This Stock is a Better EV Bet Than Tata Motors

As governments, industries, and consumers around the world embrace cleaner alternatives, electric vehicles (EV) are set to redefine the future of transportation, promising a more sustainable and efficient era on our roads.

The EV megatrend is in full force in India as well.

As per media reports, electric vehicle sales in India surpassed over 1.5 million units in 2023, a historic feat. This was on the back of government subsidies, rising consumer awareness, and accessibility to newer models.

As a result, shares of EV companies also rose higher. The stock that saw maximum traction was Tata Motors. With a 101% rise in its share price, the company was the top Nifty 50 gainer of 2023.

As India's largest electric vehicle manufacturer, it's no surprise that shares of the company spiked. The company is a leader in the passenger vehicle (PV) EV segment with a 70% market share.

However, the hype around the stock doesn't seem to die.

The company has a clear plan to transition to a mostly EV company by 2030 and has backed the plan with billions in funding, leadership support, and technology partnerships which seems to push its share price higher.

But what if I told you a better way to play this opportunity? Forget the fanfare, forget the brand recognition.

This stock boasts better fundamentals and a wider exposure to the electric vehicle theme. It's not about size, it's about strategy.

If you're wondering which company this is, it is none other than Amara Raja Energy & Mobility.

Let's see how this hidden gem could electrify your portfolio far more than the established giant.

Amara Raja Energy & Mobility: At the Heart of the EV revolution

While electric vehicles are the pioneers of eco-friendly transportation, what makes them sustainable are the EV batteries. They release the vehicles from their dependence on fossil fuels.

Amara Raja Energy & Mobility is at the heart of this transition.

What does the company do?

Amara Raja Energy & Mobility is the flagship company of the Amara Raja Group.

It is one of the largest manufacturers of lead-acid batteries for both industrial and automotive applications in the Indian storage battery industry and is the largest player in this segment after Exide Industries Ltd (Exide).

The company has forayed into the EV space via its new energy division that manufactures lithium cells and packs, EV chargers, and energy storage solutions.

In FY23, the company established its subsidiary Amara Raja Advanced Cell Technologies (ARACT) for its new energy business.

ARACT is focused on developing advanced cell chemistries tailored to Indian conditions and supplying battery packs and chargers to two-wheeler and three-wheeler OEMs (original equipment manufacturers).

The company also laid the foundation for one of India's largest Giga Corridor for Lithium-Ion Cell and Battery Pack Manufacturing in Telangana, marking a significant milestone.

This will be a 16 gigawatt - hour (GWH) plant that will be built in a phased manner with an investment of Rs 95 billion (bn) over a period of 10 years.

The company's technology partners are ISRO and Log 9 and they have created a portfolio catering to e-mobility and energy storage applications.

The company also plans to acquire Amara Raja Power Systems Limited (ARPSL) from the promoter family.

ARPSL is involved in the manufacturing of industrial chargers, integrated power systems, EV chargers for two-wheelers/three-wheelers and other energy management devices.

The company's new energy business has started contributing, albeit marginally.

This business is expected to ramp up its revenue by 3x (Rs 7.5 bn) in FY24, as it will also start supplies to electric two wheelers.

Why the Stock is a Better EV Bet Than Tata Motors

While Tata Motors has been the obvious choice for investors riding the EV megatrend, the fact is that the company's fundamentals are far from robust.

	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Revenue (in Rs million)
Tata Motors	3,019,384	2,610,680	2,497,948	2,784,536	3,459,670
Amara Raja Energy & Mobility	67,931	68,392	71,498	89,822	107,886
Net Profit (in Rs million)
Tata Motors	-289,337	-109,752	-130,161	-112,347	23,535
Amara Raja Energy & Mobility	4,832	6,608	6,468	5,126	6,945
Operating Profit Margin (in %)
Tata Motors	9.2%	8.0%	14.0%	10.0%	10.6%
Amara Raja Energy & Mobility	14.7%	16.9%	16.8%	12.3%	13.4%

Data Source: Ace Equity

As you can see from the table above, the company's revenue has grown at a meagre CAGR (compounded annual growth rate) of 3% over the last five years, with a lot of fluctuation in its sales.

While some of it can be attributed to the weakness in the auto industry due to the pandemic, one cannot ignore that the company has been struggling since its acquisition of Jaguar Land Rover (JLR).

On the other hand, Amara Raja's revenue has increased at a CAGR of 11% over the last five years withstanding both industry and economic cycles.

Weak operating efficiency has also resulted in poor margins for Tata Motors.

However, this has not been the case for Amara Raja. The company's 5-year average operating profit margins stand much higher at 14.8% as compared to 10.3% for Tata Motors.

In terms of profitability as well, Amara Raja has reported better numbers. While the company's net profit has grown at a CAGR of 10% over the last five years, Tata Motors has posted losses for 4 consecutive years before it turned profitable in 2023.

While there has been a turnaround in numbers, it remains to be seen whether the company can sustain its profitability given stiff competition and inherent cyclicality in the domestic commercial vehicle industry.

The domestic passenger vehicle market also remains highly competitive.

The segment is expected to witness increased competitive intensity, going forward, as OEMs introduce new models. This could pose a threat to the company's leadership in the segment.

Tata Motors vs Amara Raja - Financial Ratios (2019-2023)

	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Return on Equity
Tata Motors	-37.19	-17.94	-22.17	-22.53	5.24
Amara Raja Energy & Mobility	14.49	18.91	16.45	11.7	14.1
Return on Capital Employed
Tata Motors	-14.61	-1.92	-1.27	1.23	7.48
Amara Raja Energy & Mobility	21.72	24.04	22.25	16.01	19.60
Debt to Equity
Tata Motors	1.76	1.91	2.46	3.14	2.78
Amara Raja Energy & Mobility	0.02	0.01	0.01	0.01	0.00
Interest Coverage Ratio
Tata Motors	-4.45	-0.46	-0.29	0.25	1.3
Amara Raja Energy & Mobility	106.05	69.96	83.94	46.77	43.9

Data Source: Ace Equity

Coming to return ratios, Amara Raja's return on equity (RoE) and return on capital employed (RoCE) stand robust at an average of 15.1x and 20.7x over the last five years, indicating that the company has utilized both shareholder's money and capital efficiently.

Tata Motors, meanwhile, has posted negative ratios between 2019-2022.

However, this has improved in the last two years. Yet, the numbers are far from adequate for such a hyped stock.

With respect to debt, Tata Motors debt to equity ratio stands dangerously high at 2.78x.

Although the company has expressed its desire to become debt free by the end of FY25, the feasibility of this goal remains uncertain.

In line with JLR's commitment to transition entirely to electric vehicles, significant annual investments of 3 billion pounds for product development are anticipated.

Additionally, the India business is expected to demand an extra investment of Rs 70-80 bn annually for similar purposes.

Amara Raja, however, has a debt-to-equity ratio of 0.02x.

Moreover, despite its large capex plans, the company's limited reliance on debt and accruals of Rs 11-12 bn, are expected to ensure debt metrics remain at robust levels over the medium term.

All these factors make Amara Raja a much safer and sound investment as compared to Tata Motors.

Valuations

The stock of Tata Motors is currently trading at a PE (Price to Earnings) ratio of 61.5x.

This is considerably higher than its historical average of 14.4x from 2015 to 2018 during which the company was profitable, making it overvalued.

The company reported a string of losses from 2019 to 2022, after which it reported that it was profitable in 2023.

However, despite its growth plans and leadership in the EV segment, the stock does not warrant such a high PE ratio, given its weak fundamentals.

On the other hand, shares of Amara Raja are trading at a PE Ratio of 17.9x, slightly below their 5-year historical average of 18.5x, making them undervalued.

This is quite a puzzle and suggests there might be something temporarily buoying the share price. Alternatively, a lack of immediate triggers on the new technology front could also be holding the stock back.

Nevertheless, the stock is fundamentally sound and could see further upside in the months ahead.

Conclusion

In conclusion, Amara Raja emerges as a compelling choice in the electric vehicle (EV) market, outshining Tata Motors in several key aspects.

The company's steadfast commitment to innovation, coupled with its robust expertise in battery technology, positions it as a frontrunner in the rapidly evolving EV landscape.

The company also has better fundamentals and has been able to withstand economic, industry, interest rate, and product cycles better than Tata Motors.

Investors looking for a reliable avenue in the electrified future of transportation may find Amara Raja to be an appealing choice.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...