With EVs nipping at their heels, two-wheelers are facing an uneven recovery | Mint

With EVs nipping at their heels, two-wheelers are facing an uneven recovery

As the recovery remains soft, higher input prices are likely to hit margins in the near-term
As the recovery remains soft, higher input prices are likely to hit margins in the near-term

Summary

  • With the benefits of scale and reduced costs, penetration levels of e-2Ws could improve to 5-10%
  • If the vehicles of new players sell well, multiples may well de-rate, according to Nomura analysts

The ride could get bumpier for the two-wheeler sector in the coming quarters. Even as demand has been lacklustre due to lockdowns, the segment needs to reckon with rising competition from electric vehicles (EVs). The government has hiked incentives for electric two-wheelers (e-2Ws), which means that some of the conventional players will have to raise their game and ramp up manufacturing to catch up with existing players.

With the increase in incentives to 15,000 per kilowatt hour ((kWh) from 10,000, the total cost of owning an EV will fall. In some cases, it would even make ownership costs comparable to fuel-based vehicles, analysts said.

“Total cost of ownership (TCO) for an internal combustion engine scooter (Honda Activa) stands at 5.7 per km, while it is higher for e-2Ws (Ather 450 Plus) at 7.2 per km, assuming usage of 500km. Including the 5,000/kWh additional incentive, the TCO reduces to 6.5/km. In the case of monthly usage of 700km, TCO will now be similar, which should attract customers with higher usage," said analysts at Emkay Global Financial Services Ltd.

On a low gear
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On a low gear

In addition, some states are sweetening the deal with incentives such as lower road tax and state subsidies.

Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd see about 0.5 million e-2Ws getting funded in FY22 with current incentives, which compares well with the 75,000 units sold in FY20 and FY21 combined.

Besides, with the benefits of scale and reduction in battery costs, the penetration levels of e-2Ws could improve to 5-10% from about 1% at present over the medium term, analysts at Emkay noted.

Hence, the threat of electric vehicles may intensify much earlier for two-wheelers than passenger vehicles. Some of the conventional motorbike manufacturers are yet to ramp up their manufacturing, but competition from other players is stiff.

“Large listed OEMs (original equipment manufacturers) are positioning themselves to benefit from the anticipated EV adoption. However, considering competition from other OEMs (Hero Electric, Ola Electric, Okinawa, Ampere, etc), we expect some market share and margin pressures over the medium term," said Emkay Global analysts.

If EV adoption is high in the domestic markets, conventional listed players could lose some of their valuations.

“In absolute terms, the volume impact may not be substantial for incumbents over the next few years. But, if new players’ vehicles sell well, multiples may well de-rate, as seen in the global auto industry," said Nomura’s analysts. In fact, the two-wheeler sector is running on potholed roads for now. After the lockdowns, and particularly after the second covid-19 wave hit rural markets, two-wheeler sales have been hit hard. Besides, base metal prices have risen sharply and constitute 12-15% of a vehicle’s price. Hence, as the recovery remains soft, manufacturers will be hard-pressed to absorb the costs. This can shrink margins in the coming quarters.

Another worry two-wheeler companies face is rising inventory levels. Around this time last year, inventory levels were low post the lockdown with dealers, which made recovery easier. But not this time.

“2W dealers are under greater stress in the current year as they resume operations with a high inventory versus last year, absence of liquidity support such as moratorium and lower support from manufacturers," said analysts at JM Financial Institutional Securities.

This may make the recovery road long and winding.

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