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"Revolutionizing the Two-Wheeler Industry: What Is The Tectonic Shift That Everyone Is Missing?"

AltG's Principals, Poornima Vardhan and Taponeel Mukherjee, discussing rollup investment opportunities in India

By AltG Research On Behalf Of Taponeel Mukherjee And Poornima Vardhan

In 2018-19, the two-wheeler industry reached a historical peak of 21.2 million units sold. However, there was a significant downturn in the following years, resulting in sales dropping to 13.4 million units by 2021-22. Although there has been an increase in sales figures this year, it is still a long way from the industry's previous highs.

The Tectonic Industry Shift: Value Moving From Hardware to Software

In the past ten years, there has been a significant shift in the business landscape, as software has progressively overtaken hardware in capturing a significant share of the value chain. This industry transformation is exemplified in the financial markets, where auto software company KPIT's stock has surged by 760% since its listing. In contrast, the stock price of industry leaders Hero Honda has decreased by around 35%.

According to Taponeel Mukherjee and Poornima Vardhan of AltG, the industry is high quality, but they identify two fundamental issues.

Firstly, poor capital allocation - businesses are not adapting to structural changes within the industry and instead investing in low-growth areas. Investing in growth is crucial, and Two Wheeler companies should look to invest in the high-growth software sector. The software industry in this sector is showing twice the growth, higher margins, and more than double the existing business's FCF yields.

Secondly, they suggest that the industry tends to "Build, Don't Buy" - relying on developing businesses internally rather than acquiring them. This is a problem as the industry is capital and operationally intensive. Thus, patient capital allocation could create more value by simply rolling up high-growth businesses.


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