As India moves from ‘Lockdown 5.0’ to ‘Unlock 1.0’, investors are placing bets on rural India to lead the economic growth. For analysts, two-wheeler (2W) stocks are emerging as the top investment pick in the current market scenario within the auto sector that has outperformed the frontline index for two consecutive months now. Expected demand pick-up in tier-II and tier-III cities as well as preference for personal mobility amid the Covid-19 health concerns are the top two factors that would drive the demand, they say.
“Covid-19 should impact the rural economy relatively less than the urban economy as the spread is largely in the latter, and agriculture should suffer less from the lockdown. Covid-19 should also trigger a shift towards personal mobility, where a section of public transportation users should switch to 2Ws, especially in urban,” wrote Nitij Mangal, equity analyst at Jefferies India, along with Sagar Sahu in a co-authored report.
For analysts at HSBC, demand for two-wheelers is normalising much quicker, exceeding most expectations, since the partial easing in lockdown. Most two-wheeler dealers (which are open now), they said, are now seeing throughput in the 50-60 per cent range, compared to normalised levels − much better than passenger vehicles (PVs). “Over the next few quarters, better traction in rural India and the movement towards personal mobility (two-wheelers from trains/metros) should help demand,” wrote Yogesh Aggarwal, Vivek Gedda and Kushan Parikh of HSBC in a May 28 note.
The view is supported by the May auto sales data where companies such as Hero MotoCorp and Eicher Motors reported better-than-expected sales. Hero MotoCorp’s total domestic sales came in at 637,319 units, as against Nirmal Bang Institutional Equities’ expectations of 95,000 units. Eicher Motors, on the other hand, reported total domestic sales at 19,113 units compared to expectation of 12,500 units.
On the downside, TVS Motor Company and Bajaj Auto reported missed expectations. The former reported domestic sales at 41,067 units as against foreign brokerage Nomura’s expectations of 60,000 units, while the latter reported sales at 39,286 units, compared to expectations of 40,000 units.
Thus far in the financial year 2020-21 (FY21), stocks of two-wheeler companies have rallied up to 42 per cent at the bourses, ACE Equity data show. Hero MotoCorp has managed to outrun the benchmarks Nifty50 and Nifty Auto by rising 42 per cent till Monday, as against gain of 19 per cent and 38 per cent, respectively in the indices. Meanwhile, Bajaj Auto, Eicher Motors, and TVS Motor Company have advanced 34.5 per cent, 30 per cent, and 26 per cent, respectively during this period.
According to Ajay Bodke, chief executive officer for portfolio management services (PMS) at Prabhudas Lilladher, enquiries for two-wheelers have gained momentum after the bumper Rabi crop. Besides, there is pent-up demand in the urban areas as well, which bodes well for the sector.
“After the IL&FS crisis, NBFCs had reduced dealing with automobile companies. Besides, transition from BS IV to BS VI led to concerns of increase in prices. This led to stock prices being punished at the bourses. However, investors now believe, that the prices have bottomed out and auto stocks could outperform the market from here on,” says Bodke.
According to analysts at JM Financial, 2W demand is coming from customers who intend to use bikes more for daily commute rather than for leisurely purposes.
Investment Strategy
Nishant Vyas, research analyst at ICICI Securities, says he prefers mass market 2W vis-à-vis PV/CV companies. He has ‘Buy’ rating on all the two-wheeler stocks.
“We expect weakness across 2W segments in FY21 but believe premium bikes are better placed in the long-term. Share of scooters should also rise further given the ease of use and potential to make inroads into rural,” says Mangal of Jefferies.
Adding: “We find valuations supportive for two-wheelers, except for TVS, especially given good balance sheets and cash flows. We prefer Eicher (BUY) for its strong franchise, long-term growth potential and a renewed focus on products. While we see long-term challenges for Hero (BUY), valuations are reasonable to play the next 2W upturn. We have HOLD on Bajaj but underperform on TVS,” he says.
"There could be some uptick in 2W and PV sales as preference shifts towards personal vehicles over public transport. Large 2W players with rural focus are likely to perform better and HeroMoto Corp is a clear leader in this segment. TVS being the smallest player and having a leveraged balance sheet will face the most pressure to compete with its larger peers with ample amounts of cash," says Naveen Kulkarni, Chief Investment Officer, Axis Securities.
