2-wheeler sector outlook tepid but Eicher still best bet

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26 Aug, 2025 12:21

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Moneycontrol Bureau

Though risk-reward ratio for two-wheeler is reasonable, Deutsche Bank feels its near-term outlook remains weak. The brokerage is cautious on the sector and is concerned that the recent underperformance of two-wheeler stocks indicates that market expectations have moderated.  The current stock prices of two-wheeler companies are implying an improvement in the volume growth rate over the next two years, it says.

"Analysis suggests reasonable investor expectations for Eicher and Hero while the implied assumptions for Bajaj and TVS continue to be optimistic," it says in a report.

Going forward, Deutsche Bank expects two-wheeler volumes to register a CAGR of 10 percent compared to 14 percent annual growth during FY09-15. According to it, scooter growth at 15.6 percent per annum should continue to outpace motorcycle growth of 7.8 percent per annum.

"This should be driven by aggressive product introductions by almost all players and significant scooter-dedicated capacities which are coming up in the next 12 months. The share of scooters in overall 2Ws is expected to rise from 28 percent in FY15 to 31 percent in FY17E," it elaborates.

Indian two-wheeler companies generate significant free cash flows, and their return on equity (ROEs) are generally in the range of 30-50 percent. Deutsche Bank feels that can provide support to valuations during times of low growth and margin contraction. "Also, any announcement related to an increase in the dividend payout would be viewed positively by investors," it adds

So, which is the best two-wheeler stock to bet on?

Eicher is its only 'buy' rated two-wheeler stock with a target price of Rs 18000 as it continues to ride the strong growth in its operating niche. "We see potential upside of 32 percent/26 percent /17 percent/18 percent for Eicher, Hero, Bajaj and TVS under respective bull-case scenarios. Under bear-case scenarios the potential downsides are 21 percent/17 percent /20 percent/31 percent respectively," it estimates.

According to the brokerage, Eicher’s volume growth may remain high at 47.5 percent per annum compared to 70 percent in 2014. In such a case, two wheeler business EBITDA margins could improve to 30 percent and the stock could trade at 30x FY16E earnings – a 100 percent premium to domestic two wheeler major Hero and Bajaj’s long-term average valuations, it states.

Eicher Motors on Friday reported a 38.5 percent increase in its consolidated net profit at Rs 216 crore for the first quarter quarter ended March 31 on robust sales during the period. The company had posted a net profit of Rs 156 crore during the same period of previous fiscal.

On Royal Enfield, the two-wheeler division of the company,  Managing Director & CEO Siddhartha said the first quarter has been the best ever quarter for the two-wheeler maker with record sales of 92,845 units, a growth of 44.5 percent over Q1 2014.

The stock closed at Rs 15,789.00, up Rs 992.80, or 6.71 percent on Friday.

Posted by Nasrin Sultana