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Two-wheeler shares lose their spark

LiveMint logoLiveMint 13-04-2017 Vatsala Kamat

Two-wheeler firms are likely to report having encountered a rough ride when they announce financial results for the March quarter. First, the note ban continued to affect sales growth. The end of the quarter saw them get hit by the strict implementation of the new BS-IV emission norms.

The December quarter had already borne the brunt of the cash crunch, which saw two-wheeler sales decline by 9%. The usually strong March quarter brought no solace either. Domestic two-wheeler sales for leaders like Bajaj Auto Ltd and Hero MotoCorp Ltd dropped by 7-10% as customers deferred purchases. Dealers say that customers may be evaluating the plethora of new models as the dust on the new emission norms settles. Further, two-wheeler markets have a significant rural presence that may take time to recoup from the note ban-linked cash crunch. Exports could have been a saviour but dull market conditions in Latin America, Africa and Sri Lanka have been a dampener.

This was not all. Heavy discounts offered by manufacturers to clear unsold stock, since companies were not allowed to carry over BS-III stock to the current fiscal year, will also pull down revenue realized per vehicle. Besides, rising commodity prices—which are up by 20-25% from a year ago—along with weak sales would weigh down profit margins of two-wheeler firms. Analysts forecast that the March quarter operating margins could be 50-100 basis points lower than a year ago. A basis point is one-hundredth of a percentage point. Hero MotoCorp’s revenue and profitability will be affected as it had the highest inventory of BS-III vehicles. However, Bajaj Auto’s margins would take a beating on account of contraction in exports, which comprise a significant part of its revenue.

In comparison, passenger car sales recouped fast after the note ban. Moreover, sales were not affected by the new emission norms as most firms were already compliant. No wonder, two-wheeler stocks have underperformed the BSE Auto index and its auto peers since the note ban in November. Most brokerage firms have trimmed the earnings forecast for fiscal years 2018 and 2019 by about 6-8% for two-wheeler makers.

Can things get better? That answer depends on the monsoon. If the rains are bountiful, the subdued rural economy will get a boost and drive two-wheeler sales in the forthcoming quarters. If not, the pain is likely to continue.

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