Autos (Two Wheelers) - A changed landscape - Sector Thematic - HDFC Securities

The two-wheeler landscape has changed particularly for the global premium lifestyle biking category, which is witnessing multiple structural/cyclical headwinds. While near term demand will be impacted due to the COVID situation, longer term demand for cruiser bikes is stagnating due to changing consumer habits, which is prompting Harley Davidson to diversify beyond its traditional segment. We believe these factors will impact Eicher Motors' (REDUCE) export initiatives. Further, Royal Enfield's (RE) strategy of driving sales from Tier III/IV towns in India will be delayed at a time when demand in key southern states will be impacted due to falling remittances from overseas. In the mass market segment, we prefer Hero (BUY) due to the OEMs dominant market leadership in the entry/executive (Hero has 52% market share in the domestic motorbike segment). However, Bajaj (ADD) will be impacted by a weakening outlook for the high growth export markets, which account for almost half of its volumes.

Global Premium Biking category to witness multiple headwinds; to impact Royal Enfield: As demand for premium bikes in mature markets, particularly the US has been falling, the world's foremost cruiser bike manufacturer - Harley Davidson is diversifying its product range to ADVs (Pan America 1250), Street fighters (Bronx) as well as to smaller powered sub 500cc bikes (HD 350). Exports is an emerging growth driver for Royal Enfield, with the contribution expected to rise to 10-20% of sales (from 6% currently). However, with changing consumer habits, rising competition in the global mid-size segment as well as a downturn in developed markets, export initiatives will be impacted, in our view.

Domestic premium segment sales to be impacted: We expect demand for luxury bikes (300cc+) to be affected as RE's traditional markets in southern India will be impacted by an expected decline in remittances from overseas. Further, the OEMs strategy to attract new customers from Tier III/IV centers will be delayed as customers postpone their decision to upgrade to higher powered bikes. Sales from these new format stores was expected to account for 6-7% of incremental volumes.

Mass Segment -we prefer Hero Moto: We expect Hero Motocorp to benefit from its domestic centric model (over 90% of its sales). We expect the share of entry segment bikes (currently at ~30% of the market) to rise further due to BSVI related price hikes as well as higher mix of rural sales, which will benefit Hero. While Bajaj has a diversified domestic portfolio, exports (~47% of volumes) will face headwinds. A significant portion of Bajaj's shipments are to frontier markets such as Africa, which are resource driven economies. Due to the correction in crude oil prices and the COVID impact, countries such as Nigeria are facing rising deficits. We expect exports to decline 10% in FY21E after growing at 16% CAGR over FY17-20.

COVID - expect gradual scale up of operations: OEMs have commenced limited operations in single shifts as they face restricted availability of labor as well as components. Dealers in large cities remain impacted by the red zone classification, while those in the semi urban markets are gradually opening up.

Source : Equity Bulls

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