The results of the June quarter (Q1FY23) of the two-track TVS Motor Co. Ltd and Bajaj Auto Ltd show that fiscal 23 has started well in the face of the adversity of the commodity market and the token shortage. Both carmakers announced their results last week and said they expect a gradual easing of the restrictions seen in the first quarter.

Currently, TVS has an advantage over Bajaj. Both companies argue that domestic demand is recovering; however, they see that some export markets are under pressure, mainly due to the depreciation of their local currencies, as well as economic tensions in parts of Africa. This would have a greater impact on Bajaj’s earnings as exports accounted for 58% of its total volume in fiscal year 22 compared to around 38% for TVS.

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In this context, Jefferies India expects Bajaj’s export volume share to drop to 53.6% and TVS share to 35% in FY23. Note that the export business is a high-margin industry.

On the supply side, the chip shortage continues to limit the auto industry’s ability to produce enough vehicles. For TVS, production of premium products such as Apache suffered in Q1, leading to a 200 basis point (bps) loss of market share in the domestic motorcycle segment to 6% compared to fiscal 22 levels, Jefferies said.

Bajaj noticed a deeper impact of the crisis, in Q1 it affected about 40% of production. This meant a decline in the channel’s share, which resulted in a loss of motorcycle market share in the first quarter by 500 bp to 13% compared to the previous year’s level.

However, both have a new chip supplier on board and the scenario is likely to improve. However, this would have a negative impact on Bajaj’s product mix, as the company prioritized premium models in Q1 due to supply problems that will reverse as the situation improves in the following quarters, Kotak Institutional Equities analysts point out. Meanwhile, TVS would have a larger mix of premium brands.

Moreover, easing the cost of goods is welcome and the depreciation of the rupee supports export activity. But increased energy costs remain a concern. The second quarter is expected to bring a slight impact of inflation, but there should be some respite from the third quarter. In any event, in the case of TVS, the provision of the margin was resilient. In the first quarter, it practically managed to maintain EBITDA’s margin at 10%, while Bajaj recorded a 90bps decline in this measure.

In the case of electric vehicles (EV), TVS is ahead of Bajaj with Q1 sales of 8,724 units for the i-Qube versus more than 6,200 units for Chetak. TVS sells electric vehicles in around 85 cities, while Bajaj EVs are only available in 27 cities. TVS intends to increase its capacity to 10,000 units per month in the near future.

However, the growing popularity of electric vehicles could impact the domestic TVS internal combustion scooter portfolio, which is a key risk as this segment accounts for approximately 34% of its total Q1 volume. “While this is a threat, it cannot be interpreted as big for TVS given the aggressive development of its own electric vehicle portfolio that would help smooth the transition from ICE to EV scooters. But in this regard, the ICE Bajaj Auto portfolio remains protected at the moment from any potential EV disruptions given that there is not yet a major car maker in EV motorcycles, said Aniket Mhatre, an institutional research analyst at HDFC Securities.

Investors seem to have taken note of the above factors as TVS shares so far rose almost 45% in the 22nd quarter, while Bajaj shares rose 20.5%. According to Bloomberg data, the TVS and Bajaj shares are recording 25 times and 17 times the estimated profits for the full year, respectively. Both companies are flirting with their 52-week highs that could contain significant short-term gains.

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