Navigating bumps: Race to dominate the 2-Wheeler EV market

Photo: Reuters
Photo: Reuters


Currently, TVS is leading the pack among listed two-wheeler manufacturers. Its EV, iQube, is present across 135 cities and it aims to widen the availability as well as launch new EVs.

Shares of TVS Motor Co. Ltd hit a new 52-week high on Friday, after its March quarter (Q4FY23) results showed that Ebitda (earnings before interest, taxes, depreciation and amortization) margin had risen sequentially, albeit just by 20 basis points to 10.3%. It helps that the sharp 47% growth in TVS’ electric vehicle (EV) volumes has not hurt margins. Peers Hero MotoCorp Ltd and Bajaj Auto Ltd also saw their respective margins rise sequentially.

But as two-wheeler companies race to grow their EV portfolios, how margins shape up will be closely watched. While announcing Q4 results, these companies emphasized expanding their presence in the EV segment.

Graphic: Mint
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Graphic: Mint

Currently, TVS is leading the pack among listed two-wheeler manufacturers. Its EV, iQube, is present across 135 cities and it aims to widen the availability as well as launch new EVs. Bajaj intends to scale up Chetak in FY24 and Hero plans to cover 100 cities in 2023 with the Vida EV.

While it augurs well that the industry is moving towards sustainable options, there are challenges, at least in the near to medium term. The EV portfolio is margin-dilutive and, therefore, higher volumes will weigh on margins. Even as TVS saw sequential margin growth, it is worth noting that the company’s margin has been range-bound at 10% over the past seven quarters.

“We expect margin recovery to fall below expectations (for TVS), as we expect the domestic ICE (internal combustion engine) scooter mix to decline (more profitable) while the EV segment mix will continue to rise (less profitable)," said Kotak Institutional Equities’ analysts in a report on 4 May.

The EV market is more fragmented compared to ICE. Moreover, a key two-wheeler company, Honda Motorcycle and Scooter India, is yet to enter the EV segment. “For listed two-wheeler companies, garnering the EV market share equivalent to that of ICE would be difficult," said Kumar Rakesh, automobile and technology analyst, BNP Paribas Securities India.

Further, it does not help that the demand environment is subdued in the overall two-wheeler market, especially in the entry level segment. “There is lot of optimism on growth in two-wheelers, which we see at risk. If ICE volumes turn out to be weak, then it would have an implication on companies’ valuation as well. While penetration of EVs in the portfolio of listed two-wheeler companies is on the rise, it will not fully compensate for any potential drop in ICE business and its valuation, in our view," said Rakesh.

In the domestic market, demand in rural areas is yet to gather pace. TVS said rural recovery has been slow and it expects the process to be gradual at best. March was good for Hero, thanks to the festival season. But, whether this trend sustains needs closer tracking given that the mass segment forms a good chunk of Hero’s volumes.

Overall, the momentum in premium products for automakers is on a strong footing. But two-wheeler exports are yet to see a significant turnaround. Bajaj said in its Q4 earnings call that the unavailability of dollars remainsaconcern. It expects some relief on this front by Q2FY24. The export segment accounts for a large share of Bajaj’s two-wheeler sales (47.6% in FY23 versus 57% in FY22) and is thus, relatively more crucial for it.

Meanwhile, Bloomberg data showed, shares of Bajaj, TVS and Hero were trading at nearly 17 times, 25 times and 14 times their respective FY25 estimated earnings. It goes without saying that investors would do well to follow the progress on EV strategies. Also, continued volume growth and upward margin trajectory is crucial for valuations to expand.

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