10 am

Why two-wheeler industry's prospects look bright?

While April was a washout for two-wheeler manufacturers, industry leaders Bajaj Auto and Hero Motocorp have shown some recovery in May-20 sales numbers.

Healthy exports by Bajaj Auto

Bajaj Auto has overtaken Hero Motocorp to emerge as India’s largest two-wheeler manufacturer in May. This is mainly because of huge exports by Bajaj Auto (around 65% in May). In comparison, Hero MotoCorp’s domestic volumes make up an overwhelming 96% of total sales.

  • As shown in the chart above, Bajaj’s two-wheelers exports were higher than its two-wheeler sales within India for the sixth consecutive month. The maker of bikes such as Pulsar and Chetak sells more vehicles outside of India than in India. 
  • Interestingly, while Bajaj Auto did not sell anything domestically in April due to the lockdown, it was able to export around 38,000 vehicles in April.
  • Unlike Hero which manufactures motorcycles and scooters, Bajaj Auto's sales, at present are primarily driven by motorcycles

Hero vs Bajaj: Total Sales comparison

Barring the last two months, Hero Motocorp remains the market leader in two-wheelers. As at the end of FY20, HeroMotocorp retained a healthy 52% market share in Motorcycles. Bajaj Auto had ~20% market share. 

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. 

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, as it operates mainly in the entry-level and premium segments. 

Two-wheeler sales will also get a boost as consumers look to avoid public transport and prefer to have their own vehicles to better practise social distancing. Interestingly, most two-wheeler dealers (which are open now) are now seeing throughput in the 50-60% range, compared to normalised levels − much better than passenger vehicles (PVs). Due to pent up demand, HeroMotocorp was able to sell 10,000 units within a week, in the first week of May.  

Thus, 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. These shares have been rated Buy by our model since the last one month.  Interestingly, Hero MotoCorp has outperformed benchmarks Nifty50 and Nifty Auto by rising 42% in FY21 so far. Meanwhile, Bajaj Auto has returned about 35% in the current fiscal year.

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