Riding on CNG bikes, can Bajaj Auto raid Hero MotoCorp’s fortress?

New Delhi: Much like his father Rahul, Rajiv Bajaj is known for his candour, and no-nonsense straight-talk. There is never a dearth of controversy or headlines whenever he decides to speak in public. Even then, nobody was prepared for the bombshell that he would drop on a chilly December morning in Delhi, over a decade and a half ago.

While launching the 135cc variant of its flagship Pulsar brand in 2009, which marked Bajaj Auto Ltd’s foray into the mass market motorcycle segment ruled by arch-rival Hero MotoCorp, Bajaj said he would stop making scooters altogether. It was a tectonic shift for a company that built its name riding on scooters. At its peak, the company sold nearly a million scooters every year in the mid-1990s.

The decision was preceded by the dramatic shift from scooters to motorcycles in the domestic market. Motorcycles overtook scooter sales in India for the first time in 1998-99. Over the next decade, the gap significantly widened. By 2008-09, bike sales, at 5.8 million units, were more than five times bigger than scooters. As Bajaj adjusted to the market and had its first bonafide success in motorcycles with the Pulsar, it dropped the ball on scooters and was promptly overtaken by Honda Motorcycle and Scooter India. Still, the thought of Bajaj exiting the segment entirely was unthinkable for most.

“We will exit the scooter market because we don’t see much sense in it. If we are to be a motorcycle specialist, we cannot make scooters,” Bajaj said that day. “One day, God willing, we will be the largest motorcycle company in the world.”

It has not gone as planned.

While the lack of scooters in its portfolio has hurt (scooter sales in India have nearly tripled since 2010-11 and account for a third of all two-wheeler sales), the company has lost share in motorcycles as well—from 27% in 2010-11 to 18% last year. In the process, Bajaj has dropped from being the second-largest player in the market to being the fourth, behind market leader Hero MotoCorp, Honda and TVS.

The company has not thrown in the towel though. Last week, it launched the world’s first motorcycle that can run on compressed natural gas (CNG). Called Freedom, it is a fresh salvo to lure the consumers at the very bottom of the motorcycling pyramid with a price tag between ₹95,000 and ₹1,10,000. It is also the fortress of Hero MotoCorp that Bajaj has repeatedly tried to breach but without much success.

“High running cost is a major pain point for the commuter segment and we believe this is a game changer product,” said Rajiv Bajaj at the launch of Freedom in Pune on 5 July. “Every month, around 900,000 commuter motorcycles are sold in India. We sell around 150,000-170,000 units out of this. In the 100cc segment, Bajaj has a really small presence. In the 125cc segment, we are a strong number 2 but far from being a monopoly. So, the headroom for us is almost 700,000 motorcycles every month,” he added.

The commuter segment comprises bikes with engine sizes between 100cc and 125cc. These are utilitarian no-frills machines focused less on performance and more on fuel economy. The Freedom is powered by a 125cc petrol engine and carries a 2kg CNG tank, along with a 2 litre petrol tank. However, it can run entirely on CNG alone.

Will this bold gambit pay dividends and help Bajaj recoup lost ground in the market?

King of Bottom Line

For all the decline in motorcycle market share, and the lack of scooters, Bajaj remains significantly more profitable than its direct rivals. It prides itself on consistently delivering a strong bottom line.

Last year, Bajaj returned a net profit of ₹7,708 crore on net sales of ₹44,870 crore. This was significantly better than market leader Hero’s ₹3,755 crore net profit on sales of ₹37,789 crore and TVS’ profit of ₹1,686 crore on sales of ₹39,145 crore.

No wonder, the Bajaj stock is a favourite with investors in the stock exchange—it has quadrupled in the last decade outpacing the overall stock market which has trebled. In the last one year, Bajaj Auto’s stock has shot up 95% and closed at ₹9,537 on 8 July. In comparison, Hero Motocorp’s shares have risen 77% and TVS 83% in the same period.

What is the secret to its profitability? Its traditional strength in the executive segment (bikes between 125cc-250cc), which offers better margins against the entry level bikes, where price wars are common, is one of the reasons. Bajaj has always prioritized margins over volumes. The company also sells more three-wheelers (autos) than any other firm in India, ahead of Piaggio, Mahindra and Atul Auto. Here, Bajaj has a near monopoly with close to 70% market share, which helps its bottom line.

And the company was one of the early movers in exports. In 2023-24, it exported over 1.4 million motorcycles from India accounting for over 40% of all motorcycles shipped out of the country. Exports offer better margins than domestic sales and account for a third of Bajaj’s overall net sales. Freedom can potentially add to these impressive numbers, going forward.

“To begin with, we will try to satisfy the demand in the domestic market. But, we have plans for export and have identified six countries—Egypt and Tanzania in Africa, Bangladesh and Indonesia in Asia and Colombia and Peru in Latin America—which can be big export markets for Freedom,” said Rakesh Sharma, executive director, Bajaj Auto.

Fuel Advantage

The biggest USP of CNG over petrol is its lower running cost. CNG costs over 20% lower than petrol or ₹75.09 per kg versus ₹94.72 per litre. At the same time, it offers higher mileage, 102km per kg for Freedom versus 65km per litre for petrol.

It addresses the rising cost of running vehicles due to an increase in petrol prices, one of the major reasons for the decline in commuter segment sales. In 2023-24, commuter sales were still 15% below the peak of 2018-19 when sales had topped 10 million units. What has exacerbated the situation is the rise in the cost of motorcycles since 2019 by almost 25% due to stricter safety and emission norms.

“The key variables for the success of CNG are initial upfront cost, tank capacity and mileage. Considering its expertise in three-wheeler CNG, Bajaj is best placed to attempt this,” said Pramod Amthe, head of equity research, Incred Capital, a brokerage firm. “Motorcycle customers are conscious of fuel mileage and power.”

According to brokerage house Nuvama, around 45% of the current motorcycle market could be addressed by CNG. It could potentially grow to 60% of the market in the worst and 80% in the best-case scenario. “CNG-powered motorcycles can potentially be a more attractive alternative for Indian consumers in the mobility sector. CNG is not only more competitive to petrol in terms of price, but also can be a lucrative alternative to electric motorcycles,” the brokerage stated in a note in June.

The Optimism

In the two categories where CNG vehicles are readily available—passenger vehicles and three-wheelers—the share has grown significantly in the last few years. CNG accounts for over 30% share in three-wheelers and around 15% in passenger vehicles. Bajaj believes the potential, at least in the entry-level segment, is even bigger.

“Commuter segment sales are around 650,000 units per month and we sell around 150,000-170,000 units out of this. So, the headroom for growth is significant,” Bajaj said during the launch. “A 30% penetration in this segment would give us volumes of 200,000 units and it would go up to 500,000 units at 80% penetration.”

It could be a critical addition to Bajaj’s portfolio given its recent performance in the domestic market. The lack of petrol scooters already means it doesn’t have a play in a third of the market. It has lost four percentage points in the 100-125cc motorcycle segment since 2012-13 and even in the 125-250cc segment, which it leads, its share has dropped from 50.21% in 2010-11 to 34.6% in 2023-24. In the fast-growing premium segment of 250cc mobikes and above, Bajaj, like all other mass market players, has been slow to react and has a share of just 4.4%. Bullet maker Royal Enfield is the overwhelming leader here with an 88% share.

“With the number of CNG stations expected to reach 17,500 by 2030, there will be an increased offtake in many cities and towns. This would in some way complement the electric vehicle (EV) network and lead to sales growth for Bajaj due to the lack of electric motorcycles in the market,” said Ashim Sharma, senior partner, Nomura Research Institute, a management consulting firm. “CNG is a time-tested technology. So, the adoption would be better and the ability to switch between petrol and CNG would alleviate any range anxiety.”

To begin with, Bajaj is being conservative. Freedom is currently available in Maharashtra and Gujarat but will be rolled out in other states by the next quarter. It is targeting sales of 10,000 units per month now and expects it to grow to 50,000 units a month by the end of the year.

Many Concerns

On the flip side, Freedom costs significantly more ( ₹95,000- ₹110,000) than best-selling 100cc and 125cc mobikes. Bajaj’s own 100cc bike Platina costs ₹68,262; comparable models like Honda Shine sell for ₹65,000 and Hero Splendor+ at ₹75,441. The 125cc Hero Glamor is priced at ₹82,598.

So, customers will have to recover the differential in price through lower running costs before it leads to any real savings.

There are other concerns too, like safety. Consumers may be hesitant to ride on top of the CNG tank; queuing up at CNG stations for a refill may put off some people. There are less than 6,500 CNG stations in the country today against over 80,000 petrol pumps. Additionally, a number of electric motorcycles that offer even lower running costs are slated to be launched in the next 12 months which may hamper the prospects for Freedom.

“The higher upfront cost needs to be recouped with fuel savings, which seems apt for two-wheeler fleet owners only. CNG can help address a small group of only fuel cost conscious customers,” said Amthe of Incred. “Considering that EVs provide the lowest cost of fuel, consumers have better choices. CNG could have been an easy win five years back, but with EV alternatives, it’s going to be challenging,” he added.

What if the CNG gambit fails?

“Logically it should do very well and if it does, we are well positioned to exploit it,” Rajiv Bajaj said at the launch. “But marketing can be very counter-intuitive. Sometimes things that should do well, don’t. And those that shouldn’t, do,” he added. “So, if it doesn’t, it’s ok. We will move on to other things.”

But, if the bet works, there is a chance Bajaj will be able to raid Hero’s bastion.