Two wheeler stocks: In the fast lane without a helmet?

Two Wheelers

Two-wheeler (2W) stocks have had a dream run in 2020 so far. From the March lows through mid-October, Hero Motocorp—the market leader in India’s 2W industry—gained a massive 130% and surpassed its pre-COVID levels by a noticeable margin. Other companies such as Bajaj Auto, Eicher Motors and TVS Motors haven’t been far behind.  

Are the sands shifting now? Looks like!

 If you look at their daily charts closely, you would notice, not only are they struggling to take trend-line support but also to hold on to crucial moving averages. Volume, Stochastics and RSI indicators aren’t encouraging either.

Hero Motocorp

DMA: Day Moving Average
Data as October 28, 2020

Bajaj Auto

DMA: Day Moving Average
Data as October 28, 2020

Eicher Motors

DMA: Day Moving Average
Data as October 28, 2020

TVS Motors

DMA: Day Moving Average
Data as October 28, 2020

This makes us believe that, investors shouldn’t get swayed by the performance of companies in Q2FY21. Numbers don’t offer much cues about coming quarters.

Report card

Source: Company records

Let’s dwell deeper to understand what drove 2W stocks until now and what savvy investors are reading into their future (as reflected in the charts) that their Q2FY21 results may not bring out clearly.

Following were some of the primary drivers of the rally in 2W stocks

  • Post BS-VI implementation in April 2020 there wasn’t any major regulatory overhang
  • Pent-up demand was expected to drive sales during the unlock period
  • Resilience in the rural economy
  • Industry experts expected more people to prefer private vehicles over the public transport due to the on-going pandemic
  • Lower borrowing rates heightened expectations of bumper sales during the festive season

The situation on ground…

In anticipation of a sustained uptick in demand, companies ramped up their production during the unlock period. Inventories with dealers piled up quickly. However, the trend in production, RTO registrations and the inventory with dealers doesn’t paint a rosy picture. Against the 2W registrations of 10.31 lakhs in September, companies stuffed 18.3 lakh units with their dealers. One could argue that this was an inventory built-up for the festive session. Well, this theory doesn’t hold much ground.

Pent-up demand; indeed?

Reflects monthly data for the past 1 year
(Source: Vahan.nic.in, FADA, Ventura Research)

According to RTO database, 10.31 lakh 2Ws were registered in September. Against that, the first 28 days of October have seen only 8.71 lakh registration. At this rate, October is unlikely to be a better month than September.

A message of Mr Vinkesh Gulati, President – FADA (Federation of Automobile Dealers Association) to auto dealers in September 2020 was quite telling. “While we hope for a good festive season this time around, I will like to put a word of caution here. With the current inventory full to the brim, please avoid building any further inventory as this may lead to a disastrous situation similar to the last 2 festive seasons when sales were well below our expectations.”

On this backdrop, if you see the stock-market performance of 2W companies, investors now seem more worried about follow-through demand post festive season—and rightly so. And thus, more than this quarter’s numbers, primary (company sales to dealers) and secondary 2W volumes (dealer sales to consumers) for the next few months would be crucial.

BS-VI compliant vehicles are 10%-15% costlier than BS-IV compliant 2Ws.  They might have been well-received by the markets but simultaneously trends in the used 2W market should be tracked closely.  Work from Home (WFH) models affected the scooter market in urban areas—close to 70% of demand comes from the top 20 cities. Will it revive with more pronounced economic activity in metros now?

Well, with last mile sales cooling in India, the export market and premiumization could become important themes in future.

Bajaj Auto, which has the highest export revenue amongst Indian 2W makers, could be better off, albeit marginally. In the Q2FY21 earnings call, it has indicated that it aims to protect margins and make supply chains more nimble. For Bajaj Auto, export markets have witnessed a sharper recovery as compared to the domestic markets in the quarter gone by.

To reduce dependency on the mass market, 2W companies have been trying to grow their presence in the premium segments.

Bajaj has been expecting to repeat the story of KTM in Husqvarna as well. Last year, Bajaj Auto entered a JV with Triumph Motorcycles, which is set to launch its first sub Rs 2-lakh-200cc bike in 2022. Clearly, the company has been growing its presence in the lifestyle segment—a territory so far dominated by Eicher Motors.  

To add to the story, recently, Hero Motocorp inked an agreement with one of the world’s most stylish motorcycle brands, Harley Davidson, to manufacture and distribute its products in India.

Earlier, Harley Davidson had decided to discontinue its India operations after doing business for 11 years. It had struggled to appeal to Indian buyers; this is clearly visible from a 48% drop in sales volumes between FY16 and FY20. It barely sold 2,470 bikes in FY20. In value terms, the revenue of the brand could be ~5%-7% of Hero’s FY20 revenues.

Going by this, it seems Hero MotorCorp, which will primarily earn distribution remuneration, doesn’t have many incentives from the deal upfront. Nonetheless, synergies of both companies might later provide a product to compete with Bajaj and Eicher in the premium segment.

The Two-Wheeler segment dominates India’s automobile market and accounts for 81% of auto sales volumes in India. It appears that 2W makers might have already plucked the low-hanging fruit of pent-up demand and are set to travel uphill.

In a nutshell…

The uncertainty pertaining to the outcome of the US presidential elections and the second wave of COVID infections in Europe have been making global markets jittery. Under such conditions, stocks that have run up a lot need to be monitored carefully, especially if the valuations are rich and outlook is uncertain. Registration data and inventory numbers of two-wheelers are real. It’s time to avoid taking positive management commentaries and solid Q2 numbers at face value.

The intelligent investor is a realist who sells to optimists and buys from pessimists—Benjamin Graham

Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.

You may also like to read: Q2FY21 earnings update: Building blocks of cement stocks

 

Disclaimer

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

 

 

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