TVS Motor ahead of Bajaj Auto

Two wheeler companies TVS Motor Co. Ltd and Bajaj Auto Ltd’s June quarter (FY23) earnings show that FY23 has started off well amid commodity headwinds and chip crunch. Both automakers announced their results last week, and said they expect the hurdles seen in Q1 to gradually ease.

Currently, TVS has the upper hand vs Bajaj. Both companies say domestic demand is improving. However, they see that some export markets are under pressure, mainly due to the depreciation of their local currencies, as well as economic tensions in parts of Africa. This will take a heavy toll on Bajaj’s earnings, as exports constituted 58% of its total volumes in FY12, around 38% for TVS.

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Against this backdrop, Jefferies India expects Bajaj’s export volume to fall to 53.6% and TVS’s export share to 35% in FY13. Note that the export business is a high-margin business.

On the supply side, chip shortages limit the auto industry’s ability to produce enough vehicles. Jefferies said that for TVS, production of premium products like Apache took a hit in the first quarter, leading to a 200 basis points (bps) decrease in market share in the domestic motorcycle segment.

Bajaj saw the deep impact of the crisis, with nearly 40% of its production affected in Q1. This means reduction in channel stock, resulting in a 500bps loss of Q1 market share in the domestic motorcycle segment to 13% from FY22 levels.

However, both have a new chip supplier, and the landscape is likely to get better going forward. But this will adversely impact Bajaj’s product mix, as the company preferred the premium model in Q1 due to supply issues, which will reverse in the coming quarters as the situation improves, say analysts at Kotak Institutional Equities . Meanwhile, TVS will have a greater mix of premium brands.

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Besides, softening of commodity costs is welcome and depreciating rupee helps export business. But increased energy costs remain a concern. A slight impact of inflation is expected in the second quarter, but there should be some relief from the third quarter. Anyway, margin delivery has been flexible for TVS. In Q1, it managed to maintain its Ebitda margin at 10%, while Bajaj reported a 90bps sequential decline in the measure.

In terms of electric vehicles (EVs), TVS is ahead of Bajaj, with first sales of 8,724 units for the i-Cube compared to over 6,200 units for Chetak. TVS sells EVs in around 85 cities while Bajaj EVs are available in only 27 cities. TVS aims to increase the capacity to 10,000 units per month in the near future.

But the adoption of EVs could impact TVS’s domestic ICE (internal combustion engine) scooter portfolio, which is a major risk as the segment accounts for around 34% of its total volumes in Q1. “While this is a threat, it cannot be considered as a big one for TVS, given the aggressive ramp-up of its own EV portfolio, which will aid in a smooth transition from ICE to EV scooters. But to that extent, Bajaj Auto’s ICE portfolio is currently shielded from any potential EV disruption, given that there are no major automakers in EV motorcycles yet,” said Aniket Mhatre, institutional research analyst at HDFC Securities.

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

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