CLSA says 2-wheeler recovery momentum slowing, downgrades Hero Motocorp, Bajaj Auto; maintains outperform on TVS Motor

Brokerage house CLSA expects the two-wheelers (2W) recovery to underperform other automotive segments. CLSA highlights that the recent data points on 2W as well as our channel checks suggest weakening momentum (especially in entry motorcycles). While FY22 volume growth (CLSA: 16%) will look strong optically, we would highlight that it comes on the back of a 29% cumulative decline over FY19-2021.

CLSA does not expect 2Ws to reach their FY19 peak even by FY23 (unlike PVs). The rapid rise in commodity prices will also pressure 2W OEMs to choose between customer affordability (volume) and margins.

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CLSA downgrade ratings on Hero Motocorp and Bajaj Auto from Outperform to Underperform but upgrade Eicher from SELL to Underperform to account for recent stock performance. CLSA maintains Outperform rating on TVS Motors as it continues to improve its market share and grow its exports.

CLSA cut their FY22/23 industry volume forecasts by 1%-3% primarily led by a 4% cut in our motorcycle volume forecasts. Channel checks indicate that pent-up demand is largely behind us. In addition, demand from segments such as high school and college students as well as urban semi-skilled professionals (retail, hospitality and small traders) continue to be pushed forward. Rural demand should perform relatively better than urban but we need to watch trends during the April and May wedding season.

CLSA says that 2W affordability has been adversely impacted over the past three years due to regulatory changes (insurance, safety and emissions). OEMs may have to soon start prioritising between volume and profitability if the demand environment remains soft.

CLSA downgrades Hero Motocorp rating to Underperform and cuts target price to Rs 3040 from Rs 3610. Hero Motocorp’s wholesale and retail market share gains have begun to taper as the entry/executive motorcycle segments have started to underperform other categories.

CLSA downgraded Bajaj Auto rating to Underperform and cut our target price to Rs 3750 from Rs 3915. While exports are doing relatively better for Bajaj Auto, it will likely face headwinds in domestic 2Ws and 3Ws.

CLSA upgrades Eicher Motors rating to Underperform with an unchanged target price of Rs 2450. Eicher’s wholesale and retail market share have begun to improve as premium segments have started to outperform.

CLSA maintains Outperform recommendation on TVS Motor with an unchanged target price of Rs 600. TVS Motor has been consistently gaining market share in the domestic market and is performing better in exports.