Deceleration in electrification rates in Auto Sector: IIFL Capital Services

23 Nov 2023 , 10:39 AM

Electrification rate has moderated in 2W and PV. In case of 2W, moderation started post cut in FAME subsidy. No such specific reason can be attributed to PVs. The 2W EV industry has seen significant consolidation, with four players now accounting for >75% share. Bajaj has made rapid strides, up from 5% mktshare in FY23 to 13%, to claim the No. 3 spot from Ather. Based on Ather’s FY23 Annual report, analysts of IIFL Capital Services estimate ‘revenue per unit’ was lower than variable cost, implying negative contribution margin. Ola also clocked a sizeable operating loss in FY23. With reduction in subsidy effective June 2023, profitability may remain a challenge. Unlike 2W EV start-ups, Tata reported a small Ebitda loss (-5%) in its PV EV business. The contrast may be due to PV EV OEMs pricing products closer to cost, and an existing large revenue base, making overhead absorption easier. 

Electrification rates moderated in recent months: 

Electrification in 2Ws came off from Jun 2023, post the reduction in FAME subsidy. The current electrification rate at ~4.5% is almost at the same level as in FY23. In PV, electrification stood at over 2% in early FY24. Since then, the rate of electrification has moderated to ~1.7% in recent months. Unlike 2Ws, where moderation can be attributed to lowered subsidy, no such reason can be attributed to the case of PVs. 

Bajaj has made rapid strides in recent months: 

Top 4 players (Ola, TVS, Bajaj, Ather) account for >75% market share in 2W EVs. Bajaj has made rapid strides, ramping up from 5% share in FY23 to 13% in recent months. This is higher than its ICE mkt-share of 12%. Having overtaken Ather, Bajaj now stands at No. 3. Hero Moto’s share (although still low) has started inching up, from near-zero in FY23 to 3% in recent months. 

2W EVs – profitability is a challenge: 

Based on Ather’s Annual Report, analysts of IIFL Capital Services estimate FY23 revenue per unit (including subsidy from govt.) fell short of variable costs, implying negative contribution margin.= Gross margin (before variable overheads) was +9%, while Ebitda margin was negative at -40%. As per news reports, Ola clocked operating loss of USD136mn in FY23, on a rev of USD335mn. With the reduction in FAME subsidy from June 2023, profitability may remain a challenge. Tata’s EV business (cars) clocked a negative Ebitda margin of only -5% in FY23. Analysts of IIFL Capital Services believe the contrast is attributable to two factors: (i) PV OEMs do not rely on subsidies, and seem to be pricing the products closer to cost, (ii) Larger ICE OEMs have large existing revenue base, which makes it easier to absorb overheads.