What is your take on the two-wheeler counters because the latest concern in the two-wheeler stocks is over reports suggesting that the transport ministry may approve the anti-lock braking systems (ABS), in two-wheelers from CY2026. Has this been a long-standing demand from the industry or is the timing a bit of a surprise?
Rishi Vora: if you look at the ABS norms, it already existed in the above 125cc two-wheeler segment for the last five years. Globally, these are not the norms for under 125cc two-wheelers. So, if it happens, it will be first of its kind for the two-wheeler sector. Now, at least from an OEM perspective, it would not be appreciated given that there will be a decent cost increase which will have some detrimental impact on the overall demand.
So, the OEMs will at least suggest to the government that this can create further headwinds for the sector and they will try to delay this. Obviously from a government perspective, it is more about safety. The government has been reported to have said that almost 44% of the road accidents involve two-wheelers. So, it is more in keeping with the safety of the riders in mind and hence they are going for stringent safety norms for the two-wheeler segment. Yes, it is negative from the demand perspective. But from a consumer perspective, the government is focusing more on the safety aspects.
Can auto companies take a price hike whatever the incremental cost is loaded up on the product?
Rishi Vora: Last time in 2020 when this norm was implemented for above 125cc two-wheelers, there was Rs 4,000 to Rs 8,000 price increase depending on single channel or dual channel ABS and over time they passed it on. Now, again if this rule gets implemented, then there will be anywhere between Rs 3,000 and Rs 5,000 cost increase as per our estimates, which is roughly 5% of the vehicle ex-showroom price. So, over time, they will be able to pass it on. But it might have some impact on demand at least in the near term when this happens.
If they take a price hike, how much could that affect demand? If they do not take a price hike, how much could that affect the financials of these companies?
Rishi Vora: As I discussed, Rs 3,000-5,000 is the approximate cost increase that will happen. So, assuming they pass it on in one go, a 5% cost increase in the entry-level – 110cc, 125cc motorcycle segments, there can be a 5-7% decline in the segment which gets impacted. So, yes, there is a good amount of headwind which the sector will have to face and we have to keep that in mind.
If we look at the domestic two-wheeler market in FY2025, the industry volumes ended at around 20 million which is still below the pre-COVID peak. So, it is not like the two-wheeler industry has surpassed the pre-COVID peak and that is another challenge. So, this can be an incremental headwind. If they decide to take a hit and not pass it on to the customers, each company will have a different impact, given what part of their portfolio gets impacted. As per our analysis, Hero will be the most impacted.
In the case of Hero MotoCorp, almost 94% of their portfolio will go through a cost increase, followed by TVS where around 64-65% will be affected. If they do not pass it on, there can be an impact of anywhere between 50 to 100 basis point on their margins.
If somebody wants to buy a three-wheeler, you will have to buy these new norms. It is like wearing a seat belt, wear it or pay chalan. So, why will demand get impacted because for those who want to buy a two-wheeler, it is a need-based product and the safety measure are compulsory. Why should this impact demand just because there is a Rs 3,000 additional load up? Is this market that sensitive?
Rishi Vora: Yes, it is right. Again, OEMs will have to comply with this norm if it comes into effect and then cost increases will take place. A 5% cost increase in a price sensitive segment has a detrimental impact on demand. So, there will be some immediate impact. Over time, it will get absorbed, but it might take a year or one-and-a-half years before things start to normalise.
What about the other side of the spectrum, the players who operate in the ABS supply chain band? How will they be impacted by this news flow? Will it be very incremental?
Rishi Vora: Obviously Bosch is the largest player in terms of market share within ABS. But again, that is an unlisted entity and not a listed one. The ABS part sits in the unlisted segment. Beyond that, there is Continental and Endurance Technologies. So, yes, among the listed names one of the major beneficiaries would be Endurance Technologies. They roughly have around 10-15% market share right now in the ABS market. If this norm comes through, our assessment is that the ABS market in India will increase almost five-fold from roughly Rs 2,000 crore today to 5x growth over the coming years. So, even if we assume that Endurance Technologies maintains a similar kind of market share, it is going to be a decent tailwind for them in terms of demand uptake.
The other concerning factor for the auto space right now is the whole shortage related to the rare earth magnet issue. We have been talking to a lot of these companies as well as suppliers. The companies have been saying that they have the stocks only till July and August. How do you see the situation right now and how do you see this situation getting worrisome?
Rishi Vora: Again, as things stand today, none of the OEMs have gotten approval from the Chinese government for lifting the restrictions on rare earth material. It continues to remain a lingering issue for the sector. Now, obviously some OEMs have or suppliers have two-three months of inventory; some have a month’s inventory. So, within a month’s time, we will start seeing issues or production cuts pertaining to the shortage of rare earth materials. The first sector in general which will be affected will be EVs because the motor uses permanent magnets and that is a very direct impact and the dependence on China is extremely high over there. So, the EV sector will get impacted firsthand.
So, all the companies – some earlier, some later – which cater to the EV segment will eventually get impacted. The good thing is that once the approvals come through, the magnets or rare earth materials can be airlifted and production restarted,within one to two days. So, that is a good thing and no freight related time wastage will happen once the approval comes through. But yes, right now, everybody is discussing it with the Indian government.
The Indian government is trying to get in touch with China and trying to resolve this issue, but that is something that needs to be watched out over the next one to two months. If it does not get resolved, then we will see some production cuts starting with the EV segment and maybe then it can flow through to the ICE passenger vehicle segment as well. But that will take at least a couple more months.
Given that most of the two-wheeler companies have corrected anywhere between 30% and 40% in the past one year, is anything looking attractive to you purely on the valuation front, and not just from two-wheeler but the passenger vehicles and tractor companies as well?
Rishi Vora: We have seen some corrections, especially after the festive period last year and it is predominantly because of very sharp deceleration in demand. In the first half of FY25 domestic two-wheeler demand was growing in low-teens and then, suddenly the industry growth came down to a flattish number. That resulted in a negative surprise overall.
In terms of what we like, we continue to prefer a passenger vehicle segment over two-wheelers as we believe it is still on the two-wheeler side, valuations are expensive and the industry growth would be lower than what Street is expecting at this point in time. Within passenger vehicles, our preferred pick is Mahindra & Mahindra, Hyundai Motors, and Maruti Suzuki.