India's electric two-wheelers (e-2Wheelers) and allied segments can generate around an annual revenue of $30 billion by 2030, following an investment of $20 billion over 2022-30.
The number of registered two-wheelers in the country is around eight times that of the passenger vehicles. Hence CO2 emission from two-wheelers is around 2.5 times that of passenger vehicles, calling for a faster transition resulting in a higher reduction in pollution.
Localisation of battery cells will drive the rapid transition to electric two-wheelers from fiscal 2025. We believe import duties and lower scale of need is in turn inflating the cost of electric two-wheelers.
By fiscal 2026, the cost of electric two-wheeler and petrol two-wheeler should be equal, resulting in around 30 percent lower total cost of operating an electric vehicle. This would take the electric two-wheeler mix to around 35 percent by the fiscal year 2026 from 1 percent now.
Around 60 percent localisation of input components, charging infra creation, power availability and component makers’ preparedness are key to the transition.
Declining battery prices and policy actions of governments around the world to tackle climate change have led to a gradual adoption of electric vehicles and a shift away from Internal Combustion Engine (ICE) vehicles.
In a lower per capita GDP and price-conscious market like India, not just the cost of operating but the comparable capital cost is also needed for electric vehicle adoption to pick up.
So what does the future look like for India's two-wheeler electrification, given that India imports lithium-ion (li-ion) batteries?
As batteries account for 40-50 percent of EV cost, it makes sense to look at the expected cost trajectory in the international market.
According to BNEF, Li-ion battery cell costs are expected to fall to $62/kwh by the end of this decade, which is less than half of the level observed in 2020.
A major chunk of the drop comes from increasing volumes and learning rate of 18 percent (reduction in prices for every doubling of cumulative production volume) alongside better chemistries offering much higher energy density (kwh/kg), reducing materials required and hence battery prices.
We estimate around 6.5 percent domestic two-wheeler industry volume CAGR in the fiscal year 2022-26. Demand elasticity through around 30 percent lower cost of operating for electric two-wheelers will potentially raise CAGR to around 10.5 percent.
Though back-ended in nature, we expect a negative 4.5 percent CAGR for mass-market two-wheelers (ex-125cc plus motorcycles), paving way for 35-40 percent electric two-wheelers mix by the fiscal year 2026.
Factoring additional around six million units created through demand elasticity by the fiscal 2026, the mix of electric two-wheeler in the domestic market can be as high as around 50 percent.
We are assuming full transition of entry/executive motorcycles/scooters from urban markets and around 20 percent transition of rural two-wheelers (ex-premium motorcycles) to electric two-wheelers by 2026.
With no mandate for shifting to electric for premium motorcycles, we are not factoring demand disruption.
By the fiscal 2026, we expect the cost of operating a petrol Activa scooter to be around Rs 3,600 a month (including EMI for a four-year loan). Led by regulatory changes and the surging cost of petrol, the total operating cost saw an increase of around 20 percent in the past three years, thus exceeding per capita income CAGR.
Our analysis suggests the same for an e-Activa would be 30 percent lower, with a limited scope for a total cost of operating inflation, unlike in petrol models.
Other than scooters, we expect a gradual shift from entry/ executive petrol motorcycles to electric vehicles closer to 2025-26. This transition would result in around 4.5 percent negative CAGR for ex-premium motorcycles two-wheelers market in India versus around 6.5 percent CAGR for the overall market (around 10.5 percent including additional around 6 million market size led by demand elasticity).
In the coming four to five years, the transition from petrol to electric two-wheeler will take place through partial substitution of existing models and incremental market creation through demand elasticity.
We expect an electric two-wheeler market of around 15 million by the fiscal 2026, accounting for around 50 percent of the market.
Of these 15 million, we expect around 9 million units of electric two-wheeler would be sold at the cost of petrol models, thus creating disruption.
The majority of this substitution would come at the cost of urban entry/executive motorcycles and scooters. Though prima facie the disruption would look elevated across the space, one should look at the risk to EBITDA for the key incumbents instead of risk to volume.
Despite incumbents launching electric two-wheelers in due course to fend off competition from new entrants, the biggest risk would be loss of pricing power rather than the volume during the transition.
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