Volume growth for the domestic 2W industry in 2Q has been robust and betterthan expectations: Overall volume growth for the industry was 12.5% y/y in 2Q18,despite a demanding base from 2Q17 (which saw volume growth of 21% y/y). Growthwas driven by multiple factors. Foremost, wholesale volumes in the quarter benefittedfrom channel filling post the inventory reduction at the end of 1Q18 (pre-GSTimplementation). Early festive season, strong rural and public sector demand andmarginal price reduction post GST also contributed to the pickup in retail sales. Positively,other than domestic markets, even exports saw steady double-digit growth in 2Q18. Thisis the second consecutive quarter of double-digit growth in exports.    Earnings could do even better than volumes: Cumulative revenues are expected togrow by c18% y/y and margins are expected to expand c120bps q/q. Excluding theonetime GST impact in 1Q, margins are expected to be only c50-60bps higher on asequential basis. Margin expansion is led by TVS and Bajaj – both of which had strongeroperating leverage and saw an increase in proportion of 3W. Overall we expect 2Wcompanies cumulatively to post nearly 20%y/y growth in earnings.    Near-term outlook remains good; EV strategies may be the focus of analysts’ calls:With a benign 2H base from the previous year (due to demonetization last year), 2Windustry volume growth should remain robust in 2HFY18. We expect 2W industry growthof c14% y/y for FY18. With increasing government focus and discussions aroundelectrification, we think the Street may like to hear more on company-specific strategy andget more colour on the EV ecosystem during the 2Q analysts’ calls.    Valuations: We have Hold ratings on Bajaj, Hero and Eicher and a Reduce on TVS. Wemarginally increase our FY19 earnings estimates (0%-3%) due to stronger volume, offsetby recent increase in commodity prices. We have no Buys in the 2W industry (see recentdowngrade of Eicher, Demand not outgrowing supply anymore, 11 Sept 2017).

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