After languishing since FY19, two-wheelers grow faster than passenger cars in FY24-25

• The future looks bright for India’s two-wheeler manufacturers, who are now expected to surpass their peers in the passenger car segment over the next two years.
• The two-wheeler segment is expected to benefit from an impending replacement cycle and a shift in consumer purchases towards electric vehicles and premium scooters and bicycles.
• Overall, the outlook for the Indian auto sector is positive across all segments, with Jefferies expecting volume growth of 11% to 18% in FY24 and FY25.

The future looks brighter for India’s two-wheeler manufacturers, which have seen a drop in volume of nearly 35% between FY19-22. Going forward, however, Jefferies expects the two-wheeler segment to outpace the sales growth of the passenger car segment in FY24-25.

The replacement cycle, which was slowed by the pandemic, will enter the current and next fiscal year, Jefferies analysts believe.

Overall, the outlook for the Indian auto sector is positive across all segments, with Jefferies expecting volume growth of 11% to 18% in FY24 and FY25.

“We remain positive on Indian autos as the industry is experiencing a strong earnings cycle. Strong sales growth and better margins should lead to double-digit earnings per share compound annual growth rate (CAGR) for most companies,” said Jefferies.

Despite a challenging global environment in FY23, Indian auto companies made the most of their first trouble-free year after the Covid-19 pandemic. Domestic sales increased 21% year over year in the 11 months of FY23 compared to the same period in FY22.

Industry agency Association of Car Dealers (FADA) stressed that FY24 will be a year of consolidation, with growth expected to be in the low single digits due to factors such as price increases and inflation impacting entry-level sales.

Two-wheelers are undergoing premiumization

Heading into FY24, Jefferies analysts note that factors such as low base and replacement demand will drive volume growth in the two-wheeler segment. It’s not just volumes that are expected to pick up – other factors, such as the shift in consumer preference towards more luxury vehicles and declining commodity prices, are also expected to boost auto companies’ margins going forward.

“We expect margin expansion of 1% to 4% before interest, taxes, depreciation and amortization (EBITDA) for most of our covered auto OEMs in FY23-25E, led by better pricing power amid good demand and operational leverage,” Jefferies said.

While passenger cars also saw premiumization in FY23, as evidenced by the continued growth in demand for the more expensive Sports Utility Vehicles (SUVs) over entry-level options, analysts suggest a similar trend of premium two-wheelers is also emerging.

According to Jefferies, while the share of sub-125cc two-wheelers will fall from 52% in FY22 to 45% in FY26, the share of premium scooters and bicycles is expected to rise from 44% to 53% over this period, with electric vehicles also helping at this shift.

TVS Motor, Tata Motors top picks as EVs go faster

While the outlook for the Indian auto sector remains healthy for the next two years, Jefferies analysts have chosen TVS Motor and Tata engines as their favourites, aside from auto parts manufacturer Sona BLW.

The common factor between these three companies is that they respond to the demand for electric vehicles. In the listed area, TVS Motor is the market leader in electric two-wheelers, while Tata Motors has an 80% market share in electric passenger cars.

“TVS should be a major beneficiary of the potential recovery in demand for two-wheelers in both India and export markets. It has also risen to second position in electric two-wheelers with an EV market share approaching that of internal combustion engine (ICE) scooters,” the brokerage said.

Tata’s early shift to electric vehicles reflects its dominance in this space (electric passenger cars), as well as in its own portfolio – electric vehicles now account for nearly 15% of tata Portfolio Motors. Its UK subsidiary, JLR, also has a strong order book and its focus on selling higher margin SUVs should also help to boost Tata Motors’ overall margins.

Overall, despite concerns about a global economic slowdown, Indian auto companies expect healthy growth over the next two years on the back of robust domestic demand and an expected recovery in global markets.

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