Among traditional two-wheeler makers, TVS stands to benefit the most from the “electrification” of the two-wheeler industry, while Hero Motocorp is vulnerable to growing change, according to a report by investment bank UBS. TVS will persevere due to its early shift to electric vehicles and its past track record of disrupting navigation and strong product/brand franchise. Its electric vehicle supply partnership with BMW Motorrad also underscores its capabilities.
Therefore, the Swiss firm launched TVS to “buy” and also raised its price target to ₹1,000. It also expects TVS to deliver EBITDA/PAT CAGRs of 33%-45% in fiscal years 21E-24E. “By FY30E, we expect TVS to be the EV leader with 22% market share,” the report said. UBS also says TVS has a huge R&D lead in the EV space, and that it has a two-year window in which it should aggressively expand its EV footprint using new capital.
One of the reasons TVS is so well positioned in the electric two-wheeler market is that it is currently one of the very few companies devoting significant resources to building their in-house electrical/software capabilities – which heralds a significant leap in electric vehicles. “The software for the riding modes on TVS’ Apache-series motorcycles was developed in-house, as was the telematics for its first EV iQube model,” the report adds. Its legacy counterparts, on the other hand, have yet to make significant investments and rely on vendor partners.
TVS’ product portfolio is also resisting the rapid electrification of the two-wheeler market. “TVS remains one of the most exposed companies in the two-wheeler space given its high share of ICE scooters. While we expect ICE scooters to be the first among two-wheelers to pass to electric vehicles, we believe that TVS’ portfolio is better positioned than that of most other incumbents,” the report added. Its Apache brand capitalizes huge retention value (according to Google search trends), and the company continues to hold a strong position in the premium motorcycle segment, in fact, TVS has been the only company to create successful new brands over the past decade.
On the contrary, UBS downgraded Hero MotoCorp, the world’s largest two-wheeler manufacturer, and revised its price target from ₹3,600 to ₹2,850. He believes that Hero valuations alone cannot be a catalyst given the macro and micro challenges in the sector; its lack of diversification (more than 80% of its volumes/profits come from domestic commuter motorcycles) and a weak record of execution in high-end motorcycles, scooters and exports do not bode well for the transition to electric vehicles. “We believe Hero’s strong dividend yield (around 4%) provides support for the stock and investments in Ather and Gogoro JV remain the main upside risks. Our FY23E/24E PAT estimates are 16-17% lower to consensus,” the memo reads.
Hero MotoCorp’s EV efforts, including its internal project, sit between Ather Energy (where Hero has a roughly 35% stake and recently invested an additional 420 crore) and its joint venture with Gogoro. This reduces equity exposure for investors, but there are possible risks of conflicts of interest. Hero’s own product is expected to be launched in March vis-à-vis Ather, and the fixed battery of its own product vis-à-vis Gogoro JV’s exchange model.
Compared to TVS, Hero has little to no success building and executing the brand, according to UBS. “Hero scores lowest in these areas without new big brand success over the past decade (measured in terms of volume contribution or category share) and has lost market share,” it adds. he. A lion’s share of its volumes comes from products launched under the former joint venture with Honda (HF and Splendor, which are two-decade-old models). Despite several launches, it hasn’t been able to scale its high-end scooter and bike offerings.
UBS expects Hero to have a 10% market share in electric vehicles over the long term (by FY30E) and its overall two-wheeler market share to grow from around 35% currently to 32- 25% in FY25E/30E. The poor performance of its products could render its strengths in distribution and supply chain management ineffective. Contrary to industry expectations, the commuter motorcycle segment will be the most exposed to disruption from electric vehicles. “In the medium term, falling costs and improved performance of electric vehicles challenge the use case for ICE commuter motorcycles in most parts of the country,” the report adds.
The report also claims that the proliferation of cheaper low-tech electric two-wheelers in rural markets is also seducing rural adoption. “We expect electric two-wheelers to represent 8% to 37% of two-wheeler industry volumes by FY25E-30E, with a high import supply chain and battery prices remaining key hurdles. “, he adds. Once the use of two-wheelers and electric cars will also be widely adopted, the lack of charging infrastructure in India will also be a barrier.