Will e-bikes cannibalize their ICE makers?

As TVS, Hero and Bajaj prepare to do battle in the electric domain, they risk reducing their own profits because the margin on sales of e-bikes is lower than the margin on sales of conventional two-wheelers, says Mint.

While nobody is using this to make the case for continued petrol-driven bikes, analysts and market experts are keeping a close watch, as it could lead to investment re-ratings for these companies. 

All three companies – TVS, Hero and Bajaj – reported slightly improved margins for the quarter ended March 2023. Bloomberg data shows their valuations at 25x estimated FY25 earnings for TVS, followed by 17x for Bajaj and 14x for Hero. Honda Motorcycle and Scooter India is not yet present in the e-bike segment.

Analysts for Kotak Institutional Equities, in a report dated May 4, said of TVS, "We expect margin recovery to fall below expectations as we expect the domestic ICE (internal combustion engine) scooter mix to decline (more profitable) while the EV segment mix will continue to rise (less profitable)".

The two-wheeler EV market is also more fragmented that the conventional two-wheeler market, with players such as Ola, Ather, Hop, Revolt and Lectrix in the fray. Some of these, such as Ather and Ola, have deep pockets, allowing them to go toe-to-toe with the traditional giants in search for customers and the cash to set up charging networks.

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Kumar Rakesh, automobile and technology analyst at BNP Paribas India, said that for listed domestic two-wheeler companies, "garnering the EV market share equivalent to that of ICE would be difficult". He also cautions that demand for two-wheelers overall is itself subdued at the moment. "While penetration of EVs in the portfolio of listed two-wheeler companies is on the rise, it will not fully compensate for any potential drop in ICE business and its valuation, in our view," he added.

TVS itself says rural recovery has been slow and that it expects recovery to be gradual if not long-drawn. Wait and watch.