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Impending rural revival, new launches to aid recovery

Slowdown in the entry-level two-wheeler (2W) segment, lack of new product initiatives, and aggressive competition, especially in the 125cc segment has impacted HMCL’s 2W market share by 350bps over FY19-23. However, the company is making concerted efforts to change that. Recent product initiatives (Xtec variants & Xoom) and HMCL’s commentary on new product interventions indicate multiple new model launches going ahead. Rise in average 2W fleet age and gradual improvement in rural consumption are also expected to aid 2W demand. Reduction in FAME subsidy is expected to make EVs dearer, thereby temporarily slowing E2W penetration in the near term, possibly benefiting ICE 2W demand. HMCL’s EBITDA margin recovered strongly during 4QFY23, led by positive operating leverage and softening commodity prices. We expect this recovery momentum to sustain. Below-normal inventory level (15-20 days), new product launches, and softening commodity prices provide comfort. We reiterate BUY with a Mar’24 TP of INR 3,200 (15x FY25e EPS). Recovery in rural demand will be a key monitorable.

* New product launches are expected to rise: During the last 3-4 years, HMCL’s product initiatives have been one-off events (Exhibit 5). We believe this will change during FY24 and FY25, as the company plans to make concerted efforts to revamp its entire product portfolio and address key voids. This includes product actions in the 125cc segment, premium motorcycles, scooters and EVs (Exhibit 6). Customer response to new product interventions such as Xtec variants, Zoom. etc., has been encouraging (Exhibits 4, 7 & 8). Basis our analysis, one or two key brands generally dominate large share of two-wheeler (2W) OEMs’ sales, barring in a few cases (Exhibit 1). Each successful new product model can help garner both volume and market share in the industry (Exhibit 9). We, therefore, believe that just one or two product successes among its new launches can help HMCL drive its premium portfolio.

* 2W replacement demand overdue; expect recovery in 2H: 2W industry volume in FY23 was still 25% below its peak (FY19). This has been primarily led by the slowdown in the entry level motorcycle segment, which is still 38% below its FY19 peak (Exhibit 10); rise in initial acquisition cost and higher fuel prices have impacted demand in the segment. Age of the 2W fleet has risen from c.55 months on average to over 65 months (Exhibit 11). However, with softening inflation and gradual rise in real rural wages, rural consumption is gradually picking up (Exhibits 14 & 15). Also, being a pre-election year, government spends on rural development and infra is expected to drive demand recovery in 2HFY24. Given HMCL’s significant dependence on the rural segment, we expect the company to benefit from the impending recovery in rural consumption.

* EVs - not far from peers; change in FAME subsidy reduces TCO benefit over ICE: Initial traction for the recently launched Vida V1 has been positive. Post the recent price cuts, Vida is priced competitively (Exhibit 18). Like its peers, HMCL also plans to expand Vida’s footprint to over 100 cities, and it is expected to launch an affordable E2W in FY24. The recent notification on reduction in FAME subsidy for 2Ws reduces the total cost of ownership (TCO) benefit of an EV vis-à-vis an ICE scooter (Exhibits 19 & 20). This change could also benefit ICE 2Ws in the near term.

* Margin recovery to continue: Our report on analysis of deflationary cycles indicated that HMCL’s EBITDA margin performance has been relatively better whenever steel prices have corrected, during the past two cycles (Exhibit 21). While steel prices have declined from the peak of INR c.75k/tn to INR c.55k/tn, they are still significantly above the pre-Covid level. Despite this, HMCL’s operating profit per vehicle was the highest ever during 4QFY23 (Exhibit 22). Positive operating leverage and softening commodity prices are expected to drive margin recovery, going ahead.

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