IGI Logo

2W OEM 2QFY22 result review and outlook

Two wheeler OEMs’ 2Q revenue and EBITDA were above estimates. Beat in revenue (HMCL and EIM) was driven by higher contribution from spares/accessories, while beat in margin was driven by better cost management. Domestic demand is gaining traction as farm output reaches ‘mandis’ and marriage-related demand picks momentum. As per Steelmint, steel contracts with OEMs have been settled at INR 4k/t higher during 2H. Our analysis suggests that this increase is likely to have 50-100bps adverse impact on gross margin. We believe that the price hike in 3Q is sufficient to offset 2H commodity cost inflation and any price hike taken during 4Q is likely to offset under recoveries from inflation in the past 3 quarters. Traditional 2W OEMs have showcased their intent to swiftly expand in e-2W market. While TVS remains are our preferred pick in 2W segemnt, we add HMCL as well driven by a) positive outlook for 2W demand, b) strengthening market share in premium segment (4% to 6%), c) improving exports (300k units vs. 200k units earlier), d) planned e-2W launch and e) relatively cheap valuation (11x Sep’23 PE vs. 14x for BJAUT.

* Revenue supported by strong exports and ancillary revenue: Revenue was 7%/5% above estimates for HMCL/EIM driven by higher contribution from spares/ accessories, while BJAUT/TVSL revenue was in-line. BJAUT (+20% YoY) and TVSL (+22% YoY) reported near record level revenues driven by robust exports and increasing realization. HMCL (-10% YoY) revenue was impacted by weak domestic volume and EIM revenue was impacted due to to supply chain constraints.

* Some under recovery still remains on commodity front: Margin for all 2W OEMs (except TVSL) remained lower than normal levels owing to commodity inflation. TVSL margin was back to near double-digit while BJAUT margin was in-line with estimates. Other OEM margins came-in c.50bps higher than estimates as OEMs could offset margin pressure through a mix of price hikes, cost cutting initiatives and higher ancillary sales (spares, accessories).

* Improving demand momentum: HMCL highlighted that after a weak start to festive season initially, domestic demand gained traction in the second half. Positive momentum is expected to extend with improving sentiment in rural as farm output reaches ‘mandis’. Onset of wedding season (from mid-Nov) is also likely to support demand. We believe that though impact of significant price hikes in 2W may limit the growth in near term, improving rural and marriage season demand may aid normalization of channel inventory. In the premium segment, EIM highlighted that chip supply is improving since Oct’21. BJAUT/TVSL highlighted that export demand remains robust.

* Rising commodity inflation continue to impact gross margin: As per Steelmint, steel contracts have been set at c.INR 4k/t higher (vs. 2QFY22) for 2HFY22. As per our analysis, assuming no price hike, the commodity inflation is likely to impact gross margin by 100bps for HMCL/BJAUT and 50bps for TVSL/EIM in 2H. HMCL and TVSL have taken c.2%/1% price hike in Oct’22, while BJAUT and EIM are expected to also take hikes in 3Q. We believe that the price hike in 3Q is sufficient to offset 2H commodity cost inflation and any price hike taken during 4Q is likely to offset under recoveries from inflation in past 3 quarters.

* Traditional 2W OEMs are gearing up for electrification: TVS iQube is available in 33 cities and the company plans to expand pan- India by FY22 end with production capacity of 10k units/month. BJAUT is also present in 8 cities and plans to expand to 30 cities by Mar’22. HMCL is expected to launch its first in-house EV product by Mar’22. HMCL expects EV penetration to remain restricted to the scooter segment initially as MC needs power and more mileage leading to higher battery size and cost. Current enquiries in EV are from scooter customers. The company also highlighted that share of scooter has increased in 2Q vs 1Q indicating that customers are not deferring ICE engine purchases.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer