Bajaj Auto riding on 3-wheelers for next leg of earnings growth

What's fuelling the growth?

"The country has very decisively promoted the usage of CNG," Rakesh Sharma, executive director of Bajaj Auto, said on an earnings call. CNG-powered three-wheelers deliver much better economics than diesel-powered vehicles, he said.

"CNG-powered 3W economics are much better for owners versus diesel and this migration from diesel to CNG is helping Bajaj ramp up market share," analysts at ICICI Securities said.

Also read: Bajaj Auto: Earnings trajectory improving; valuations reasonable

All automobile sectors are recovering from losses suffered during the pandemic. The resumption of activity enables three-wheeler drivers to earn more, helping them to finance their vehicle purchases. Bajaj Auto financed 90 percent of the vehicles sold during the quarter.

For CNG three-wheelers, Bajaj Auto’s market share stands at 90-93 percent, company figures showed. The three-wheeler segment contributed 12.5 percent to total revenue in the July-September quarter, more than doubling from the previous quarter’s 6.1 percent.

How are electric autos faring?

According to the company, e-autos were restricted in large parts of the north and east of the country and this gave rise to a semi-organised industry of e-rickshaws. However, the need for intercity and intracity mobility in the smaller towns of these areas is strong.

Now, when Bajaj enters with e-autos, they don't require permits. So there is a strong possibility of converting the e-ricks to e-autos, provided the company delivers value performance.

"So, the entire north and east is our first target and there we don't sell too many ICE (internal combustion engine) autos and we should be able to get the e-autos moving over there," the company said.

Bajaj Auto has already acquired leadership positions in Agra and Pune in the span of a year. In the electric three-wheeler segment, the company's strategy is to achieve a market share similar to what it garnered in the ICE segment, ranging from over 50 percent to almost 70 percent. The company is looking to target cities where autos are not permitted.

In the space, Bajaj Auto trails market leader Mahindra & Mahindra.
The company has started phase two of its calibrated expansion programme, which will take it to 40 cities in the next six months.

"We do not see any cannibalization impact of recently launched e-autos on ICE three-wheelers in the foreseeable future. E-Autos and 3W CNG may continue to grow in the foreseeable future and add meaningfully to revenue growth and profitability in the short-medium term", Unnati Bhavekar Jadhav, lead analyst at KR Choksey told Moneycontrol. 

E-autos aren't margin dilutive

When compared to electric two-wheelers, e-autos are EBITDA margin positive. This is because the overall cost is relatively lower than that of a two-wheeler.

Bajaj is setting up an EV factory in Waluj, which should be ready by the end of the year. The factory, however, will not expand fixed costs substantially, the management said. Given the company's cemented position in the market, it allows them to spend less money on advertising.

Domestic brokerage KRChoksey forecasts that Bajaj Auto should ensure an 80 percent market share in the segment and a steady expansion of e-autos in the coming quarters.

"Recent management guidance of margin neutrality of EV vs ICE can help drive EV penetration in 3W without compromising on profitability", Pramod Amthe, Head of Institutional Equity Research at InCred Capital said.

Axis Securities is of the view that sales will grow in line with the market and the expansion of the CNG network. Given its non-dilutive business, analysts highlighted that it opens up a new segment for the company and states that is ASP accretive.

"Three-wheelers should not only drive volumes but also ASPs and thereby add meaningfully to the overall financial performance of Bajaj Auto in the foreseeable future", Jadhav further added.