India’s auto sales to ride on two wheels in 2024

• Two wheeler sales are expected to grow at 15% for next two years, outpacing PVs.
• Sales of 2Ws have been lagging behind PV sales for the last three years.
• Margins of 2W companies are also expected to improve due to moderating metal prices, strong demand.
  

Two wheeler sales are expected to see double digit growth for the next two years, outpacing passenger vehicles, says a report by Jefferies. Two wheelers are expected to grow at a 15% compounded annual growth rate (CAGR) while passenger vehicles and trucks are expected to grow at 7-8% CAGR.

The research firm also believes that tractors are at the risk of a downturn after an elongated up-cycle. Their volumes are expected to fall by 9% FY24 and 5% in FY25, followed by a recovery in FY26. Amidst a mixed auto picture, two-wheelers are the preferred picks.

“We enter 2024 reiterating our positive view on Indian autos with preference for two-wheelers. After the strong 2023 rally in autos, valuations are not cheap, but we believe premium multiples are justified in most cases for the strong growth outlook and company-specific positives,” said Jefferies.

Its preferred buys are TVS and Eimco Elecon, followed by Tata Motors, Bajaj Auto and Hero Motocorp. It also has buy ratings on Maruti and AL, but they’re lower in its pecking order.

Turning tide: Sales & profitability

Jefferies believes that the tide has now turned for two wheelers after stressful pandemic years. The sales of two wheelers have been lagging behind passenger vehicles (PVs) for the last three years.

“Compared to the respective FY19 peaks, FY23 volumes were 23% lower for 2Ws but 15% higher for PVs,” said Jefferies. In 2023, 2Ws started charting their recovery, and grew at 9.5% as compared to 11% growth seen in PVs, as per data by Federation of Automobile Dealers Associations (FADA).

Experts also surmise that the year of 2024 will see a boost for two wheelers. “The two wheeler sector expects a boost from new model launches, especially in the first half of the year, and an overall better economic condition coupled with higher EV participation. Improved customer sentiments, due to factors like lower fuel prices and crop payments to farmers, are likely to drive demand,” said Manish Raj Singhania, president of FADA in 2024 outlook.

Improved margins; EV consolidation

Strong demand and new launches are also expected to yield good margins for two-wheeler automakers. They have been stressed between FY21 and FY23 on weak demand as well as a rally in steel and aluminum prices. Commodity prices have turned benign since then which is expected to add to two-wheeler profitability along with sales.

“Auto OEM margins are on an improving trajectory as rising demand is boosting pricing power and providing operating leverage benefit, amid a benign commodity price environment,” said Jefferies.

Electric vehicle sales are also expected to push for more sales in the two-wheeler category in the coming year. As of the second half of 2023, EVs made up for 5% of the market.

“While the reduction in EV subsidies in June 2023 has slowed down the pace of 2W electrification, tighter regulations and lower subsidies are driving consolidation,” opined Jefferies.

Top four original equipment manufacturers hold around 80% market share in electric two-wheelers. In the ICE market, the top four players hold 86% of the market share.

Two wheeler HHI (Herfindahl–Hirschman Index) is also converging with ICE, which should ease concerns on long-term profitability, says Jefferies. HHI is a measure of market concentration used to determine competitiveness in the market.