Hero sounds first warning on CAFE’s emerging risk to two-wheeler firms

New Delhii: Hero MotoCorp Ltd has become the first two-wheeler maker to flag the government’s proposed corporate average fuel efficiency (CAFE) norms for motorcycles and scooters as an “emerging risk” to business, warning that stricter fuel efficiency rules could increase costs in India’s highly price-sensitive market.

The disclosure in the company’s FY26 annual report comes as the government prepares to implement fleet-wide fuel efficiency targets for India’s two-wheelers, the world’s largest market for the segment, from April 2028.

The country’s largest two-wheeler manufacturer said it plans to mitigate the impact of the proposed fuel efficiency norms by increasing the use of lightweight components, improving vehicle efficiency and expanding its product range. electric vehicle (EV) portfolio.

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The warning could signal a pushback from the industry amid views that price increases resulting from emissions increases could cost companies growth. Other major companies in the industry, Bajaj Auto and TVS Motor, are yet to flag CAFE norms as a risk.

“We are engaging with policymakers through the Society of Indian Automobile Manufacturers (SIAM) to advocate realistic and technically feasible targets, especially for the 2-wheeler segment,” Hero said in its annual report for fiscal 2026.

The company emphasized that the introduction of these norms has become necessary in order to reduce emissions and increase energy security, but there is a material risk for the business world.

“Sudden implementation, potentially due to geopolitical tensions, could leave 2-wheeler OEMs unprepared, result in hasty redesigns, lead to higher compliance costs and risk penalties,” the management said. The 2028 deadline may be difficult as emissions targets have not yet been set and companies have not made demands. The product development cycle typically takes two to four years.

In the statement regarding the emerging risks, it was said: “In a price-sensitive market, it is difficult to transfer these costs to consumers, which threatens profitability and competitiveness. Failure to comply with the legislation can lead to financial penalties, recall of products and damage to reputation.”

The warning on the impact of price sensitivity is of particular importance for Hero MotoCorp, where around 5.4 million of its total sales of 6 million in FY26 came from its entry-level motorcycle range with engine capacity between 75cc and 125cc.

CAFE norms impose a fleet-based emission target on car manufacturers, calculated based on average fuel consumption and CO2 emissions from the vehicle. These norms for the four-wheeler passenger vehicle market have been in force since 2017 and the third one will be introduced next year, but two-wheelers have not been subject to any regulatory checks on pollution so far.

So far, no automobile company has identified CAFE norms as a significant business risk in their annual reports.

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Given India’s alarming pollution levels and more than two-thirds of the country’s car sales coming from scooters and motorcycles, the government has started targeting two-wheelers as well.

mint reported On July 1, it reported that the Bureau of Energy Efficiency (BEE) under the Union Power Ministry was in discussions with two-wheeler manufacturers and lobby groups Society of Indian Automobile Manufacturers (Siam) and Automotive Component Manufacturers of India (Acma) on a suitable methodology to measure emissions in powertrains.

While the proposed norms may cover all engine categories from 75 to 100cc in relation to carbon emissions, the engine capacity and battery efficiency of electric vehicles will also be in line with the emission norms of electric vehicles.

Since EVs have significantly lower emissions than conventional fuel-powered or internal combustion engine (ICE) vehicles, the launch of more models in the segment will help manufacturers effectively meet the norms without incurring penalties. The potential penalty for each non-compliant model sold will generally be much higher than a long-term investment in EV technology.

Legacy two-wheeler manufacturers Bajaj Auto and TVS Motor are leading the EV market with their electric scooter portfolios that have increased the share of EVs in total retail sales to 12% and 8% respectively, according to the Federation of Automobile Dealers Association (FADA).

Hero MotoCorp, the country’s largest two-wheeler maker, lags behind the EV market with a share of just 3% in total sales, which could worry the company if stringent emission targets come into effect.

So far in 2026, Hero MotoCorp’s shares are down 16% against rival TVS’ 4% decline and Bajaj Auto’s 6% gain. Nifty Auto index fell 6%. While TVS and Bajaj are leading the growing two-wheeler electric vehicle market in the wake of the West Asian war, Hero has lagged behind, but investors think it will catch up.

“In EVs, the Vida VX2 (Hero’s electric scooter) has been well received by customers. The removable battery feature, which can be charged at home using a regular plug, is likely to be one of the key USPs of this product,” analysts at Motilal Oswal said in a note on a meeting with Hero MotoCorp. “The market share increased from just 4% as of 4QFY25 to 11.1% as of 4QFY26. VIDA achieved market share of over 20% in 28 towns and over 10% in 79 towns, while being among the top two EV players in 37 towns.”

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Analysts noted a healthy increase in electric scooters. Along with ICE, it will assist the company this fiscal year.

Electrification drive

While Hero is flagging the risks, it is also preparing for emissions regulations to come into force soon by identifying electrification as a priority.

“We continue to focus on strengthening our core business, accelerating growth in premium and electric mobility, expanding our global footprint and building a more agile, future-ready organization,” Harshavardhan Chitale, CEO of Hero MotoCorp, who took over in January, said in his first annual letter to shareholders.

Experts said the impact on the price-sensitive two-wheeler market should be taken into account before introducing such norms.

“Norms need careful alignment and fuel baseline correction. Ravindra Patki, managing partner of Vector Consulting Group, had previously said: “E20 is a realistic glide path so the cost is not falling on rural, cost-conscious buyers who are not the ones driving the urban pollution problem.” Mint.