scorecardresearchDiwali Sales: Will the upcoming festive season be a gamechanger for 2-wheelers?
Will the upcoming festive season give the momentum back to the 2-wheelers or will they continue to remain subdued? Let's see what analysts have to say.

Diwali Sales: Will the upcoming festive season be a gamechanger for 2-wheelers?

Updated: 05 Oct 2022, 08:36 AM IST
TL;DR.
The Nifty Auto index has fallen 4.5 percent in September so far as against a 4 percent fall in Nifty. However, in the last 5 months, between April and August, the auto index surged 25 percent on the back of some recovery in demand as well as improving chip availability. The index is up 15 percent in 2022 YTD and 21 percent in the last 1 year.

After 5 months of continuous positive returns, the auto index has not fared well in September on the back of market volatility, a massive decline in the rupee, concerns that the Fed rate hikes can cause economies to grow at a slower pace as well as raw material and crude oil inflation.

The Nifty Auto index has fallen 4.5 percent in September so far as against a 4 percent fall in Nifty. However, in the last 5 months, between April and August, the auto index surged 25 percent on the back of some recovery in demand as well as improving chip availability. The index is up 15 percent in 2022 YTD and 21 percent in the last 1 year.

In comparison, the Nifty is down around 2 percent YTD and over 4.5 percent in the last 1 year.

Nifty Auto
Nifty Auto

The August auto sales also numbers saw a decent rise and a build-up in inventory ahead of the upcoming festive season. Passenger vehicles (PVs), commercial vehicle (CV) segment, and two-wheelers (2Ws) segment saw a rise in volume on a year-on-year (YoY) basis.

Motilal Oswal Financial Services pointed out that the volume of the 2-Wheelers segment rose 8 percent YoY in August. It said the domestic wholesales for original equipment manufacturers (OEMs) were above its estimate, indicating a build-up in inventory ahead of the upcoming festive season, while exports were under stress.

However, it also noted that while easing semiconductor supplies boosted PV retails, and increasing economic activity and higher capacity utilization propelled CVs, the 2W segment is yet to recover amid a high cost of ownership.

On a YTD basis, most auto stocks gave positive returns with TVS Motors jumping the most, up 61 percent. Other 2-wheeler stocks Eicher Motors, Bajaj Auto and Hero Moto were also in the green, up 35 percent, 11 percent and 9.5 percent, respectively. However, in the last 1 month, only TVS was positive, up 6 percent while Bajaj and Hero lost 10 percent and 5 percent, respectively.

Will the upcoming festive season give the momentum back to the 2-wheelers or will they continue to remain subdued? Let's see what analysts have to say:

According to Nishit Master, Portfolio Manager, Axis Securities, there are chances of a decent near-term demand from the festive season, especially if the remaining part of the agriculture season pans out well.

"With the festival season being earlier this year, compared to last year, we believe optically the demand for two-wheelers will be strong in Q2 if compared with last year. On the production side, too, with semiconductor availability improving, we believe the numbers will be far better this year in Q2 versus last year," said Master.

If we compare the full year festive season, including Q2 and Q3, our initial channel checks suggest that the start of the festive season is not very encouraging, he cautioned, adding that it's important to monitor the situation, especially before and during Diwali.

Basant Maheshwari, smallcase manager and Co-founder, Basant Maheshwari Wealth Advisers LLP is also extremely bullish on the 2-wheeler outlook for the festive season.

"In India, the festive season always brings along hope for better prospects. The same is the case with the two-wheelers industry in India. Generally, the festive season demand is pretty upbeat for two-wheeler manufacturers and hopefully, 2-wheeler companies will be able to capitalize on the same," said Maheshwari.

He noted that Hero Motocorp is all set to launch its electric 2W in this festive season, however, this can’t be mistaken for a secular trend. This seasonality is not a leading indicator of the long-term performance of the industry, he said.

The industry has to witness sustained structural demand coming back, substantially from domestic markets (especially rural markets where most of the 2W companies derive more than 40 percent of their total domestic sales) to witness an increase in their numbers and at least try to beat their volumes pre-pandemic before any constructive view can be formed, added the market expert.

Meanwhile, Saji John, Research Analyst at Geojit Financial Services believes that the 2-wheeler market is yet to recover from its underperformance over 2019 levels.

"While the 2-wheeler retail market expanded by 8.5 percent YoY in August, it has yet to recover from its underperformance over 2019 levels. Due to regulatory changes and elevated material prices, the sector has raised prices at regular intervals. This, combined with poor crop realization caused by erratic monsoon has pushed most entry-level buyers out of reach," said John.

Outlook

Pranjal Kamra - CEO of Finology Ventures, noted that almost all industrial metrics, along with consumer demand, have gained momentum in recent months. Subsequent to the covid-led prolonged drawdown, auto sales, too, have picked up since April, he pointed out.

"Two-wheelers, for instance, have witnessed around 250 percent YoY sales growth in May 2022. Most of this growth is basically an offshoot of the gradual reopening of schools and offices. In short, this year is expected to be better than the last three years for the automobile industry with an anticipated bumper festive season," pointed Kamra.

John of Geojit expects the near-term growth trend to continue as the industry anticipates a resurgence in 2w wheeler sales in the second half of the year, thanks to the festive season, a good monsoon, increased farm activity and ramp up in EV share. He is bullish on select stocks which are fundamentally sound and provide a diverse product portfolio to meet consumer preferences.

"We have a positive outlook on TVS and Eicher motors," he said.

Meanwhile, Nishit Master of Axis Securities said, "from a near-term perspective, we believe that there could be some investor interest in the two-wheeler space due to triggers of the festive season and improvement in the supply situation, but from a long-term perspective, we would avoid this space as we believe that there is a high chance of market share loss for the existing players with the advent of newer players focussing on two-wheeler EVs."

He advises long-term investors to stay away from the space. For traders, he believes they can play near-term triggers of earlier festive demand through either Eicher Motors or Hero Moto.

Punit Patni, Equity Research Analyst, Swastika Investmart has a cautiously optimistic view of the automobile sector due to the recent gains in the stock prices.

"The export market is expected to remain subdued due to the global economic slowdown; nonetheless, the order backlog and upcoming new launches will help sustain domestic demand. Further, the upcoming festive season demand and management commentary remain positive," he added.

Patni believes due to demographical strength and very low per capita vehicle ownership in India, the sector will perform well in the long term. He is positive about Tata Motors, Ashok Leyland, Mahindra and Mahindra, and Hero MotoCorp.

These are some of the tips given by ace investor Benjamin Graham.  
These are some of the tips given by ace investor Benjamin Graham.  
First Published: 05 Oct 2022, 08:36 AM IST