The two-wheeler segment has gained momentum after the sluggish festive season. Hero MotoCorp Ltd and TVS Motor Co Ltd in their respective September quarter (Q2FY23) earnings call last week said that they have seen volume growth in the festive period as compared to a year ago. During the festive period of 32 days, Hero witnessed a 20% growth in retail and the lowest level of inventory after the festive season. Similarly, TVS had stocks for less than a month after the festive season.
Both the two wheeler makers are optimistic about better demand for their products post the festive season. Actually, the lack of chips is a matter of concern, but the situation is improving.
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TVS is ahead of Hero in seeing the K-shaped recovery in the automobile industry. Premium vehicles are gaining traction and TVS products, such as the Ronin, will aid volume growth. The outlook for Hero, which primarily operates in the entry-level segment, is not good, especially given the weak rural markets. Thus, while Hero is losing out, TVS continues to gain or maintain market share in the domestic two-wheeler segment.
Investors accept this. The stock performance of both companies reflects these changes in the demand environment. TVS shares have gained up to 78% so far in CY22, while Hero has gained only 5%. This comes on the back of a 29% gain in TVS shares in CY21 and a fall of around 21% in Hero’s stock in CY21.
Weak rural sentiment will continue to weigh heavily on Hero’s stock. However, the company’s efforts to strengthen its hold in the premium segment will help the investor sentiment. The festive season saw good demand for the premium variants of Hero, with its XTEC variants accounting for 20% of the retail sales. The company is planning to launch more premium models here.
Coming to second-quarter earnings, the Ebitda margins of both companies disappointed, not meeting consensus estimates. TVS has seen a marginal increase compared to a year ago, while Hero’s EBITDA margin has come down. Ebitda is earnings before interest, taxes, depreciation and amortization.
Margins are expected to benefit in the second half of FY23 on softening commodity prices. Still, currency headwinds can play a bad game. Thus, the lever for margin growth appears to be slightly higher for Hero as compared to TVS.
“Hero’s margins will benefit as its premium vehicles come into play. While TVS continues to see growth in products, efforts to accelerate in the electric vehicle (EV) segment will have an impact on its margin performance,” said Varun Baxi, an analyst at Nirmal Bang Equities.
Investors have rewarded TVS’s drive for the EV segment over its peers. Its EV, the iQube, saw sales volume at 8,103 units in October. It has an order backlog of 25,000 units. TVS aims to deliver 10,000 units per month by the end of Q3 and 25,000 per month by the end of FY23.
Hero, on the other hand, has lagged behind when it launched its EV, the VIDA V1 last month. Since it is priced in the upper end of the electric two-wheeler segment, it will be difficult to get a wide response.
As things stand, TVS shares are down only 5% from their 52-week highs, while Hero’s stock is down about 12% so far. Analysts at Dolat Capital Markets said of the TVS shares, “It appears to be all near-term positive value.” TVS is priced expensive and Hero provides the comfort here. According to Bloomberg data, TVS trades at 29 times FY24 estimated earnings, while Hero trades at around 14x. How does it grow?
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