Brokerage firm Goldman Sachs India expressed guarded optimism for India’s two-wheeler market as it expects rebound in rural consumption and pent-up demand in premium models to set up a favourable demand environment for struggling manufacturers.
Indian two-wheeler companies are currently undergoing one of the worst down cycles in their history that started with the collapse of non-bank lender IL&FS in 2018 and has continued till now due to slower recovery in domestic consumption post the COVID-19 pandemic and production difficulties.
“Ongoing geopolitical uncertainties, associated volatility in raw material costs and emerging startup costs in the transition towards electric 2Ws (E2W) could impact margin recovery, in our view,” Goldman Sachs said in a note on March 4.
The brokerage firm is backing Bajaj Auto as it initiated coverage on the stock with a buy rating due to its high exposure to the export market and expected demand surge in three-wheeler segment driven by higher penetration of compressed natural gas.
On the other side, the brokerage firm has initiated coverage on Hero MotoCorp with a sell rating as it fears that the high dependency of entry-level two-wheelers on financing could hinder demand growth for the company.
Shares of both the companies have fallen so far this year, however, Bajaj Auto has outperformed Hero MotoCorp. Bajaj Auto's stock has fallen merely 1 percent in the current market turmoil while those of Hero MotoCorp have declined 5 percent.
To be sure, Goldman Sachs sees challenges to the profit pool of incumbent two-wheeler manufacturers from electric vehicle startups going ahead as that market grows. The brokerage firm expects 38 percent of two-wheelers sales to be electric by the end of the decade.
“While the industry is entering a phase of gradual demand recovery, the medium-term profit pool may be more challenged due to higher electric 2-wheeler penetration, associated startup costs, and more intense competition from new entrants,” the brokerage firm said.
The brokerage firm said that incumbent companies will face higher costs on their electric two-wheeler projects as it sees such projects only breaking even in 2026-27. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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