Two-wheelers are set to lead India’s electric vehicle (EV) revolution. The running cost of e-scooters is only a tenth of those with internal combustion-powered two-wheelers (2Ws), and a persistent rise in fuel prices is only widening this difference. Two-wheelers also make up 81% of vehicles on India’s roads, and given that they are much cheaper, there is a shorter payback period than electric cars.

Despite they have a minuscule share in the industry currently, Ambit Capital anticipates that the Indian electric 2 wheelers (2W) and allied segments could generate revenues of $30 billion per annum by calendar year (CY) 2030 post investments of $20 billion over CY22-30. As the registered 2Ws in India are 8 times of passenger vehicles and emission from 2Ws is approximately 2.5 times that of passenger vehicle thereby justifying a faster transition.

“Inevitable localization of battery cells will drive a rapid transition to e-2Ws from financial year (FY) 25. By FY26, the capital cost of e-2Ws and petrol 2Ws should be equal, resulting in ~30% lower total cost of ownership for e-2Ws. This would take the e-2W mix to ~35% by FY26 vs ~1% now. With approximately 60% localization in input components, charging infra creation, power availability and component makers preparedness are key drivers,” said Ambit Capital in a report.

Filling up missing dots

There are many missing dots in the electric vehicle like charging infrastructure, local battery cell plants and many others. Investments are fast filling up missing dots. Investments in setting up local battery cell plants, electric-2W assembly plants, charging infra and making e-2W components would happen in FY22-25. As per Ambit Capital analysis, approximately 50GWh of cell manufacturing would ask for ~$ 5 billion investment and $ 1 billion investment by component makers. It expects $10bn of investments related to charging infra by CY30 to cater to the potential e-2W fleet by then. A 10mn unit e-2W market by CY30 would generate revenue of $12 billion per annum.

Profitability test

“New e-2W entrants like Ola, Ather, Ampere etc. would be able to price highspeed models competitively led by 8-10x fixed asset-turn for e-2Ws vs 3-4x for petrol 2Ws. This could drive price war and hit the profitability of incumbent 2W makers,” stated the report.

Entry/executive bikes and scooters would be most vulnerable to substitution by e-2Ws, with the bulk of transition in urban markets. With the transition to electric vehicles, even the components play would alter. Given the structural shift, the 2W industry will witness over the next 5-6 years here is Ambit Capital’s recommendation on how to play the electrification theme.

TVS Motors | Rating: Buy | Price target: Rs 742

Exports/premium bikes contributing 43%/28% of EBITDA and ~8%/11% contribution from domestic 3Ws/spares, we expect a mere ~10% of TVS Motors EBITDA to be exposed to e-2W transition risk. This would be driven by lower margin mass-market bikes like Star City/Sport/Radeon along with the scooter portfolio of Jupiter/Scooty. Meanwhile, the company has already launched the iQube e-scooter in Delhi/Bangalore by leveraging its in-house R&D capabilities. Also, TVS Motors has made a cumulative investment of Rs 41 crore in EV start-up Ultraviolette for developing high-performance e-motorcycles. Ambit is positive on TVS Motors given its diversified portfolio, product development capabilities and ability to move up the margin curve.

Varroc Engineering | Rating: Buy | Price target: Rs 547

Varroc’s focus on products like traction motors & controllers, BMS, DC-DC convertors, onboard chargers etc., is all set to diversify into the EV component space. Companies India business (~30% of cons. revenue) will benefit significantly from the rising mix of EVs as content per e-2W would jump 3-4x vs ICE 2Ws. Only a part of its metallic business unit (~5% of consolidated revenue) producing crankshafts, connecting rods etc. would be at risk from EV transition. Meanwhile, Varroc derives ~65% consolidated revenue from its global lighting business, which should also benefit from rising e-PV penetration globally given higher LED content vs ICE PVs. Ambit Capital is positive on Varroc given significant scope for strong FCF (free cash flow) generation and consequent deleveraging/RoCE (return on capital employed) improvement. This would be led by expansion capex being largely behind and global PV/domestic 2W revival on a soft FY21 base.

Minda Industries | Rating: Under Review

Minda Industries portfolio is powertrain agnostic given the presence in switches, lighting, horns, alloy wheels and presence in segments like sensors/controllers, car infotainment. The company is focused on key business drivers by upgrading existing products to better cater to changing needs of the market, aligning to premiumisation-led demand from target OEMS, targeting opportunities for products led by a gradual shift to EV. Thus, the addition of EV-led products like sensors, LED head-lamps, telematics, chargers etc. make Minda Industries well-placed capitalize on EV shift in both 2Ws/PVs. The brokerage house is positive on the capability of the company to outperform OEM industry growth, operate at the optimal capital structure of sub-0.5x debt/equity and maintain ~20%+ ROE (return on equity).

Bajaj Auto | Rating: Sell | Price target: Rs 3,936

Bajaj Auto’s to be least affected within 2W OEMs (original equipment manufacturers) led by the transition to e-2Ws. Around 38% of EBITDA (earnings before interest tax depreciation amortization) comes from exports vs ~24%/15%/18% from domestic premium bikes/domestic 3Ws/spares. This results in a mere ~5% EBITDA contribution from low-margin entry-level bikes like CT/Platina. Companies focus on the reincarnation of Chetak in an e-scooter version other than collaborating with Peirer Mobility AG for the production of e-2Ws. Despite putting in efforts in building EV capabilities and having low electric vehicle transition risk Ambit Capital is negative on Bajaj Auto. FY22-32E volume CAGR (compounded annual growth rate) of ~7% along with EBITDA Margin capped at ~18% would limit earnings CAGR to 9%, resulting in limited scope for re-rating.

Hero Motocorp | Rating: Sell | Price target: Rs 2,968

Hero Motocorp is most exposed to electric vehicle transition risk as to the domestic 2W pack, with ~75% EBITDA (earnings before interest tax depreciation and amortization) contribution from mass-market models. With a lack of sizeable exposure to exports/premium motorcycles (~3% each), the company would be forced to engage in price wars with new entrants to protect the market share in mass-market e-2Ws. The positives for Hero Motocorp in this transition period would be utilizing investment in Ather to leverage its product/charging infrastructure; accelerating roll-out of battery-swapping stations under Gogoro tie-up; leveraging in-house Jaipur/Germany R&D centres to develop best-in-class e-2Ws, and developing a premium bike portfolio under tie-up with Harley Davidson. The brokerage firm is negative on domestic entry/executive motorcycles in the long run and thus on entry/executive market leader Hero Motocorp.

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