How to Play the EV Story without Actually Playing the EV Story

Aug 18, 2021

I recently returned to Mumbai after taking a solo trip to the mountains for a week. My destination was the picturesque Ladakh, the land of high passes and mountains.

It felt great to take a break from reading annual reports, talking with company managements, and making financial projections.

My tour guide, a local talkative Kashmiri, was an enthusiastic soul.

Our discussions started with the obvious topics i.e. the declaration of Ladakh as a union territory, and covid.

He told me covid has turned out to be a blessing in disguise for local tourism, especially the North Indian states, as tourists can't travel abroad.

The analyst in me decided to talk to him about the effect of rising fuel prices on his livelihood. I knew that standalone tourist drivers are likely to have a tough time.

In a grim voice, my driver asserted that rising fuel prices are killing the transport business.

Based on his calculations, while the diesel prices have gone up by 30-35% in a year, the rate per km, which he charges customers, has increased by only 15-20%.

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His income has gone down by at least 15% due to rising fuel prices.

I asked him what next?

He said he hoped electric vehicles (EVs) would bring his costs down.

My eyes lit up at once.

On enquiring further, his knowledge about recent developments like the launch of Ola electric and subsidies by the government was at par with most people in the industry.

Both of us were excited about the price of OLA s electric 2-wheeler at launch, which certainly didn't disappoint.

It's clear to me that it's not only analysts and auto enthusiasts who are excited about the upcoming EV revolution. The masses too, are tracking the EV space closely.

The sentiment for EVs is ripe due to many tailwinds - high fuel prices, the falling price gap to petrol/diesel vehicles, and the government's push.

In a previous editorial, I wrote about how an electric 2-wheelers offer a payback within 3-4 years and after that, cost savings can be high.

Let's assume the EV adoption in India is likely to jump sharply over the next couple of years.

This is great news for private equity players who have backed electric vehicle OEMs like OLA Electric and Ather Energy.

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What about investors like us who deal in the stocks market?

Unfortunately, pure play EV firms are not listed and those which are listed have dismal financial performance. Some even have negative net worth.

Some pure play EV companies have been incurring losses since inception. Their order book has been improving gradually but sales do not amount to profitability.

I believe this is normal for the EV industry because economies of scale are absent i.e. the industry is too small.

Investing in these companies is a risky bet on the future.

Factors such as speed of adoption, government subsidies and competition among electric OEMs will determine the road to profitability for these companies.

Now, that is risky gamble...

There are too many unknowns to bet on a narrative, right?

So, why not focus on safe and sound companies which supply parts to these electric OEMs? They have strong balance sheets too.

I am talking about auto ancillary companies. This is the safest bet on the EV boom.

An Ola or Ather scooter or a Tata Nexon will need LED headlights, side mirrors, light weight tyres, and lots of electronics among many other parts.

I think it's best to identify which set of auto ancillary companies will benefit and which ones will go out of business.

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Imagine a company manufacturing key engine parts. Even if we assume 8-10% of all vehicles sold in India in 2025 will be electric, the revenue visibility of the engine parts manufacturer will go down substantially.

And don't forget, markets are forward looking. These are the set of companies which one should avoid.

Given a choice between investing in companies which are expected to benefit when EV picks up (OEMs) and companies which are likely to benefit incrementally (auto ancillaries supplying to EVs), my choice is clear.

The auto ancillaries are the way to go.

Until we get visibility on which OEM emerges as a market winner, auto ancillaries will not only see an increase in revenue - more parts used in every vehicle - but also have an insurance net in them.

At the end of the day the most important factor determining any customer's buying decision is the cost benefit analysis.

While the cost difference is gradually declining in electric 2-wheelers, it might take some time for passenger cars and commercial vehicles.

In such cases, auto ancillaries have the cushion to adapt if EVs don't pick up.

In my view, the best way to play EVs without playing EVs is playing the auto ancillary companies supplying to EV players.

When the industry picks up steam, only then consider the OEMs.

I believe, in life and in the stock market, every opportunity should be evaluated by giving more weightage to downside risks rather than upside potential.

In the current euphoric market, this should be your golden rule.

Warm regards,

Aditya Vora
Aditya Vora
Research Analyst, Hidden Treasure

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4 Responses to "How to Play the EV Story without Actually Playing the EV Story"

R Doshi

Sep 10, 2021

your view at a macro level is true but your talk on backing ancillaries that supply to EV OEMs is itself caught in a wrong logic. If the volumes in EV space are less and do not provide ability to predict winners since economies of scale are not present, how is that you have ability to predict that a auto ancillary will do better when the OEM to whom it is supplying not having economies of scale?

It is better to have a consistent logic to back the ancillary if the same logic is not applicable to the OEM to whom these ancillaries will be supplying.

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P S Rao

Aug 20, 2021

Dear Aditya Vora,

Can you collect total number of vehicles on road in India, how many are expected to be road worthy approximately. Then, compare with annual demand every year for new vehicles. From this insight, we can arrive at demand for auto parts of non-Electric vehicles. Then assess intrinsic value of each company.

Just go and ask for new battery replacement for any 4-year old mobile of yours. I swear that you will not get. So what do you do? Buy a new mobile. You will reinforce your buying decision with additional features like internal memory and RAM. The additional requirement for RAM and internal memory stems from the fact that the apps are made bulky (in the name of features), system software is made bulky(in the name of sturdiness and security) so that they are always resource thristy.

Just close your eyes and think. Are you prepared to change your EV scooter, with the same Zeal and without blinking an eye every four years , as you change your mobile? What would be your calculations if you were to change EV every four years? I am sure you won't. We are misers when it comes to buying EVs and essentials.

Did you notice that the battery in your mobile discharges faster after 2 years. Then the mileage per charge goes down drastically. Where is this incorporated in your calculation for EVs?

Did you take into consideration that though the claim a certain mileage per charge and this may be under certain test conditions (as is for other than EVs). But the important thing to note is that calculations will go wrong badly for EVs than others if the actual mileage is lower than claimed.

To confirm my claims, just go to any EV owner who has already operated more than 2 years and then sit and recalculate.

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Pankaj Mahidhar

Aug 18, 2021

I have hardly read anywhere that the EV market is not growing rapidly because of exorbitant prices charged by companies under the garb of economies of scale.

Electric vehicles have 20% moving parts compared to a regular combustion vehicle. Except batteries cost a little more but these are going to go down sooner than later. The companies are not taking the risks required to push the scales.

I believe ideally a quality two wheeler should not cost more than 50K which are today prices at 100 to 150K. Electronics is so cheap but the startups and large companies show a few electronic enhancements as something dramatic but same and much more is available in a very ordinary phones of today.

I was expecting Ola to price it's scooter near 50K with such huge production capacity but I think it is trying to encash the small pockets of enthusiastic environment friendly prospects.

Avoiding Chinese products is fine but there is no harm in adapting Chinese thinking in pricing policies.

It may be a long time India actually succeeds in self dependency because our companies are so accustomed to do business tweaking and influencing government policies that competitive business practices may take decade/s to adapt.

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MITESH J SHAH

Aug 18, 2021

Dear Aditya Vora,

I would be really , really great if all stories are covered with LIVE examples.This stories wud not mean anything unless backed by real examples. GYAN toh sahi hai par sirf GYAN se PAISA NAHIN Banega Na ???

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