UBS downgrades Bajaj Auto to sell; says EVs eating into margins, market share

Cost analysis suggests that e-3W margins are entirely dependent on government subsidies and remain significantly lower than ICE 3W margins.

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While Bajaj Auto’s management cited several growth triggers of its transition to the three-wheeler EV segment, global brokerage firm UBS thinks otherwise and suggests that the company’s transition is rather margin and market share dilutive owing to stiff competition and rising costs.

Analysts at the firm have downgraded the stock to ‘sell’ from its previous stance of ‘neutral’, and have revised its target price to Rs 5,600 from Rs 5,450. This implies a downside potential of over 8 percent from the closing price of November 30.

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“With the 3W export market experiencing demand and competition headwinds, Bajaj’s dependence on domestic 3Ws remains high even as signs of demand normalisation emerge”, UBS said in its recent note. It further added that cost analysis suggests that e-3W margins are entirely dependent on government subsidies and remain significantly lower than ICE 3W margins.

At 2:30 pm, the Bajaj Auto stock was trading at Rs 6,063, down 0.5 percent from the previous close on the NSE. In the last six months, the stock has nearly ralled 30 percent.

Matters could get worse

The Triumph-maker heavily relies on its 3W internal combustion engine (ICE) vehicles. However, the industry’s shift to electric vehicles poses significant downside risks for the company. Not just that, TVS entering the market has also created a hurdle for Bajaj. “Based on better product specs, we expect TVS to gain market share in the e-3W segment amid a regulatory push toward e-3Ws and away from ICE 3Ws”, the UBS note added.

E-3Ws can’t match ICE margins

Domestic ICE 3Ws are the highest margin category for Bajaj Auto at 30-35 percent and achieving similar margins for e-3Ws using significant bought-out components and expensive hardware would be difficult. “Even global EV companies with significant vertical integration and scale struggle to make double-digit margins”, analysts at the firm said.

Is market share parity on the cards?

No, says UBS. Replicating market share in e-3Ws would be difficult given the technological shift and competition. Moreover, TVS Motor has eroded Bajaj’s 3W export market share and has entered the domestic e-3W market.

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. In the segment, it trails to Mahindra and Mahindra, the market leader.

“Despite having only a 3 percent market share of the domestic ICE 3W market, we are confident that TVS will become the second largest company with a 20-30 percent share of the e-3W market”, UBS said.

As per the report, its export market share has risen from 10 percent in FY13 to 50 percent in recent quarters and 3W export volume in October 2023 surpassed Bajaj’s.

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