The Biggest Winners and Losers in India's Transition to Electric Vehicles

Nov 26, 2021

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Warren Buffett is widely regarded as the world's greatest investor.

What does his wealth have to do with India's EV transition? Quite a lot actually. More on that in a bit.

Did you know Buffett made 99.7% of his wealth after the age of 52?

And this is despite starting his financial carrier very early in life. While kids aged 10-11 were talking about cartoon characters, young Buffett was investing in stocks. He bought his first stock at the age of 11. By 35, he was a millionaire.

I am sure, you would agree that making huge gains take a lot of time. We can best understand this by the formula for compound interest we learnt in school.

Amount after compounding = Principal*(1+ Rate/n)^nt

Here 'n' is number of times the interest is compounded and 't' is time.

When thinking about stock market profits, most people focus on the rate (how fast the stock goes up) and the principal (how much money to invest).

However, for the magic of compounding to work, you need to focus on 't' the time.

The difference between simple interest and compound interest is evident only as time progress. It's because of this fact that compounding is sometimes called the 8th wonder of the world.

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As we see with Mr Buffett and others, success in investing is back ended. It takes years of patience and hard work.

That brings me to the hottest topic in the stock market these days: Electric Vehicles.

The effect of India's transition to EVs

It's the talk of the town. Every investor wants to know how to make money from this megatrend.

We need to figure out the following points...

  1. The obvious question - Which auto companies to buy that will benefit from the EV adoption?
  2. The negative question - Which auto companies to avoid/sell that will be impacted from the EV adoption?
  3. The indifferent question - Which auto companies will not be impacted much by the EV adoption.

A lot has been spoken and written about companies that will benefit from the EV adoption.

But what about the incumbents - Hero, Bajaj, TVS, and Maruti?

There are only two possibilities here...

Either they will lose market share to new players like OLA, Ather, etc.

Or they will use their financial muscle, distribution, and service reach, and adapt to the EV transition better than the new entrants.

The market doesn't seem convinced about the second possibility. While the Nifty is making new highs, stocks of auto firms are underperforming.

Apart from the known issues of the rise in ownership cots, the rise in raw material costs, and semiconductor shortages, there is the threat of unknown.

Lazy Millionaire: Stocks to BUY During the Coming Market Correction...

EVs are making Dalal Street nervous about auto stocks.

And this finally brings me to the link between EVs and creating huge wealth via compounding.

The concept of terminal value and the effect of EVs

In compounding, the 'meat' is found towards the latter part of your investment horizon. Remember Buffett has made 99.7% of his wealth after the age of 52.

Let me show you how the EV threat could shave off 20-25% of the market value of auto companies.

We analysts commonly use the discounted cash flow (DCF) method to find the value of the company. To do this, we make predictions of the company's future cashflow.

The value of any asset is nothing but the current value of all the income which it will produce over its life + its terminal value.

So what is this terminal value?

In simple terms, it's the end value of the company. To calculate it, we take a point in time in the future, after which, cashflows are assumed to grow at a fixed rate in perpetuity.

The punch line is this: A major part of the value of a company is it's the terminal value. In fact, at least 20-25% of the current market price of any stock is nothing but the terminal value.

If you go by the NITI Aayog projections, it expects 80% of two and three wheelers, and 30% of private cars to turn electric by 2030.

On a conservative basis, let's assume 50% two and three wheelers, and 15% of private cars go electric by 2030.

That is a still huge number by any standard.

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The segments likely to get hit the hardest

The hit to 2-wheeler sales will be huge followed by passenger vehicles.

On the other hand, heavy commercial vehicles like trucks and tippers will be almost unaffected. Their terminal value is likely to be affected to the extent of 25-30% of their stock price.

Scooters will bear the brunt of India's EV transition.

Scooters account for 30-33% of the total 2-wheelers sold in India. The risk of EVs is very real in the case of scooters. This segment is at the highest risk.

Honda and TVS to be Hit the Most

FY21 Domestic scooter volumes Market share in Scooter segment
Hero 317382 10%
Honda 1606451 52%
Suzuki 325201 11%
TVS 637235 21%
Others 216843 6%
Data Source: Annual Reports

A couple of years ago the question about EV transition was 'when'.

However, the question to be asked now is 'how fast'.

The narrative has changed and will change even faster.

So which companies in the 2-wheeler space are likely to be affected the most?

Company Domestic scooters as a % of total volumes
Hero 5%
TVS 21%
Bajaj 0%
Data Source: Annual Reports

In the 2-wheeler segment, electrification of scooters is likely to happen first, followed by motorcycles then and 3-wheelers.

Companies like TVS and Honda Motorcycles & Scooters Ltd are likely to face tough competition from EVs.

On the other hand, Hero has a relatively lower share of revenues from scooters.

Bajaj Auto does not sell scooters and is likely to be least affected.

A second line of impact would be the cannibalisation from the motorcycle segment. Especially in the entry level motorcycle where the price point is similar to electric scooters (post subsidy).

Thus a second family 2-wheeler is likely to be an electric on.

In the passenger vehicle space, the adoption of EVs is likely to be gradual. This leads to less uncertainty for investors when evaluating Maruti.

Nevertheless, the threat persists and is likely to affect the terminal value calculation of Maruti too. But to a lesser extent.

These incumbents have been in business for decades. Will they allow the EV transition to consume them?

I am sure these old timers aren't going to let private equity backed new players to have a cake walk.

They want others to test the turf, learn from their mistakes, and after the market has accepted the revolution, will they go full throttle.

In conclusion

India's EV transition will have an impact on companies producing fossil fuel powered vehicles in terms of their terminal value. Their valuations could take a hit.

If you were in charge of Hero, TVS or Maruti, would you let new players just move in and take away your market share? I am sure these firms would have R&D and marketing plans in place to produce and sell EVs.

Are they willing to sell at a loss to compete? Does it make business sense to bring down a company's profit margins by selling loss making EVs?

If you're a shareholder in these companies, how do you feel about this? Are you worried?

Write to me with your thoughts. I would love to hear from you.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: Equitymaster's top editors, Tanushree Banerjee and Richa Agarwal, recently identified India's top EV stocks. Get the details of the 15x opportunity in EV stocks here.

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