Two wheelers may race ahead in 2024

The Nifty Auto index raced ahead in 2023, occupying the slot of the second best performer among sectoral indices, gaining nearly 48% vis à vis the 20% gain in the Nifty 50 index. Investors were excited about volume growth, launches and the resilient margin show put up by the original equipment manufacturers.

In particular, the two wheeler segment saw improving prospects, ending the year smoothly. While volumes lagged expectations, the segment continued to lead the automobile pack in December. Bajaj Auto Ltd and TVS Motor Co. Ltd’s two wheeler wholesale volume clocked about 15% and 27% year on year growth, respectively.

At the time of writing this, Hero MotoCorp Ltd was yet to report December volume but the general expectation is that it would do well led by higher demand seen in the northern regions, which are strong markets for the company. On the other hand, Eicher Motors Ltd’s Royal Enfield was a disappointment with volume falling by 7%, partly bogged down by weak exports.

With deliveries of the new Himalayan picking up pace, volumes could get a boost ahead. Going into 2024 or FY25, two wheelers may see better growth rates. Besides a gradual recovering demand environment, a favourable base also helps. Channel checks by Antique Stock Broking indicate signs of improvement in the entry segment two wheeler demand.

“Dealers are closely monitoring the entry level segment and expect the months of January and February to be important to gauge demand," said the Antique report. For passenger vehicles (PV), while volumes are likely to grow in 2024, the pace needs to be watched, however. Maruti Suzuki India Ltd’s management notes that the pent up demand seen after the pandemic is waning and the repo rate hikes would be passed on gradually.

Moreover, thanks to easing supply chain constraints, huge pending bookings have been met. Hyundai Motor India’s management expects PV industry to grow by a mere 3 4% in 2024. Here, companies with utility vehicles (UV) in their portfolio would continue to have the upper hand due to the ongoing premiumization trend.

For perspective, UVs formed 58% of the total PV sales in FY24 (till November) versus 51% last year. Mahindra & Mahindra Ltd (M&M) and Tata Motors Ltd have a strong footing in UVs. While Maruti is capitalizing on the trend through its launches such as Fronx and Jimny, it is troubled by the stress at the lower end of the market.

Remember the entry level segment forms the largest share of its total portfolio. In December, Maruti’s volume dropped by 1.3% year on year whereas Tata Motors and M&M saw 8% and 24% rise in PV volumes, respectively. Coming to electric vehicles, two wheelers faced a roadblock in 2023 due to cut in subsidy.

Hence, the share of electric two wheelers stood at 5% versus 4% in 2022. In PVs, the share of electric vehicles was close to 2% in 2023. Meanwhile, commercial vehicle volumes would see volatility in 2024 due to elections. Tractors were impacted in December owing to weak rural sentiments. But the government support is expected to aid volumes ahead.

On the margin front, for now, there is little to worry about. “Our proprietary commodity cost index was largely flat month on month in December," said a BNP Paribas Securities (India) report dated 2 January. Many original equipment manufacturers announced price hikes last month to offset the increase in commodity prices and do not expect any significant impact on margins, added the report.

A further rally in the Nifty Auto index in 2024 would be led by consistent volume growth, an upward margin trajectory and success of new models..