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2Ws: Timely revival in exports as domestic slows

While we acknowledge the slowing growth momentum in the domestic 2W industry with 8% YoY growth in Vahan retail registrations during the Sep-Dec ’24E festive period vs 12.6% YoY during Apr-Aug ’24, the steep correction of 24% in 2W stocks from the recent peak (with the steepest decline at 33%/30% for HMCL/BJAUT) is unwarranted, in our view. We highlight that outlook on exports is improving and poised for sharp recovery, as bulk of the macro challenges in the highly under-penetrated key African markets like Nigeria are now largely behind and Latin America is seeing sustained growth. We believe exports would drive growth momentum in 2Ws, with 16-21% volume CAGR over FY24-27E (implying 1%/4%/9% CAGR from peak for BJAUT/TVSL/RE, respectively) even as growth in the domestic industry is likely to moderate to 7%/8% for FY26E/27E, implying 1.3% CAGR over FY19-27E (vs 12% in FY25E). We also highlight that while optically, the domestic 2W industry growth may moderate from 12% in FY25E to 7.6% in FY26E, growth moderation for listed incumbents (ie ex-Honda 2Ws supply normalization in FY25E) will be restricted, from 8.5% to 7.3%. This, along with export recovery, is restricting FY26E/27E EPS cuts to ~3.5% for our 2W OEM coverage universe.

We upgrade TVSL to BUY from Add (revised TP: Rs2,800 at 30x Dec-26E Core PER, rolledover), amid continued bottom-up growth and market share gains, margin expansion levers; we also upgrade BJAUT to ADD from Sell (unchanged TP: Rs9,500) after the recent 30% stock price correction from the peak, amid improving exports outlook, E-2W performance. We retain BUY on HMCL (TP: Rs5,600) amid attractive risk-reward at 13x Core Dec-26E PER (stock down 33% from the recent peak); we also maintain BUY on EIM. We still prefer 2Ws over PVs due to relatively better growth outlook (even post factoring in the slowdown) and the relatively strengthening competitive positioning for incumbents in EVs.

Domestic growth momentum slowing in 2Ws; we bake-in moderation; still better than PVs We highlight that growth momentum in the domestic 2W industry is moderating, with ~8% YoY growth in Vahan registrations over Sep-24 to Dec-24E vs 12.6% during Apr-24 to Aug-24 due to broader weakness in consumer sentiment and cautiousness among retail financiers. We now build-in moderate growth for domestic 2Ws industry for 7%/8% in FY26E/27E, respectively (12% in FY25E). However, we note that 2Ws remain relatively better placed than 4Ws that are struggling on growth despite elevated discounts (refer to our recent note). For listed companies, normalization of supplies at Honda 2Ws (HMSI) is now behind – which would also partly lead to stabilization in market shares (HMSI’s FY25TD retail market share at ~25.7% – near the previous highs of ~26%).

Exports outlook improving amid the worst of its struggles in Africa now likely behind While the domestic outlook is moderating, export visibility is improving. Key markets like Nigeria, previously affected by currency devaluation and inflation, are stabilizing, with the Naira showing signs of recovery and improvements expected from CY25, per industry experts (Exhibit 6); exports to Nigeria for BJAUT had declined to 10% of peak levels in Apr-24 before rising to 30%/50% in Q1/endQ2); b) consistently healthy growth in Latin America;, and c) improving retail performance in middleweight markets for Royal Enfield. Low penetration levels in African markets (1/5th levels vs India) continue to act as a long-term growth driver for exports. We build in 16%/17% 2W export CAGR (FY24-27E) for BJAUT/TVSL, respectively, implying 1%/4% CAGR from peak levels of FY22.

Q3FY25E – Expect sequential margin pressure largely due to adverse mix Volumes for 2W players are expected to be a mixed bag in Q3, with TVSL/RE seen outperforming (expect 12%/17% YoY volume growth in Q3FY25E) vs 3%/5% growth for HMCL/BJAUT. Owing to likely adverse product mix across OEMs, we build in ~1-1.5% lower ASPs sequentially. Lower realizations, combined with rising contribution from EVs, are seen driving ~10-50bps QoQ margin contraction across 2W OEMs. We trim FY26E/27E EPS by 1.5%-3.5% for coverage 2Ws.

We upgrade TVSL to BUY and BJAUT to ADD; maintain BUY on HMCL, EIM We upgrade TVSL to BUY with revised TP of Rs2,800 at 30x core Dec-26E PER, amid intact structural strengths, ie i) improving positioning across ‘growth’ categories – eg in scooters, despite normalized supplies at HMSI; also, a close #2 player in E-2Ws, and sustained margin expansion (with PLI benefits yet to kick-in). We also upgrade BJAUT to ADD with unchanged TP of Rs9,500; recent stock-price correction (down 30% from the recent peak) adequately captures the weakened positioning in domestic 2Ws as well as normalized the 3W volumes ahead, even as the company would benefit from exports recovery, and has emerged as the E-2W leader in Dec-24. We maintain BUY on HMCL, with revised TP of Rs5,600; after the ~33% price correction from the recent peak, we believe it trades at attractive valuation of 13x Dec-26E core PER with ~5% dividend yield. We also maintain BUY on EIM on renewed growth focus and potential recovery in exports (refer to Demand sustaining post-festive despite wider gloominess).

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