Home / Markets / Mark To Market /  CNG, EVs accelerate; ride bumpy for latter

Auto fuel prices in India are on fire with prices of petrol and diesel being raised steadily over the past two weeks. This would add to the woes of the already subdued demand in the automobile sector as the total cost of ownership (TCO) rises.

However, there are two sides to the same coin. Rise in fuel prices could mean an accelerated transition to electric vehicles (EVs). This is more pertinent for the two-wheeler (2W) segment as operating an EV would be cheaper than its internal combustion engine (ICE) equivalent. Government subsidies and initiatives to shift to sustainable options have also boosted demand.

Expanding territory
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Expanding territory

FY22 has ended on a strong note with electric 2W (e-2W) volumes rising by over 460% year-on-year and penetration crossing 4% in March, according to Vahan registrations.

Making its way
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Making its way

A person buying an e-2W could have considerable savings over a couple of years despite the higher capital cost, according to a TCO analysis of e-2Ws and ICE vehicles by Systematix Shares and Stocks (India) Ltd. Another important factor for a 2W buyer in India is the resale value and an e-2W buyer also has concerns over battery replacement cost. “To address these, many new-age e-2W companies (such as Ather Energy) have announced buyback offers for their products after battery warranty expiry (normally three years) at reasonably high prices. This further lowers the TCO for e-2Ws versus their ICE counterparts," analysts at Systematix said in a report. Hero MotoCorp Ltd has a 35% stake in Ather.

All this points to a strong demand environment, but constraints in supply chain pose a hurdle for ramping up EV production. Further, geopolitical tensions have led to a spike in prices of metals such as nickel, a key raw material for manufacturing batteries. Prices of aluminium, a lightweight material used to manufacture EVs, have also risen significantly. Thus, the possibility of price hikes cannot be ruled out and analysts at BofA Securities expect more than 5% price hikes. EV buyers are largely from urban mid- to high-income category and, as such, do not view any threat in shift to e-2Ws from price hikes at least for now, they said.

However, recent instances of e-2Ws catching fire have raised safety concerns. It remains to be seen if this will cast a shadow on the transition.

In the passenger vehicle (PV) segment, penetration of EVs is about 1% with Tata Motors Ltd leading the way. Maruti Suzuki India Ltd has been a laggard in this category. However, EVs are not the only preferred sustainable option in PVs, as demand for compressed natural gas (CNG) variants is also on the rise and Maruti Suzuki could be a beneficiary given its dominant position in this segment.

As such, the charging infrastructure for EVs is yet to be widely established and this makes the case for CNG vehicles. Also, the higher cost of EVs has triggered a shift towards CNG. Further, the demand is being lifted with the government expanding its CNG footprint.

CNG penetration in the PV segment in FY22 increased to 9% from 6% in FY21, according to BofA.

“The cost of running CNG vehicles is much lower than petrol variants because of better fuel efficiency and lower CNG prices compared with petrol and diesel. The trade-off with CNG vehicles is on performance because of lower powered engines," said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas India.

All said, while the nudge towards sustainable options is strong, the transition has its own set of concerns. This means the threat to incumbents from EVs is lower in the near-to-medium term.

ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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