EV disruption: Hero most vulnerable, TVS has R&D benefit, says UBS

Amidst legacy two-wheeler manufacturers, TVS is slated to benefit the most from the ‘electrification’ of the two-wheeler industry, while Hero Motocorp is vulnerable to the growing shift, according to a report by investment banking firm UBS. TVS will persevere due to its early move into EVs and past track record of navigating disruption and strong product/brand franchise. Its EV-sourcing partnership with BMW Motorrad also underscores its capabilities.

Consequently, the Swiss firm has initiated TVS to “buy”, and has also upgraded its price target to ₹1,000. It also forecasts TVS to deliver EBITDA/PAT CAGRs of 33%-45% over FY21E-24E. “By FY30E, we expect TVS to be the EV leader with 22% market share,” the report reads. UBS also says that TVS has a considerable lead in R&D in the EV space, and it has a window of two years in which it should aggressively scale up its EV footprint using fresh capital.

One of the reasons why TVS is so well-positioned in the electric two-wheeler market is because it currently is among a very few companies to dedicate considerable resources to building up their in-house electric/software capabilities — which heralds a significant jump in electric vehicles. “The software for the ride modes on TVS's Apache series motorcycles was developed in-house, as were the telematics for its debut EV model iQube,” the report adds. Its legacy peers, on the other hand, are yet to make meaningful investments, and are relying on vendor partners.

TVS’ product portfolio is also resilient to the rapid electrification of the two-wheeler market. “TVS remains one of most exposed companies within the two-wheeler space given its high share of ICE scooters. While we expect ICE scooters to be the first among the two-wheelers to transition to EVs, we believe TVS's portfolio is better positioned than most other incumbents',” the report adds. Its Apache brand capitalises a huge retention value (according to Google Search trends), and the company continues to garner a strong position in the premium motorcycles segment. In fact, TVS has been the only company to create new successful brands over the last decade.

On the contrary, UBS has downgraded Hero MotoCorp, the world’s largest two-wheeler manufacturer, and revised its price target from ₹3,600 to ₹2,850. It believes Hero's valuations alone cannot be a catalyst considering the macro and micro challenges in the industry; its lack of diversification (more than 80% of its volumes/profits are from domestic commuter motorcycles), and a weak execution record in premium motorcycles, scooters and exports do not bode well for EV transition. “We think Hero's strong dividend yield (around 4%) offers support to the stock and investments in Ather and the Gogoro JV remain key upside risks. Our FY23E/24E PAT estimates are 16-17% below consensus,” the note reads.

Hero MotoCorp's EV efforts, including its in-house project, are between Ather Energy (where Hero has a roughly 35% stake, and recently invested another ₹420 crore in it) and its JV with Gogoro. This reduces the equity exposure for investors but there are possible risks of conflicting interest. Hero’s own product is slated to launch in March, vis-à-vis Ather's, and the fixed battery of its own product vis-à-vis the swapping model in the Gogoro JV.

Compared to TVS, Hero has little to no success in brand building and execution, according to UBS. “Hero scores the lowest in these areas with no new large brand success in the last decade (as measured in volume contribution or category share) and has lost market share,” it adds. A lion share of its volumes comes from the products it launched under the erstwhile joint venture with Honda (HF and Splendor, which are two-decade old models). Despite multiple launches, it has been unable to scale its scooter and premium bike offerings.

UBS expects Hero to have a 10% market share in EVs in the long term (by FY30E), and its overall two-wheeler market share to fall from around 35% currently, to 32-25% in FY25E/30E. Its tepid product performance could render its strengths in distribution and supply chain management ineffective. Contrary to industry expectations, the commuter motorcycle segment is to be the most exposed to the EV disruptions. “In the medium term, EVs' falling costs and improving performance challenge the use case for ICE commuter motorcycles in most parts of the country,” the report adds.

The report also avers that the proliferation of low-tech cheaper electric two-wheelers in rural markets allures rural adoption as well. “We forecast electric two-wheelers to account for 8%-37% of two-wheeler industry volumes by FY25E-30E—with an import-heavy supply chain and battery prices remaining key hurdles,” it adds. Once the use of electric two-wheelers and cars is adopted on a large-scale as well, India’s lack of charging infrastructure will also be an impediment.