Post the announcement of demonetisation, retail sales of two-wheelers have got severely impacted (down ~30-50% y-o-y) in various regions in India largely due to lack of adequate cash in hands of customers. We believe cash circulation will improve over the next few months, which should lead to recovery in scooter and commuter bike demand. We believe two-wheeler demand has likely been deferred by a quarter or two due to the sudden shock to the economy owing to demonetisation, but expect recovery in FY2018.
We upgrade Bajaj Auto to add (from reduce earlier) noting fair valuations, less vulnerable to domestic demand and a strong pipeline of premium bikes over the next few months. We also upgrade Hero Motocorp a notch to reduce (from sell earlier) as we see limited risk to the company’s earnings in FY2018 as we expect rural demand to recover. We maintain our sellrating on Eicher Motors. We also maintain our sell rating on TVS Motors.