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Underlying metrics for PVs are deteriorating (flattening retail growth, rising inventory and discounts, falling orderbook); outlook is muted. Electrification worries are emerging in PVs, while abating in 2Ws.

Conversely, 2Ws offer multi-year growth visibility amid entry-level revival and replacement-driven upturn (~9% production CAGR).

 All-round positivity prompts 2W upgrades, aided by lack of alternatives in PVs, CVs. Top picks: TVSL, HMCL. We also like the tyre space.

Underlying 4W metrics deteriorating; challenges ahead

The already slowing momentum in PVs has decelerated further post-festive, despite high discounts (YTD retail industry volume growth of ~4%, flat in Dec-23); underlying health metrics continue to deteriorate (industry inventory levels at 8 weeks, as per FADA; orderbook declining, discounts rising). Unlike the commuter 2W revival, the entry-level car segment still remains a laggard. Recent industry commentary points to subdued medium-term prospects (refer to link), exacerbated by a high base and new-launch cycle now having largely panned out (next prominent launches now likely in BEVs from lateCY24). We build-in ~5% industry CAGR over FY24E-26E vs. 20% in FY21-23.

2Ws – Multi-year growth visibility; cyclical recovery + penetration headroom

2W volume recovery is sustaining post-festive (~28% YoY retail industry growth in Dec23; ~9% YTD) as well as broadening (HMCL retails up ~13% YoY during Sep-Dec vs. ~3% over Apr-Aug; indicative of revival in the entry level segment as well). With industry inventory levels as of Dec-23 at a 6-year low (as per FADA) and domestic wholesales still ~9% below the FY19 peak (after ~16% growth in FY24E), we believe 2Ws offer a clear 2-3-year growth runway led by pent-up demand (average fleet age still at multi-year highs; significant 2W household-penetration headroom still exists; upcoming general elections augur well for sentiments - reaffirmed in our recent Expert Call: 2W revival continues; PV outlook muted). We expect ~9% 2W production CAGR in FY24E-26E (~1.6% CAGR over FY19-26E).

Electrification worries abating in 2Ws, but emerging in PVs

E-2W adoption is stagnating at ~5% levels post the FAME-II subsidy reduction (despite increase in discounts recently), with consolidation in favor of larger/established players accelerating (over 80% share now). However, in PVs, competition on the electric front is set to intensify as, apart from launches by domestic majors, international players are also potentially looking to set up facilities (e.g., Tesla, VinFast); we believe the PV industry is entering a phase of uncertainty around growth as well as disruption.

All-round improvements prompt upgrades in 2Ws; we also like the tyre space

In 2Ws, strong growth prospects along with portfolio premiumization efforts and margin triggers (soft commodities, cost actions) drive ~14% EPS CAGR over FY24E-26E for our coverage; we upgrade TVSL (BUY, ~16% upside) and HMCL (BUY, ~16% upside), maintain ADD on EIM (~12% upside), and REDUCE on BJAUT (~4% downside). In 4Ws, we maintain ADD on MSIL (~7% upside; potential small-car recovery, industry-first BEV launch and possible tax rationalization on hybrid cars not yet built-in) and TTMT (~11% upside), and upgrade M&M to ADD (~7% upside; reasonable valuations at ~17x core EPS amid potential recovery in tractors post 3 flattish years). We also maintain REDUCE on AL (with CV upcycle largely behind in our view, but valuations at 1SD above LTA). We are positive on tyres, driven by sustenance of current high profitability and continued deleveraging amid tightening of demand-supply dynamics (limited capacity expansion over next 3 years).

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