EV shift a near-term threat to valuation of 2-wheeler firms: Brokerages

Brokerages say TVS, Hero and Bajaj are at a greater risk than Eicher Motors

The shift from internal combustion engine (ICE)-powered two-wheelers to electric vehicles (EVs) will adversely impact conventional companies and weigh on their volumes. This, in turn, will impact their valuation, said analysts. And, the threat is more near term for two-wheeler makers than for passenger vehicle makers, the analysts added.

The analysts’ warning comes a day after Ola Electric’s formal entry into India’s competitive two-wheeler market with the S1. The recent correction in the stock prices of these firms, including Monday’s fall, indicates that the Street has factored in the shift, but the stocks could slide further if the Ola S1’s bookings translate into brisk volumes, they said.

Two-wheeler electrification is likely to pickup with policy thrust and electric scooter launches lined up by pure electric companies and conventional manufacturers.

With prices starting from Rs 99,999 (excluding state government incentives, registration fee, and insurance cost), the Bhavish Aggarwal-founded firm undercuts its rivals. For instance, its starting price of Rs 85,000 in Delhi (because of subsidies) is cheaper than the TVS iQube (Rs 1.01 lakh), Bajaj Chetak (Rs 1.42 lakh) and the Ather 450 (starting at Rs 1.13 lakh).

Some brokerages have already started downgrading two-wheeler manufacturers’ stocks and those of their suppliers. According to Aditya Makharia, vice-president of equity research at HDFC Securities, as EVs become mainstream the terminal growth assumptions for two-wheelers are at a risk as the threat is more near term (over the next 3-5 years).

Thus, the second stage DCF (discounted cash flow) assumptions will be at risk for the incumbents. “Based on our sensitivity analysis of Hero MotoCorp, if we assume lower growth rates from the second stage onwards, the impact on the stock values will be between 15-25 per cent,” he wrote in a research note.

HDFC Securities has downgraded Hero MotoCorp and Endurance Technologies stocks to “add”, and has a “reduce” rating on Eicher Motors. It has a “buy” on Bajaj Auto because of its export presence.

Others echoed this view. “EV concerns will likely remain an overhang on (valuation) multiples of TVS, Hero MotoCorp, and Bajaj Auto while Eicher Motors (Royal Enfield) should be less impacted with its presence in premium cruiser motorcycles,” wrote Nitij Mangal, analyst at Jefferies Equity Research. TVS has the highest exposure to scooters among listed two-wheeler makers. Scooters account for 30 per cent of sales for TVS and 8 per cent for Hero MotoCorp.

An analyst at another brokerage said the Street has already factored in the disruption ahead. As a result, stock prices of most companies including Hero MotoCorp, Bajaj Auto, and TVS Motor have corrected by an average 5-10 per cent since Ola Electric announced that it saw booking of over 100,000 units within 24 hours.

Hero MotoCorp has taken the biggest beating because of its high dependence on the domestic market and two-wheelers. TVS and Bajaj Auto are relatively less impacted because of exports and presence in the three-wheeler segment, he said. “Valuations are likely to take a further hit if Ola scooter performs well and the bookings translate into brisk volumes,” he said.

According to media reports, the last valuation of Ola Electric was about $3 billion or Rs 22,500 crore, which is a stone’s throw from TVS Motor’s latest market capitalisation of Rs 25,574 crore. 

Hero MotoCorp, however, is much ahead at Rs 54,930 crore, while Eicher and Bajaj are way ahead at Rs 68,300 crore and Rs 1.08 trillion, respectively. If things work out in Ola's favour, it could displace some of its peers given the high investor interest in the electric vehicle space.