Bikes image via Shutterstock
Having moderated in May, the two-wheeler sector's growth is expected to rebound on the monsoon and new launches in the current financial year (FY17). Growth in May was muted largely due to only two per cent growth reported by Hero MotoCorp. Analysts note that the festival and marriage season was not spread over April and May as was the case last year and got bunched in April. Hero MotoCorp recorded double-digit growth in all the three months prior to May. Growth is expected to return on the back of a normal monsoon leading to strong rural demand, continued traction in scooters and new launches.
Analysts at Religare Institutional Research believe FY17 would be a year of commercial vehicles due to higher replacement demand and two-wheelers on the back of monsoon due to rural income boost and the rise in military pensions. Their top pick is Hero MotoCorp, in addition to Eicher. The sector, which recorded 2.7 per cent growth in FY16 could report double-digit growth in FY17. Prayesh Jain of IIFL believes the sector should be able to achieve a 10-12 per cent growth in FY17, with scooters expected to grow at 12-15 per cent and motorcycles at 8-10 per cent.
The reason for muted two-wheeler growth in the past two years was slow rural sales, especially in the entry-level segments given the lack of disposable incomes due to monsoon failure and lack of financing options. With a normal monsoon, motorcycles could see high single-digit growth, with higher growth in the second half of the financial year. Scooter sales should improve, given that penetration especially in states such as Bihar continues to be low. While scooters will not achieve 24-25 per cent growth levels as was witnessed in the past, they will continue to grow at mid-teens, believes Jain of IIFL.
Analysts back Hero MotoCorp to do well on the back of a recovery in rural markets, where the company has high exposure, and upsides from the export markets where, given its low base, it can achieve higher growth rates. Both Bajaj Auto (16 per cent volume growth projection for FY17) and TVS Motor are facing export hurdles in their key markets and these account for a significant part of their overall volumes. Hero’s margins should improve as some of its high-selling models such as the Splendor sell more on higher demand helping the company gain from operating leverage.