NFI Group: Can Zero-Emission Bets Drive Growth Amid ROCE Struggles?

NFI Group (TSE:NFI), a leading manufacturer of buses and coaches, faces a conundrum: its Return on Capital Employed (ROCE) has stagnated at 6.4% for the trailing twelve months ending March 2025—well below the Machinery industry average of 11%. Yet, the company's record backlog, surging demand for zero-emission buses (ZEBs), and strategic initiatives suggest there's more to the story. Is NFI's low ROCE a red flag, or is it masking a growth trajectory fueled by secular tailwinds? Let's dig in.

### The ROCE Challenge: A Symptom or a Structural Issue?
ROCE, which measures profitability relative to capital deployed, has been a persistent weakness for NFI. At 6.4%, its current ROCE (as of March 2025) lags peers, signaling inefficiency in deploying capital. Part of the issue stems from NFI's capital-heavy business model, which requires significant investments in manufacturing facilities and inventory. However, the company's Return on Invested Capital (ROIC), a related metric, improved sharply to 7.5% in Q1 2025 from 1.8% a year earlier, driven by higher Adjusted EBITDA and better capital management.

While ROCE remains a concern, management's 2025 guidance targets an ROIC of 9%-12%, suggesting confidence in optimizing capital utilization. The question is: Can NFI close the ROCE gap without sacrificing growth?



### The Backlog Boon: A Bridge to Future Growth
NFI's Q1 2025 results revealed a record $13.7 billion backlog, up from $10.3 billion a year earlier. This backlog—primarily tied to ZEB orders—provides a clear runway for revenue growth. The company's strong order intake, especially in North America and Europe, reflects accelerating demand for clean transportation. For context, ZEBs now account for over 80% of NFI's transit bus orders, a shift driven by government subsidies, emissions regulations, and corporate sustainability goals.

The backlog's size and composition are critical. Unlike traditional diesel buses, ZEBs often come with higher margins due to advanced technology content and premium pricing. Management has also noted improved pricing power on heavy-duty transit and coach deliveries, which could further boost profitability.

### Strategic Leverage: ZEBs and Supply Chain Resilience
NFI's focus on ZEBs isn't just a market response—it's a structural bet. The company has invested heavily in electrification, including partnerships with battery suppliers and software developers to enhance vehicle efficiency. This specialization positions NFI as a key player in a sector expected to grow at a 12% CAGR through 2030, according to industry analysts.

However, challenges linger. Supply chain disruptions, particularly in seat components, have slowed production. While management secured a $171.9 million credit facility to bolster liquidity, resolving these bottlenecks will be crucial to meeting delivery targets.

### The Investment Case: Hold for the Long Game?
NFI's stock has underperformed, rising just 9% over five years—a stark contrast to peers like Tesla (TSLA) or BYD (002594.SZ), which have capitalized on EV demand. Yet, the company's fundamentals suggest a potential turnaround:

1. Backlog to Revenue Conversion: The $13.7 billion backlog, if executed efficiently, could fuel revenue growth of 15%-20% annually over the next three years.
2. ROIC Improvement: Achieving the 9%-12% ROIC target would signal better capital allocation, potentially lifting ROCE in tandem.
3. ZEB Tailwinds: Regulatory and consumer demand for clean transit is unlikely to wane, creating a durable growth moat.



### Risks to Consider
- Supply Chain Volatility: Seat shortages and tariffs on imported components could delay deliveries and inflate costs.
- ROCE Lag: Even with better ROIC, the ROCE gap may deter investors until it closes.
- Competitor Pressure: Rivals like Volvo Buses and Lion Electric are ramping up ZEB production, intensifying competition.

### Bottom Line: A Hold with Upside Potential
NFI's low ROCE and supply chain hurdles are valid concerns, but the company's ZEB specialization and record backlog offer a compelling growth narrative. Investors should view NFI as a long-term play on the EV transition, with shares potentially gaining traction if capital efficiency improves. For now, a hold rating makes sense, with a buy consideration if Q2 results confirm ROIC progress and production bottlenecks ease.

In a sector where innovation and execution define winners, NFI's strategic pivot to ZEBs could yet transform its capital efficiency—and its stock.