Why Royal Enfield is a step ahead

Thus, companies catering to mid- and higher end of the two-wheeler industry are relatively better placed.

Eicher Motors Ltd, whose flagship brand is Royal Enfield (RE), is a case in point. Its market share in the above-125cc segment is on the rise and stood at 31% in the nine months ended December, according to data sourced from Jefferies India. In January, RE’s wholesale volumes rose by 27% year-on-year (y-o-y) while that of Hero MotoCorp Ltd fell by 6%, demonstrating the premiumization trend. Hero primarily operates in the entry level segment, where the demand is still weak. Its market share in the above-125cc segment in the nine months ended December was at 3%.

View Full Image

Despite the ongoing two-wheeler industry downturn, Jefferies’ analysts believe Eicher Motors is on track to deliver the highest RE volumes, RE Ebitda (earnings before interest, tax, depreciation and amortization) per vehicle and consolidated earnings per share in FY23. Besides premiumization, another trend among two-wheelers is the impact on margins due to electric vehicles (EVs).

For instance, Hero faced margin compression of about 70 basis points in December quarter (Q3FY23) due to launch of its EV, Vida. One basis point is 0.01%. But RE is shielded here as it has no immediate EV launches and it is also the least vulnerable to a potential EV disruption.

But these factors could not make Eicher Motors stock the top gainer among two-wheeler companies in the last one year. Shares of TVS Motor Co. Ltd top the list with the stock rising by as much as 70%, while shares of Eicher Motors are up by almost 22%.

Consistent margin performance at a time when costs were elevated was one reason that kept the sentiments of investors in TVS upbeat. On the other hand, pressure on RE’s margin is a worry. This comes on the back of rising share of Hunter 350, launched in August, as the product is priced lower than its other vehicles. Further, RE monthly volumes have moderated in recent months. Accordingly, Q3 Ebitda margin dipped to 23.9% from Q1 levels of 24.3%. Also, a lower share of exports meant a weaker mix.

In fact, subdued export markets are a challenge for its peers as well, though they cater to different geographies such as African countries. This would remain a significant headwind in the coming months. Bajaj Auto Ltd’s earnings would be the most impacted given its large share from exports, which is a high margin business.

Overall, softening commodity costs can provide some cushion but investors would do well to keep an eye on price of key raw materials like copper and aluminium.

Meanwhile, shares of these two-wheeler companies are down by 4-15% from their respective 52-week highs. So, sustained volume ramp-up is crucial for meaningful upsides in two-wheeler stocks. “We see a stronger rebound in urban and replacement demand, driving 23% volume CAGR for premium (125cc+) bikes over FY23-25E (FY23E: 30%),” said analysts at Jefferies India in a report on 14 February.

To be sure, a pick-up in rural economy is necessary, which may come from the recent budget announcements and a good crop season. Improving rural economy would also be an important volume driver for RE as the management is looking forward to exploring that market through Hunter.