Why Are Two-Wheeler Stocks Underperforming?

Stocks of major two-wheeler companies such as Hero Motocorp and Bajaj Auto have underperformed over the last 12 months.

The only large company in the two-wheeler space to outperform the broader indices is TVS Auto. Hero Motocorp’s stock has declined by 18.7 per cent, while Bajaj Auto has given a meagre return of five per cent respectively, against the Sensex, which gave 29 per cent returns to investors during the same period.

The reasons for the decline range from rising commodity prices, to a consumer shift favouring electric vehicles over vehicles with internal combustion (IC) engines.

Bad Festive Season

Two-wheeler companies witnessed the weakest festive season in seven years, leaving them with huge amounts of unsold inventory. According to a report by the Federation of Automobile Dealers Association (FADA), the automobile sector saw the worst festive season in the last decade. While some niche categories did see high buyer interest, the lack of inventory, due to the semi-conductor crisis, led to lower sales.

However, the two-wheeler category, especially entry level two-wheelers, have been the “the biggest spoilsport” according to the FADA press release. In October, the sales of two-wheelers declined by 30 per cent over the pre-pandemic period.

Further, the sales saw a 6 per cent decline over the same period in October 2020. The month also witnessed customer margins fall to “ultra-lean” levels.

During the 42-days festive period, two-wheeler sales witnessed a decline of 18 per cent over 2020, and a decline of over 22 per cent over the same period.

The 42-day period begins on the first day of Navaratri, and extends to 15 days after Dhanteras.

Production Cuts

With high inventory pile-up due to a lacklustre festive season, two-wheeler companies are now mulling production cuts. According to FADA, the inventory for passenger vehicles would last for 10-15 days, but the inventory for two-wheelers would last almost 40-45 days.

With such high inventory levels, auto factories are likely to take production cuts of up to 35 per cent. According to reports, Hero Motocorp will be producing less than 10 lakh vehicles during the festive season for the first time in seven years.

Hero, the world’s largest two-wheeler manufacturer, is a leader in the entry-level motorcycle space, which has been the most adversely affected segment in the Covid aftermath.

According to the credit rating agency ICRA, domestic two-wheeler production is likely to decline by around one to four per cent during the current year.

Rising Commodity Prices

Rising commodity prices have forced two-wheeler companies to hike prices, with some companies hiking prices multiple times in the year.

In addition, the price of fuel has increased by a large margin in this year, further pushing down sales of internal combustion vehicles.

The government has introduced incentives for the adoption of electric vehicles, allowing these vehicles to sell at low prices compared to IC vehicles.

These incentives combined with lower running and maintenance costs could lead to a shift from conventional to electric two-wheelers.

Electric Vehicle Adoption

Despite the lacklustre performance of conventional two-wheelers, the EV two-wheeler space is booming.

The figures speak for themselves. In October 2021, the sales for Hero Electric Vehicles jumped up almost 20 times from 315 units sold in October 2020 to 6,366 units in October 2020.

Similarly, the sales of Okinawa rose almost 8 times from around 548 units in October 2020 to 4,082 units in October 2021.

Ather Energy, Pur Energy, and several other companies have shown similar multi-fold rises in sales over the previous year. These figures only indicate the sales for high-speed electric two-wheelers.

There isn’t any official retail data available for the low-speed two-wheeler segment. However, the ease of use, combined with low initial costs, is likely to have propelled a faster growth among those two-wheelers as well.

As mentioned earlier, two-wheeler EVs require a fraction of fuel expenses to travel over the same distances, further incentivising customers to opt for EVs.

EVs have also seen a strong adoption in the three-wheeler segment where the share of EVs in three wheelers has crossed the 45 per cent mark.

As the economy returns to normalcy, vehicle sales could see some recovery. However, the recent numbers make the demand for EVs quite clear.

So far, the incumbents have not taken up mass production of EVs. However, as investor interest, government incentives, and economic incentives line up, these companies have begun spinning off the EV business into separate units.

Given the nascent stage of the business, it is expected that these companies will raise external capital to venture into the business.