The First Among Equals in India's EV Ecosystem

Oct 19, 2021

A gold rush is unfolding right in front of our eyes.

In my last editorial, I shared with you a 66x growth opportunity in electric 2 wheelers.

2-wheeler OEMs, and some new entrants - Hero, TVS Motors, Bajaj Auto, Greaves Cotton, Ola - are making big EV announcements.

However, the winners of this EV war will be few.

And most likely, they will be the names you don't often hear about in the media.

This may sound counter intuitive. So allow me to explain.

You see, these much 'visible' EV stories still heavily rely on internal combustion engines (ICE) vehicles.

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EVs are a tiny part of their huge businesses. Even as this part grows exponentially, it will cannibalise and disrupt their ICE fuelled legacy business. The business has been their bread and butter.

Thus, the incremental value gained in this transition could be low.

Of course 2-wheeler makers have no option. The EV transition is critical for their survival. But to expect overall growth, when their legacy business shrinks, is a bit of a stretch.

Until EVs achieve critical mass, they will entail huge investments. Economies of scale may take time. By that time, high competition and pricing pressures could weigh down their profits.

If you want to make big gains from India's EV revolution, you should look beyond the big EV names.

Where should you look?

The EV supply ecosystem.

Unlike most listed 2-wheeler makers, there will be a good profit making opportunity for players in the EV supply ecosystem.

So how will this supply chain work?

There are only around 20 moving parts in fully electric car. This compares to 2,000 parts in ICE vehicles.

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A fully electric vehicle will not need multi-speed transmissions, radiators, fuel injectors, gas tanks, valve trains or exhaust systems, pistons, gears, spare parts, and so on.

Companies that produce these parts only for ICEs based vehicles will suffer.

If you're thinking of investing in EV stocks, keep this graphic in mind.

Impact of EV Transition on Different Components

Extremely Negative Negative Moderate Positive Extremely Positive
Engine parts Gears Steering Systems Electric Motor Batteries
Clutch Seats Inverters Wiring harnesses
Radiator Brake Lining Microprocessors
Headlights Controllers
Leaf springs
Shock absorber
Source: BEE Technical Study of EVs and Charging Infrastructure, Industry Report (GIZ, Niti Aayog)

Companies like ShriRam Pistons and Rings, or UCAL Fuel systems (that makes carburettors and Air Suction Valves) could be on the losing side of this race.

On the other hand, players in these segments will benefit:

  • Charging infrastructure
  • Battery swapping operators
  • EV ancillary manufacturers
  • EV software and product designing
  • Battery makers
  • Metal, mining, and chemical companies - lithium, copper, soda ash, silver, fluoride (substitute for lithium).

There are other potential areas where EVs could bring growth.

EVs will need better aesthetics, design, and fuel economies. This could push EV makers to substitute iron and steel with lightweight materials.

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This could open new opportunity for high specialty polymer makers. Or for companies like NALCO and Hindalco.

EV beneficiaries could be in the sectors that might have escaped your attention. I mean, did polymer companies come to your mind when thinking of investing in EV stocks?

More examples are the product engineering, design, and technology services companies like Tata Elxsi and KPIT. These companies are working on making EVs connected, autonomous, and shared.

Lastly, be cautious of the players with heavy dependence on electrification, i.e. the 'pure EV plays', such as Olectra Greentech.

The upside in these players could be huge but getting the timing right is a huge challenge. In case of a delay in the transition to EVs, or any policy related hiccups, the momentum in these stocks could end swiftly.

Despite these caveats, I believe there will be huge profit making opportunities in the EV space.

Tanushree and I have been busy with our big EV project, separating winners from losers.

If you wish to profit from this megatrend, join us on 25 October at our special event on the EV Gold Rush.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: Equitymaster's secret research has uncovered a little-known way to play the massive 15x Profit opportunity in EVs. Get the details here...

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2 Responses to "The First Among Equals in India's EV Ecosystem"

Raj

Oct 20, 2021

These are my thoughts on EV
1. Yes people are buying electric vehicles but only as a secondary vehicle. Its still a long long way till electric vehicle becomes a primary one for a person. So the people who buy scooters for near by travel and have extra money to spend will surely go for EV. So, there will a possibility that current Scooter manufacturers like Honda and TVS will be heavily hit. This will be only in the cities- Tier I and Tier II. The City Scooter market in India is as I see the hot bed where the competition will be extreme and brutal. This is the EV market which exists currently.
2. Two wheelers in India are the workhorses. Its the backbone of rural economy for people travel and goods. Will rural India shift to EVs? With current power situation in villages its a long long long way. So, I dont see rural India jumping on EV any time soon. So, companies like Hero whose major sales is in rural India might not be affected much.
3. EV technology is evolving like the older computer technology days. Currently major parts are manufactured entirely by the company battery, inverter, motor etc.. But as it evolves we will converge on assembled model with each parts easily replaceable by any other company. All specifications will normalise. So, there is a huge opprotunity for battery, motor and inverter companies. Infact battery companies have the highest opportunity. Current cost of battery in overall vehicle is 1-2% which will jump to 40-50%. Its like a 20-25 opportunity. So Exide, Amararaja might do well. 4 Wheelers still need 1 lead acid battery in EV.
4. Finally it all comes to after sales service. Without volumes many companies might shut down. Will the new companies give good after sales and service without incurring loss.

So, in conclusion the entire EV fight as I see is in cities only at least for next 10 years.

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Mitesh Shah

Oct 19, 2021

We need to have a proper report on EV just like FOREVER Stocks. Until now things are being discussed extensively but company names or recommendations
are not yet discussed with clarity .

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