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The June quarter (Q1FY23) earnings of two-wheeler companies TVS Motor Co. Ltd and Bajaj Auto Ltd show that FY23 has kicked off on a good note, amid commodity headwinds and chip shortage. Both automakers declared their results last week, and said they expect the constraints seen in Q1 to ease gradually.

Currently, TVS has the upper hand versus Bajaj. Both companies maintain that domestic demand is in a recovery mode; however, they see some export markets to be under pressure, mainly due to the depreciation of their local currencies, as well as economic stress in parts of Africa. This would weigh more heavily on Bajaj’s earnings, as exports formed 58% of its total volumes in FY22 vis-a-vis about 38% for TVS.

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Against this backdrop, Jefferies India expects the volume share of Bajaj’s exports to dip to 53.6% and the export share of TVS to drop to 35% in FY23. Note that export business is a high-margin one.

On the supply side, the chip shortage continues to restrict the auto industry’s ability to produce enough vehicles. For TVS, output of premium products such as Apache was hurt in Q1, leading to a market share loss of 200 basis points (bps) in the domestic motorcycle segment to 6% vs FY22 levels, said Jefferies.

Bajaj saw a deeper impact of the crisis, with about 40% of its production being impacted in Q1. This meant a depletion of channel stock, resulting in a Q1 market share loss of 500bps in the domestic motorcycle segment to 13% from FY22 levels.

However, both have a new chip supplier on board, and the scenario is likely to get better ahead. But this would adversely impact Bajaj’s product mix, as the company had prioritized premium models in Q1 due to supply issues, which will reverse as the situation improves in the coming quarters, point out analysts at Kotak Institutional Equities. Meanwhile, TVS would have a higher mix of premium brands.

Further, softening of commodity costs is welcome and a depreciating rupee aids the export business. But elevated energy costs remain a worry. Q2 is expected to see a slight impact of inflation, but from Q3, there should be some respite. Anyhow, for TVS, margin delivery has been resilient. In Q1, it managed to pretty much sustain its Ebitda margin at 10%, while Bajaj reported a 90bps sequential drop in the measure.

In the case of electric vehicles (EV), TVS is ahead of Bajaj with Q1 sales of 8,724 units for i-Qube vis-a-vis over 6,200 units for Chetak. TVS sells EVs in about 85 cities while Bajaj EVs are available only in 27 cities. TVS aims to ramp up the capacity to 10,000 units per month in the near term.

But the rising adoption of EVs could impact TVS’ domestic ICE (internal combustion engine) scooter portfolio, which is a key risk as this segment is about 34% of its total volumes in Q1. “Though this is a threat, it cannot be construed as a big one to TVS given the aggressive ramp-up of its own EV portfolio, which would aid in smooth transition from ICE to EV scooters. But to that extent, Bajaj Auto’s ICE portfolio remains shielded from any potential EV disruption at the moment, given that there is no large automaker as yet in EV motorcycles," said Aniket Mhatre, institutional research analyst, HDFC Securities.

Investors seem to have taken note of the above-mentioned factors, as shares of TVS have surged by almost 45% in CY22 so far, while Bajaj’s shares are up by 20.5%. According to Bloomberg data, shares of TVS and Bajaj trade at 25 times and 17 times estimated FY24 earnings, respectively. Both companies are flirting with their 52-week highs, which could cap meaningful near-term upsides.

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