Freedom Vs Splendor: Bajaj Auto's New CNG Foray Gets Thumbs Up From Analysts

Bajaj Auto's recent launch of its CNG (compressed natural gas) motorcycle on July 5 has been given a thumbs up by most brokerages tracking the sector with many raising their target price on the stock. The key reason cited for this is the incremental volume growth with an initial ramp-up of 10,000 units per month given the auto maker's 2-3 year lead over competitors.

Bajaj Auto launched the world's first CNG motorcycle, even as the wider two-wheeler industry transitions into an electric future. The Freedom 125 is powered by a 125-CC engine with the ability to toggle between petrol and compressed natural gas, or CNG, powertrains.

The motorcycle, with a dual CNG-petrol engine, will be available in three variants, with prices starting at Rs 95,000 (ex-showroom Pune). The price at the higher end is Rs 1.1 lakh.

Bajaj Auto claims the motorcycle has a range of roughly 330 kilometers on petrol and CNG combined. The company claims that owners may expect savings of roughly Rs 75,000 over five years amid a 50% lower cost of operation compared to similar internal combustion engine, or ICE, motorcycles.

The 110-125-CC space has seen a strong demand, with their share of the industry total sales rising to 17% as of fiscal 2024 from 10% at the end of fiscal 2019. The launch of the Bajaj Pulsar 125 and TVS Motor Co.'s TVS Raider has caused demand to shift in this space.

Honda Motorcycle & Scooter India Pvt., having solved supply chain issues, has challenged both these players with Shine 125. Overall, the company saw a massive 60% growth in sales volume for June 2024.

Meanwhile, TVS Moto Co.'s TVS Raider has also been growing strongly, with sales of roughly 37,249 in May 2024, according to Autopunditz.

For Bajaj Auto, the share of 110 to 125-cc in its total sales has gone up to 27% by the end of fiscal 2024, versus 5% seen in fiscal 2019.

Nuvama sees a huge addressable market in the 125-cc space and has pegged it to be almost one-third of total motorcycle sales going forward.

The management expects an initial ramp-up of 10,000 units per month by the end of this fiscal and sees 20,000 units per month in fiscal 2026 for this model, the brokerage said.

Bajaj Auto claims that the CNG motorbike will lead to cost savings of 50% when compared with the traditional petrol motorbike.

Currently, the automaker has claimed a range of 330 km for the motorcycle with a dual CNG-petrol engine. The 2 kg CNG tank has a range of 200 km, and the 2 litre petrol tank has a capacity of 130 km, according to the company.

NDTV Profit conducted a back calculation using the assumption of the cost per kg of CNG and the cost per litre of petrol at the current price.

The below-given comparison with Hero Splendor shows that the cost of riding 330 kilometres on the CNG bike comes to around Rs 356, while Hero Splendor Plus, with a claimed mileage of 60 kilometres per litre, would cost roughly Rs 1,000 for a higher range of 540 lometers. While the range of Hero Splendor Petrol is higher than that of Bajaj Freedom CNG, the cost per kilometre is lower for the latter.

Jefferies maintains a ‘buy’ rating on Bajaj Auto and increased the target price to Rs 11,630 per share from Rs 10,500 earlier, implying an upside of 22% to the previous close.

The brokerage stated that despite the CNG bike's price being 15-20% higher than comparable petrol variants, it presents an attractive value proposition. One of the key positives, according to Jefferies, is that the capital cost breaks even within the first 2-3 years.

Nuvama, too, maintains a 'buy' rating and increased their target price on the stock to Rs 12,000 per share from Rs 10,340 earlier, implying an upside of 26% to the previous close.

Domestic market strength with CNG across vehicles has long been known. With the share of CNG across product categories like passenger vehicles at 15%, three-wheelers at a high of 60%, and light commercial vehicles at 25%, it bodes well for the two-wheeler category to enter the CNG space.

According to Nomura, CNG is currently available in 335 towns, covering 70% of the target market, and with an increased focus on increasing CNG penetration, this pie will only get bigger. 

The management highlighted that export markets such as Egypt, Tanzania, Peru, and Columbia, which have high CNG penetration, could potentially provide other opportunities for this product as well. Bajaj is traditionally present in these markets, along with petrol bikes, and has a strong distribution network.

They currently sell almost 50% of their total motorcycles in these export markets. Over the last year, the export market has been subdued due to geopolitical as well as currency issues in markets such as Turkey and Nigeria. Turkey has seen almost 62% currency devaluation, whereas Nigeria has seen upwards of 100% currency devaluation.

Nuvama expects Bajaj Auto to post compound annual growth rates of 12% and 15% in revenue and Ebitda, respectively, over fiscal 2024–2026 with an average return-on-equity of 35%.

Jefferies expects 15% volume growth along with 17% earnings per share growth over fiscal 2024–2027.