Two-Wheeler Companies To Benefit From Replacement Cycle, Says Avendus Spark MD

Ganeshram: The Nifty stocks are not seeing any downgrades or nor have they seen any material upgrades. It's hardly a percent here or there. In fact, for four quarters now, the FY25 earnings estimates haven't changed at all for the Nifty companies.

However, in the broader universe, especially in some sectors like IT, or even cement we've seen some earnings downgrades for fiscal ’25 come, especially after this quarter.

So still, only about a third of our coverage universe results have come so far. Typically, the later half tends to be more reflective of how things go. So, fingers crossed, but it's been mixed.

So to just put it in a nutshell, IT has seen some downgrades, the capital goods have seen some upgrades, cement has seen some downgrades. So far Nifty remains unchanged, while in the broader universe there have been some downgrades.

Ganeshram: Selectively, but not at a broader level. We have not seen global growth or exports pick up in most categories. We have seen it in very few, but in most categories global growth, exports growth, we haven't seen a widespread pick up.

Where we are confident of, is private sector capex-led growth picking up next year. I think that's the most positive, confidence signal that we are getting. And it's not going to be government capex. It's going to be more of private sector capex-led pickup in the coming year, property capex-led pickup coming next year. On those two, we are more confident than we were. We have been confident for almost 18 months now.

Stocks have done very well. But we still hold on to the view that the stocks have done well. They are in expectation of earnings and those earnings will play out over the next 18 months on private capex. So, some commentary from the management also indicates that now.

We have been speaking to some banks also and there also we are seeing some private sector capex-led sanctions or likely disbursements picking up next year.

So the most positive part of the growth signals for next year is coming from B2B or the private sector led, capex led signals. That's most important, caution still continuing on the consumer side.

In fact, you were right when you started off saying rural has started seeing some bit of improvement, two-wheeler companies signalling that, some FMCG companies are mentioning that.

We are also seeing it on the ground, but urban is slowing down more than we thought and our concern remains consumption. So, clearly for us, it's a mixed picture on the broader expectations for next year.

Ganeshram: No, it's a combination of a few things. I think, what's happened is, one of the points that you alluded to, which is the whole savings, which is in some form linked to consumption.

If you look, if you slice through the savings numbers, it's not as if India has suddenly started to save lesser. It's that net savings which is net of leverage, which is the concern and leverage has gone up. That's actually why we think consumption is also not seeing fresh legs, which is consumption led by household leverage at the mass consumption level.

We are not seeing that sustain the way it has, especially since Covid and our concern stems from there. So the two are linked, which is mass consumption in some form linked to savings slowdown. It has implications for deposit growth. It has implications on how lenders will slow down. It has implications on how consumer-related companies, especially urban, especially leveraged consumption, will see moderation in growth expectations going forward. That is our single-biggest key concern that we continue to have.

Ganeshram: I think that's a very important concern. We also share that concern. It's now 24 consecutive months. In fact, it's the first time ever, you know, you can go back dates as much as we want, but we have never seen two consecutive years of absolute credit growth outpacing absolute deposit growth. It's illogical, but it's happening and that is a very significant concern.

We think that's reflected in the elevated CD ratios of banks and that's reflected in many banks underperforming, which will lead to banks slowing down credit growth, especially to consumer-lending segments. That, can have an impact on volume growth and earnings growth for the rest of the companies into next year.

So a very, very important challenge, and we are vary about that as well. That has an impact on a broader level of earnings expectations of mid-teens for next year, because it has not only impact on volume growth, it has an implication on premiumisation, but on the operating leverage, and at a bottom line level.

Even a small, maybe even 250 bips to 300 bips lesser credit growth next year can have a lot more impact on earnings expectations for next year at a broader level. That is possibly the most important concern which we will have.

Ganeshram: Yes,it will, because the lending rates of the corporates are a lot lesser than the consumer. So it will have an impact on not only growth for the bank's balance sheets. It will impact margins. It can impact credit costs as well.

Some of the new regulations—which the Reserve Bank has come up with for banks—can also impact treasury gains or credit costs. That means, earnings growth expectations of most banks can be well below what it has been over the last 18 months.

I'm not even considering the impact of rate cuts. If rate cuts do come and I'm not a believer that it will come in the next 6–9 months. I don't see it in this calendar for sure. I think it can come in the next calendar. If that comes and given that repo rate-linked loans are almost more than a third of the overall loans, it can impact yields as well. That can again impact margins for FY26, may not be for FY25.

Ganeshram: Very good. In fact, in two-wheeler companies what's been happening for about 6–7 years now is, maybe it was in 2017 that we saw good sales. And now, their replacement cycle is coming out.

In the sense, there are more vehicles on the road, which were sold prior to 2017 or before than since, which means vehicles are now at an average level almost 10 years old and it leads to replacement cycle. And that's very, very positive for two-wheeler companies and also the electric vehicles, which were taking some bit of market share away, and those aren't as much as it was over the last 2–3 years. So that's also helping the incumbents and you know, the ones we have known for a long time. So this is in two-wheelers.

Four-wheelers continue to be a challenge on the entry level. The premiumisation of SUVs has been doing well. That trend is sustaining. We are not noticing much of a change there.

Commercial vehicles, we are vary. We think, there is some bit of oversupply, which has kind of picked up. Tractors, still not reflecting. So this broader level of rural recovery, I still don't want. I've not been a fan of calling for rural slowdown or no rural recovery, both over the last few years.

Tractor sales were doing well. E-commerce company sales in rural areas were doing well. Cell phone sales in rural areas continue to do well even though two-wheeler sales weren't, in the preceding 24-36 months. Now, tractor sales aren't doing well, while two-wheelers are doing well.

So my sense is, the wallets are beginning to trend differently than wallets shrinking. Behavioural patterns are more relevant than spending patterns and they are not reflective of a broad level rural recovery or slowdown. I think we will keep talking about it at a market level but I don't think that's really indicative of how consumers are reacting. At the end of the day, there are cell phone sales in rural areas, phenomenally good.

So, I'm not really going by just this narrative on rural slowing down and picking up. But for sure, we are seeing various pockets of auto sales continuing to do well and that's something that we've been expecting and we are now seeing that play out.