Auto Sector || Cash-Rich Legacy 2-Wheeler companies

“I would bet on BET (Bajaj, Enfield, TVS). Because they are champions, they have a track record. Champions eat OATS (Ola, Ather, Tork, Smart-E) for breakfast. The good Indian two-wheeler companies are not really as lightweight as some of the startups think that we are. If we launch a motorcycle in October, you will get in November, for some they launch in 2021, you will get in 2022 — that is the startup way. From a company perspective, their business model is a cash burn model, our business model is a cash flow model. We have to make sure that we make money when we sell the motorcycles”
-Rajiv Bajaj

The legacy 2W companies in India have really built an extremely profitable business. Being the world’s largest 2W market, India was and will be a lucrative market for potential players and the Indian 2W companies have done well to hold their ground, build strong market leadership and sustenance. Also, outside of the Indian market, companies like Bajaj and TVS have also been very successful in expanding globally. Today, Bajaj’s domestic sales: exports ratio is roughly 50:50. Such is the level of global dominance that some of these players have demonstrated.

To get an understanding of the level of profitability these companies generate, let us look at the core return on invested capital(fixed assets + working capital) over the last 3 years. Point to note, this is the level of returns they make during a downcycle(2019-21). Imagine, in an uninterrupted supply scenario with peak demand, what their return ratios could be.

Company FY2019 FY2020 FY2021
Hero Motocorp 50.1% 62.4% 64.6%
Bajaj Auto 256.4% 329.7% 210.3%
TVS Motors 27.4% 21.7% 52.9%
Eicher Motors 169.1% 127.0% 69.7%

As a by-product of this extremely profitable oligopolistic business, all these players are plush with cash.

Company Cash + Investments(Cr.) (Mar 31, 2021)
Hero Motocorp 10,757
Bajaj Auto 22,474
TVS Motors 4,245
Eicher Motors 7,844

So, from a capability perspective, there is no shortage of cash, execution capability, technological know-how, supply chain prowess for any of the legacy players. And all these companies have significantly ramped up efforts post positive consumer sentiment post Ola’s launch and FAME-II subsidies.

TVS is investing in a variety of EV products, set up a separate business unit to focus efforts, and is quickly ramping up production to 2.5 lakh units a year in the coming quarter.
Bajaj has set up Chetak Technologies, an EV subsidiary, working on R&D for upcoming EV products, ramping up production to 5 lakh units in a year.
Hero, outside of owning 35% of Ather, is working on 3 EVs, one by the EV business unit, one by Hero Hatch(a startup-like set up within the company), and one in collaboration with Gogoro, a leading Taiwanese battery swapping platform and EV 2W company.

The biggest challenge though is exactly how aggressive they will be to substitute this hugely profitable business with 2W EVs. Given the competitive intensity, it is not going to be easy to get a similar level of profitability from EVs, at least not in the immediate future. Moreover, the level of complexity involved in the design, development, and manufacturing of EVs is much lower than ICE 2Ws, thereby lowering the barrier to entry for new players. Given this context, the legacy players who are willing to go aggressive on EVs without worrying about initial profitability might be the ones winning the volumes. Nevertheless, the insane profitability that these legacy players have come to live with, might be a thing of the past in the EV world.

Who will win the battle for EV leadership?
  • Legacy companies (Hero, Bajaj, TVS)
  • EV Start-ups (Ola, Ather, Hero Electric, Okinawa)

0 voters

1 Like