Stocks to Target the EV Battery Supply Chain 

Dear Viewers,

A few months ago, 5.9 million tons of lithium resources were found in Jammu and Kashmir. As per the Union Minister Nitin Gadkari, it could make India number one auto manufacturer in the EV segment.

Frankly, I am not sure of that.

You see, there's many a slip between the cup and the lip. Little is known about these reserves if these can be mined in a viable way.

So that's not the reason I will bet on an EV revolution. But I'm optimistic about the rise of EV adoption in India.

The electrification of vehicles is not just a narrative anymore, but a megatrend that is taken over in the country. The major trigger has been a decline in the battery cost.

Then we have policy tailwinds - PLI schemes, carbon commitments, subsidies, and investment in EVs by corporates.

It's like little pieces coming together to make this vision a reality, especially in two-wheeler segment.

And there is data backing it.. Overall EV sales in FY23 were up 58% YoY. Of the total EV sales in FY23, electric two wheelers and three wheelers accounted for 62% and 34% respectively.

Now India is a unique country, in the sense that 2 wheelers comprise over 80% of the of the auto volumes.

If we look at our closest neighbour China, 80% of the 2-wheeler fleet is electrified.

With subsidized cost of ownership, comparable performance, and conducive charging options, as two wheelers can be charged at home at minimal cost, the EV transition in the two-wheeler space is on an accelerator.

Here's how to visualise the size of this opportunity.

In FY23, two-wheeler sales in India were 15.8 million units.

Now auto is a cyclical sector. So, let's consider a moderate 5% growth for the next 10 years. At this rate, we are looking at two-wheeler sales of 22 million units per year by 2030.

Due to all the reasons mentioned above, one third of these could be electric vehicles. That is 7.3 million electric two-wheelers per year. In FY23, the two-wheeler EV sales volumes stood at 0.7 m.

That's a 10x opportunity in this decade.

Early investors in this opportunity are in for a big wealth creation journey.

If you have been following me, you would know that I'm not too keen on EV OEMs for whom adoption of EV is more of a compulsion and a potential cannibalisation threat for the existing engine-based vehicles. I'm more interested in the pick and shovel plays - the EV ecosystem.

A few months ago, I had shared with you the names of some lesser-known pick and shovel chemical plays that could gain from EVs. You could watch it using the video link in the description section.

In today's video, I'm going to focus on a specific segment of the EV ecosystem, i.e., the EV batteries and the companies that could be potential beneficiaries. So, moving on to these stocks.

The first is Gravita India. It's a leading lead producer in India and the largest battery recycling company in India. It works with players such as Amara Raja, Exide, Tata Batteries, Panasonic, HBL Power Systems and so on.

89% of the revenues come from lead-based products and the rest from aluminium, plastic, turnkey projects.

The company has recycling facilities in India and abroad. Share of value-added products in FY22 is 42%. Exports account for 51% of its revenues.

The company has a hedging mechanism in place since June 2019, wherein it hedges its core inventory using forward contract on LME exchange along with back-to-back hedging that offers comforts with regards to commodity price fluctuation risk,

Its deep-rooted global procurement network allows it to procure material cheaper and along with established and diversified client base, offers entry barriers.

The business is witnessing tailwinds with extended producer responsibility (EPR) for on battery makers, battery waste management rules coming up in 2022 and scrappage policy in effect. With GST in place, the share of formal players like Gravitas in lead recycling industry is up from 20% in FY16 to 35% in FY23 and is expected to improve to 75% by FY26.

The capacity of the company is expected to grow by 69% by FY26. The planned capex is Rs 650 to 700 crores, mainly financed from internal accruals. Half of this would be for existing verticals and the rest for new verticals such as lithium, steel, and paper recycling.

The company is now focusing on EV battery recycling business that will help it become a prominent supplier in EV battery value chain. Battery recycling is still a nascent market in India and may take upto 6 years but could be the opportunity for an almost vertical growth for the early entrants. Gravita is working on a pilot project for Lithium-ion batteries to become market ready.

With a vast sourcing network and existing client relationships with prominent players in the battery segment, the company has an edge.

Also, one of the requirements for Ev is to use light weight components. As an aluminium recycler, the company caters to that need as well.

It targets 50% of its products to be in the value-added segment in 3 to 4 years from 43% as of now. The fixed asset turnover, i.e., Sales to fixed assets ratio in the business is 8 to 9 times. The company has been paying dividends for 12 years. The return ratios look strong with return on equity over 40% and return on capital employed over 31%. Debt to equity is comfortable at 0.6 times. The management's focus is to keep return on capital employed at a minimum of 25 percent.

The stock is trading at a PE of 20 times, against a 5-year median PE of 16 times.

The second player on this list is Kabra Extrusiontechnik.

Kabra has emerged as in interesting smallcap play in the EV value chain. It's a beneficiary of EV penetration, green growth and domestic manufacturing push. Its conventional business is making plastic extrusion machinery, where it is a market leader with 40% market share. For this business, the company's clients include Astral, Supreme, Ashirvad, Finolex etc. The conventional business stands to benefit from capex revival - rise in affordable housing, construction, and water infrastructure.

However, I'm more excited about Kabra's emergence as a player in the EV ecosystem in the recent years. With the launch of Battrix that contributed 26% of revenue in FY22, it has become a key value chain player in the green energy storage and electric mobility space. The Company targets to have 100% localization levels in Battery Management System (BMS) and other auto-components. Its R&D team is working on battery packs for electric 2 wheelers, 3 wheelers and 4 wheelers along with electric bus. It plans to increase battery pack capacity from 1 lac to 7 lac by FY24 with investment of Rs 1 bn funded by internal accruals. It is focusing on battery packs across multiple chemistries, with applications in electric 2 and 3 wheelers, LCVs, and swapping stations. The company has already captured 15% market share in the lithium-ion batteries in its segment. It is consistently increasing its partnerships with EV OEMs. The return on equity and capital for the company stand at 10% and 13% for FY22, a bit depressed due to lower scale of operations in Battrix by FY22 and Covid. But in the trailing 12 months itself, the company has grown operating profit by 35%. The latest net debt to equity ratio is at 0.24 times. The stock is trading at a PE of 46 times.

The third in the list is the graphite electrode manufacturer HEG. The company has the world's largest single site graphite electrode plant and is a global player. Its products are used in electric arc furnace for steel production.

Now that's its legacy business. I'm more interested in its new line of business.

Through its subsidiary TACC or The Advanced Carbons Company, HEG is coming up with a facility to manufacture graphite anodes for Li ion cells with inhouse tech expertise. These will cater to the batteries for electrical vehicles and energy storage systems which are mainly being imported as of now. Under the first phase which will be operational in FY26, it plans to invest Rs 1,000 crore to cater to 10 giga watt hour of cell manufacturing capacity and make 10,000 tons of anodes per annum, which is likely to take care of 20% of the domestic demand. Under Phase 2, it plans to invest another thousand crores to cater to 20 Giga watt hour of cell capacity. The management expects it to be a vertical growth opportunity for the company.

As of now, the company has return on equity and return on capital of 12 % and 14% respectively. It is trading at a PE of 8 times and price to book value of 1 time.

So, these were the three candidates I wanted to draw your attention to. Do note that today's discussion does not imply any view on the stock. But I do believe these are the stocks that deserve to be the on the watchlist, if the opportunity in EV battery chain excites you.

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Thank you for watching. Goodbye.