Rural woes could savage 2-wheelers

Just when everyone was wondering what more could go wrong with the Indian economy, the disturbing news that the kharif crop could be savaged by a prolonged dry spell in most parts of the country, has supplied the answer: everything. Rural economy has been the main driver of India’s growth over the last few years. Two-wheelers, consumer goods and cement are among the few sectors that have outperformed the markets, thanks to their strong growth in rural India. While consumer goods will be least impacted by a sub-optimal crop, two-wheelers and cement will be the worst hit. Cement prices are already falling; two-wheelers have not yet felt the impact. Clearly, monsoons, agriculture, rural incomes and two-wheeler sales are all closely linked. Though rainfall is expected to be normal, pre-monsoon showers (which make soil moist and facilitate sowing) are 24% below normal. These showers are important to grow paddy, a major kharif crop. States like Punjab and Haryana are advising their farmers to shift from paddy to other crops. As monsoons remain key to India’s crops, delay in rainfall would either affect yields, if the farmer chooses to stick with paddy, or lower returns for him, if he plants a new crop. A delay in the kharif crop, experts warn, could also affect the output of the rabi crop. Even if rainfall were normal, fewer pre-monsoon showers would still take a toll on the paddy crop. The resultant lower rural incomes would then impact the larger economy, despite adequate buffer food stocks containing inflationary forces. Punjab-based Hero MotoCorp is one of the most vulnerable stocks in the two-wheeler space. It derives nearly 46% of its revenue from rural markets. Increasing competition and rising raw material prices have already affected Hero’s performance in the March quarter: it sold fewer vehicles on-year. However, sales and realisation were flat, compared to the December 2011 quarter. A weaker currency impacted its raw material cost, leading to a lower operating profit. A higher other income component and lower effective tax rate arrested the fall in net profit which dropped by only 2%. Apart from the monsoon impact, the company could also see increased competition from its erstwhile partner Honda. Hero MotoCorp and Bajaj Auto have lost a major chunk of their market-share on account of Honda entering the market on its own. Post capacity expansion, Honda is expected to get more aggressive. The company is expected to launch its 110 cc bike Dream Yuga which will compete directly with Hero’s Splendor. Analysts expect Honda to launch a series of products which will directly confront Hero’s top-selling brands. Another cause for concern for Hero shareholders is that the company is not yet completely equipped on the research and development (R&D) front. This could affect the launch of new motorcycles. As R&D was earlier the remit of its foreign partner Honda, analysts believe Hero has not yet been able to break through that shell. Hero’s stock, like those of other two-wheeler firms, has been impacted by macro woes and fuel price hike. What makes it more vulnerable than others is that the holding of foreign institutional investors (FIIs) is almost double their holding in its rival Bajaj Auto. If Hero fails to perform due to either external factors or factors under its control, FIIs could sell hugely. Technically, the stock has taken support at `1,825 below which it could touch `1,700.