Why EaseMyTrip's E-bus venture could become a di-worsification trap

A profitable online travel agency (OTA) is a rarity, but EaseMyTrip (Easy Trip Planners) has always stood out as an exception. However, its latest diversification plans may cause concern, even among its most loyal supporters. The OTA recently announced a bold foray into the electric bus market, allocating Rs 200 crore to establish a manufacturing plant over the next two to three years capable of producing 5,000 buses.

While the company's impressive track record of generating Rs 100 crore annually in cash suggests that capital isn't a concern, its latest venture marks a sharp departure from the asset-light business model that has driven its success. Here's why this shift could be a risky gamble.

EaseMyTrip's diversification turns into di-worsification

In the Q4 FY24 earnings call, the management reaffirmed its commitment to an asset-light strategy, stating, "We want to play the game only in an asset-light manner where we don't have to pre-book anything, pre-purchase anything, and there needs to be no delivery". Yet, its entry into manufacturing electric buses contradicts this approach. This sudden shift brings three major risks:

• Lower efficiency: EaseMyTrip's asset-light model has been the backbone of its impressive performance, with an average return on capital employed (ROCE) of 48 per cent between FY21-24. In contrast, pure-play electric bus manufacturers such as Olectra Greentech and JBM Auto posted much lower ROCEs of 11 per cent and 18 per cent, respectively, in the same period. This highlights the efficiency risks of shifting to a capital-heavy model, where lower returns on investment are often the norm.
  
• HIgher capital requirements: The Rs 200 crore investment for the manufacturing plant may only be the beginning. Looking at Olectra Greentech's Rs 700 crore capex plan announced in FY24 for a plant with a capacity of 5,000 buses, EaseMyTrip may need significantly more funds to compete. Olectra already had a 1,500-bus plant prior to this latest capex outlay, suggesting that EaseMyTrip could face steep capital demands to stay competitive.
  
• Demand uncertainty: Management believes its bus ticketing platform, Yolo Bus, will synergise with the new electric bus venture, helping sell 2,000 buses by FY27-28. It's also projecting 24 per cent annual growth in the e-bus industry through FY30. However, Yolo Bus has posted significant losses over the past two financial years, and EaseMyTrip has no prior manufacturing experience. This makes the sales forecast seem more like wishful thinking than a reliable projection.

Our take

EaseMyTrip has long been a standout, generating profits in an industry rife with losses. Much of its success can be attributed to smart capital management and its strong focus on an asset-light strategy. The move into manufacturing marks a sharp deviation from this proven model, introducing risks that shareholders and potential investors can't afford to overlook.

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