Can the Best EV Stocks Be Agnostic to EVs?

Jun 8, 2021

The chicken or the egg dilemma is commonly stated as this question: Which came first, the chicken or the egg?

The dilemma stems from the observation that all chickens hatch from eggs and all chicken eggs are laid by chickens.

'Chicken and egg' is a metaphor used to describing situations where it's not clear which of two events is the cause and which is the effect.

It's used to express the difficulty of explaining the sequence of actions because each seems to depend on the other being done first.

Now the above definition makes me feel like Chatur from the movie 3 idiots, ranting out the bookish definition without any practical context.

You see, we at Equitymaster intend to be the Ranchos and not the Chaturs of investing.

There has been a lot of debate around Electric Vehicles (EV) and their limited adaptability due to no charging infrastructure.

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The chicken and egg context to EVs is as follows.

Argument 1: People don't buy EVs in India as there is no charging infrastructure.

Argument 2: There is no charging infrastructure as there are barely any EVs.

My view on this is based on how OLA/ Uber created the shared mobility industry.

It's always catastrophic to be ahead of the curve in business.

Forget internet enabled smartphones, 20 years ago owning a mobile phone was a luxury.

The reason why OLA/Uber thrived was the penetration of smart phones supported by 3G/4G services at economical costs.

Imagine what a colossal flop OLA/Uber would have been if launched 20 years ago.

The convenience factor which I think plays the most important part in choosing an OLA/Uber versus traditional cabs, was taken care by internet enabled smartphones.

How it started

The cab aggregators to impose a habit in consumers lives, doled out free schemes and massive discounts for at least 2-3 years.

I remember earning so many cashbacks by referring the service to my friends, that I travelled to and from office free for about half a month.

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The thought process was very clear: Make the customers addicted to comfort at similar or at times even lower prices than traditional Kaali Peelis.

The end game

Once customers got addicted to the comfort of an airconditioned 'on call' vehicle, they slowly and gradually reduced the freebies.

That's how an entire industry was created on two factors - Technology and Need.

The important point is as smart phone penetration increased so did the demand for Ola/Uber.

Let us see how this fits in to the EV context.

Smart phones are what charging infrastructure is in an EV ecosystem.

Electric vehicles are the OLA/Ubers of today.

Low cost 3G/4G is the declining battery costs in an electric vehicle.

For EVs to be successful all these factors have to converge together at the same time.

You cannot build electric charging infrastructure when the costs of EVs are expected to be 2-3x of gasoline cars.

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At the same time electric vehicles cannot run without a charging infrastructure.

Now that's a chicken and egg story!

What if I told you, instead of guessing the future of Electric vehicles in India, we found companies which make parts for vehicles?

What if also told you, these companies are oblivious to the fact whether there are EVs or no EVs on our roads?

I am talking about the auto ancillary space.

In my last editorial, I spoke about how market leaders in the automobile space are available at 30-35% discount from their peak prices.

Companies in the auto and auto ancillary space come under the classic playbook of buying wonderful companies at wonderful prices.

Apart from valuations, here are the reasons why I am gung-ho about this space.

What is common among the following ancillary parts in a vehicle?

Head lights, tyres, windshield, wiring harness.

The answer...

Irrespective of what you're driving - a Tesla or a Maruti - these parts will always be needed.

In fact, the usability of these parts will increase in electric vehicles.

However, if you were a company supplying engine parts or the fuel supply mechanism, there are chances you would be outdated in the next decade when electric vehicle penetration increases.

I was on a conference call with a vehicle lighting company.

The management foresees their content per vehicle to increase in electric vehicles. This will definitely lead to better margins and profitability.

It's anticipated that wiring harness content in an electric vehicle is twice than that in a gasoline vehicle.

Another reason to look into auto ancillary players is that they are less vulnerable to the cyclicality that affects auto makers.

As majority of auto ancillary players supply to different sub segments and have a diversified customer base, their businesses are generally less cyclical.

To give you an example, while commercial vehicles were hit badly due to lockdowns, the tractor industry was thriving on a good monsoon.

Two wheelers being a rural play have different demand dynamics than passenger vehicles which are an urban and tier 1-2 city plays.

I have always been intrigued by the writer Nassim Nicholas Taleb and his invention of words to describe situations.

While everybody talks about finding the Tesla of India or betting on the timeline of EV adoption in India, my bet is on finding companies which will be agnostic to EV adoption.

I call these companies Anti-fragile!

In our Hidden Treasure service, we have recommended many such anti-fragile stocks from different sectors.

Watch this space...

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

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