As urban consumption witnesses a slowdown, the auto industry’s fortunes in 2025 rest squarely on rural demand. With healthy kharif and rabi crop outputs, improved minimum support prices from the government, and better terms of trade for farmers, rural markets could provide the much-needed boost for two-wheelers and tractors in the coming year.
This rural demand is poised to be the primary growth engine for the auto industry, as passenger vehicle (PV) and commercial vehicle (CV) demand remains uneven. While PV sales hinge on the success of upcoming sports utility vehicle (SUV) launches early next year, CV manufacturers are counting on a revival in government spending to reignite demand.
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“We prefer two-wheeler and tractor companies as rural sentiment is getting better. We expect domestic two-wheeler and tractor industries to post 10% and 7% volume growth in FY25 respectively,” Raghunandhan NL, director, equity research, Nuvama Institutional Equities, told Mint.
Although tractor sales fell 3.29% year-on-year between April and November this year, there was significant 26% surge in sales last month, according to the Federation of Automobile Dealers Associations (FADA). This signals a potential revival.
“A good monsoon season and increased water reservoir levels point towards better rabi crop output in FY25. We are expecting tractor demand to be better in H2 than in H1(FY25),” Arun Agarwal, auto analyst at Kotak Securities told Mint.
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The market leader in tractor manufacturing, Mahindra and Mahindra Ltd (M&M) is best placed amongst all major original equipment manufacturers (OEMs), Agarwal added. Not just tractors though, M&M’s SUVs like the Thar Roxx and XUV3XO resonated strongly with passenger vehicle customers this year, driving up its stock price by an impressive 74% in calendar year 2024. While the entire PV industry saw a 5% year-on-year growth in wholesale volumes, M&M’s wholesale SUV volumes rose almost 16% year-on-year in November, fuelled by rising demand from rural markets.
Similarly, with 64% of two-wheelers being sold in rural India in November, according to FADA, motorcycles and scooters had a stellar festive season this year. Retail sales grew 16% year-on-year during the September-November period, which is largely the peak festival season for India, according to Vahan data, while passenger vehicles grew only 3% year-on-year.
Due to robust rural demand and the ongoing premiumisation trend, shares of two-wheeler manufacturers Bajaj Auto Ltd and TVS Motor Co Ltd have delivered returns of nearly 30% and 16%, respectively, this year. For TVS, its relatively attractive valuation, sustained market share gains across key categories, and a recovery in exports have bolstered investor sentiment.
But there are some concerns. “Easy availability of financing, which we believe drove demand over the last two years, especially of two-wheelers, is likely to be incrementally constrained,” said a BNP Paribas Exane report dated 2 December. “We see consensus volume growth expectations and valuation multiples for the two-wheeler OEMs at risk,” it added. Here, the trends in Reserve Bank of India’s systemic credit growth data which shows the trajectory of retail vehicle loans can be monitored.
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Meanwhile, CV sales have languished through 2024, hindered by reduced government infrastructure spending ahead of elections and muted mining and manufacturing activities due to an erratic monsoon season.
Shares of Ashok Leyland Ltd, a major CV manufacturer, have delivered returns of 21% this year, but analysts remain cautious. Even though Elara Securities (India) expects a marginal pickup in sales in H2FY25 as government orders resume and project awards start to trickle in, the brokerage has maintained its “reduce” rating on the Ashok Leyland stock for now.
