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Electric Vehicles Boom: Stocks to Watch Out For

Oct 9, 2017

Rahul Shah, Editor, Smart Contrarian

When cars first drove onto the roads, they ran over the horse carriage industry.

After all, who in their right mind would use horses to go from point A to point B when you could hop into a machine 20-times more powerful.

But will electric vehicles (EVs) now kill off our regular old - internal combustion engine (ICE) - cars?

Just doesn't seem likely. Forget being 20-times more powerful, the current crop of electric vehicles don't nearly have as much power as ICE cars.

Nor do they have the stamina to keep up. While ICE cars can easily clock a few hundred kilometers on a full tank, EVs start huffing and puffing after about a hundred kilometers and demand recharging.

And to top it all, EVs are going to be much more expensive to buy than ICEs of the same size.

But... It's Not Always About Economics

Given these factors, it doesn't seem EVs could be the disrupters they are made out to be.

But simple economics don't always come out on top. Regulations have a nasty way of coming in and rigging the game in their favour. After all, if government regulations make it mandatory for car owners to go all electric, there's very little anyone can do.

Besides, the idea of living in a less polluted world is hard to resist.

And who knows, given the kind of R&D being done around EVs, they could come out on top based on simple economics too.

In fact, even at current technology levels, EVs are apparently more economical than ICE cars-that is, when you consider the total cost during the entire life of a car and not just the sticker price.

Electric vs Petrol: Where Is the Auto Industry Headed?

I'm not predicting that the tipping point is here. Or that EVs about to take off big time and pose some serious competition to ICE cars.

You would not catch me dead ever playing the prediction game...let alone when it comes to a topic as complex as this.

Building a Watch List of Stocks

However, we want to make the most of opportunities to profit should an EV boom happen. Which is why we need to understand the dynamics and build a watch list of stocks that are likely to benefit from the boom.

Let's start from the heart of electric vehicles. Unlike ICE cars which are powered by internal combustion engines, electric vehicles are powered by batteries. Batteries are what provide power for the wheels to turn.

So, are conventional battery manufacturers like Exide Industries and Amara Raja going to benefit big time should an EV boom happen?

Yes and no.

Yes, because conventional batteries will run components like lights, entertainment and heating/cooling systems.

And yes, bigger and heavier conventional batteries can be used to power the entire car.

But conventional batteries are extremely heavy. To install them means either sacrificing the passenger carrying capacity of the cars, or sacrificing power, or both.

They also cycle less. This means they die out quickly, leaving you to keep replacing them every year or two.

Lithium: The Wonder Element

Given these challenges, the quest for identifying superior batteries took scientists and engineers to the doorsteps of lithium - that humble rare earth element, that powers many of the gadgets you see around you: mobiles and laptops...even toys.

Lithium is a third of the weight and half the volume of conventional car batteries. In other words, they pack the same punch but occupy significantly less space and cause less drag.

They also cycle much more. Much much more. A lithium ion battery can easily last five or six years. Some car makers even guarantee battery-life for as long as eight years.

Are there any listed lithium ion battery manufacturers in India?

Not right now, we don't think. But plans are afoot to set up lithium battery facilities. One government minister recently announced...

  • We are trying to establish a manufacturing facility with Bharat Heavy Electricals Limited entailing an investment of Rs 100 crore. Maruti also wants to invest Rs 2 lakh crore for manufacturing lithium batteries.

Of course, this is speculative at this point. But it's good to know that somebody is at least talking of manufacturing this crucial component of electric vehicles in India.

Proxy Plays: 'Indirect' Opportunities to Invest

Fortunately, there's an indirect way of playing the lithium battery story. If there's no lithium battery player in India, how about companies whose products go into the making of the lithium ion battery?

Stocks like Graphite India and HEG are both up a whopping 700% in the last one year alone. Partly because of the huge demand for their products-graphite electrodes-in the wake of the impending EV boom.

Graphite electrodes are an essential component of lithium ion batteries. If the sun of electric cars shines in large numbers, Graphite India and HEG could make a lot of hay.

Another counter that's buzzing from the positive developments in the lithium batteries space is Himadri Specialty Chemicals-one of the few companies in the world that can manufacture the high quality advanced carbon material which goes into lithium ion batteries. It is currently running a pilot which could grow enormously in the coming years.

Graphite and Lithium are by far the biggest elements that go into the making of a lithium ion battery.

But metals like cobalt, manganese, aluminium, and nickel, are also used in different formulations. So keep an eye out for companies that mine and manufacture these metals as well.

Now, don't run out and buy these stocks. I'm not making a recommendation.

This is a 'watch list' that can be tracked regularly on this soon-to-boom industry.

Only when all the moons line up in terms of company fundamentals, growth prospects and valuations - and you will know when that is because I've got my eye on them - I will then recommend you swoop in on the stocks.

In the next part of this series, I will take you beyond batteries. We will look at companies whose products go into making the rest of the electric car.

Stay tuned.

Good investing,

Rahul Shah
Editor, Smart Contrarian

Editor's Note: Just for today, for only Rs 99, you can try our foremost guru investor service. See what stocks India's best investors are buying - and get a piece of that action for yourself. Click here.

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15 Responses to "Electric Vehicles Boom: Stocks to Watch Out For"

Arun Kannan

Oct 11, 2017

Well! the buzz word is EV now. But I am quizzed to understand that how all the EVs are going to get power to recharge them? Still you need Coal/Gas/Thermal power plants to recharge these EV batteries. Only difference being, instead of burning a Diesel/Petrol/CNG/LNG in an IC engine's cylinder now, the gas needs to be fired in the boiler of a thermal power plant later, of course to a lesser extent because of the capacity and efficiency advantage.

But did anyone try to measure how much the fuel savings could be if we fire fossil fuel in power plant boiler than in an ICE cylinder? It will be definitely less. But how less is really less? So as to say that the demand for fossil fuels, be it Coal/LNG/CNG, will fall dramatically?

If equitymaster comes up with some analysis on this front, it will be really interesting to know.

Like (7)


Oct 10, 2017

I really appreciate your effort in this direction.God speed Good luck.

Like (2)

A V V Rao

Oct 9, 2017

Apart from EVs, a lot of work is being done on hydrogen cell vehicles - which uses hydrogen instead of hydrocarbons; the tail emissions will be water which is not a pollutant. As such, I understand that work is done for using water as fuel that is converted as hydrogen and oxygen through chemical reaction; hydrogen part is used as fuel. A patent is pending in Japan for this process. When these projects will materialize for commercial use is anybody's guess. But they will in course of time.

Like (2)

K Prabhakaran

Oct 9, 2017

Please read this article to appreciate where we stand:

Everyone's suddenly going electric, so India is doing it too. In the past six months, Norway, Germany, Britain, France and China have announced their intention to end the use of fossil fuels in cars by 2040 at the latest. Germany aims to do it as early as 2025.

Although several of these governments have hedged their statements saying that they will switch to electric cars or alternate fuels, everyone knows that, with the possible exception of China, which already has a large coal-based methanol programme running, they are talking about electric cars. So to no one's surprise, the Indian government has also hastened to fall in line.

In May this year, NITI Aayog, India’s revamped Planning Commission, electrified the Indian elite by announcing that India would aim at replacing its entire passenger vehicle fleet with electric cars by 2040. "India can save 64% of anticipated passenger road-based mobility-related energy demand and 37% of carbon emissions in 2030 by pursuing a shared, electric, and connected mobility future," it announced. “This would result in a reduction of 156 Mtoe (million tonnes of oil equivalent) in diesel and petrol consumption for that year.” In the same month, Piyush Goyal, the-then minister of power, said that not a single petrol or diesel passenger vehicle should be sold in India from that year onwards.

On September 7, Amitabh Kant, chief executive of NITI Aayog, told the annual meeting of the Society of Indian Automobile Manufacturers (SIAM), an industry lobby, that India would have 30.81 million electric cars on the road by 2030. None of those present could tell how he had been able to arrive at the second place decimal, to within 10,000 cars of what would happen 13 years hence.

The very next day, the newly appointed minister for transport somewhat incautiously told the assembled automakers that they would be “bulldozed” into switching to electric and alternate fuel vehicles if they did not do so voluntarily.

Automobile manufacturers are predictably incensed - and the Modi government’s electric car dream is only the latest development in a long-series of general industry policy flip-flops.

Not well thought out

Was it well thought out? Did any analysis of costs and returns precede this sudden announcement? A look at the draft energy policy for 2040, which was released in June, shows that there was none. For the plan, which estimates that India’s total energy consumption will treble by 2040, predicts that in an “ambitious energy-saving scenario,” the share of fossil fuels will only come down from 81% in 2012 to 78% in 2040. Transport will account for 25% of this.

Only 16% of the oil and 5% of the gas that the “business as usual” scenario would have required will have been saved, mainly through increases in fuel efficiency. Quite obviously, at the time when the policy was being finalised, electric cars had not yet entered the government’s dreams.

What none of the governments that have made this commitment have thought about is its feasibility. The first question any transport minister should have raised was, “Is it feasible?”. One small question would have shown that it is not. The batteries that supply power to electric cars use nickel, cobalt, aluminium, graphite and lithium. All these are rare earths, whose availability in the earth’s crust is far smaller than that of coal and oil.

This poses two problems. First, will there be enough to power the more than two billion cars that will be on the road in 2040, not to mention the billions upon billions of electric bicycles and scooters? Second, will enough new reserves of these be found to offset the amount being mined every year? If the discovery of new reserves falls short of the annual increase in consumption, it will immediately trigger speculation on their future prices in commodity markets, which will push their prices into the stratosphere.

How sensitive these prices are can be judged from the fact that the fall in price of lithium reversed itself sharply at the end of 2015, when the major automakers committed themselves to making electric cars. By mid-2017, they had risen by 50% over the 2015 price.

Automobile manufacturers are predictably incensed – and the Modi government's electric car dream is only the latest development in a long-series of general industry policy flip-flops. Credit: Reuters
Automobile manufacturers are predictably incensed – and the Modi government’s electric car dream is only the latest development in a long-series of general industry policy flip-flops. Credit: Reuters
Wishful thinking

The propagandists for the electric car argue that since lithium accounts for no more than 2% by weight of the most advanced of today’s car batteries, production will be able to keep up with demand and iron out short term price fluctuations. But this is wishful thinking.

The lithium-ion battery that powers the latest Tesla weighs 540 kg and contains close to ten kg of lithium. If the world’s governments wish to wean the world off fossil fuels, they will have to wean two billion conventional passenger cars off fossil fuels. This will require close to 20 million tonnes of lithium. If the number of passenger cars grows by 2% a year and batteries last an average of eight years (the current warranty period on the Tesla), the annual demand for lithium will be in the neighbourhood of 580,000 tonnes.

Even that will reduce the consumption of fossil fuels by somewhere around half, for it does not take into account the consumption of the road haulage industry or the billions of two-wheelers that also consume gasoline today. Against this the entire global production of lithium was 160,000 tonnes in 2015. Since it is rising at 8.8%, it is expected to reach 239,000 tonnes by 2021, according to Macquarie Research. At that rate, it will cross a million tonnes a year before 2040. Can the increase be sustained? The short answer: No. The total amount of lithium in the earth’s crust is an estimated 13.1 million tonnes, according to the US Geological Survey.

Led by the nose

Why then are governments tumbling over each other to announce plans to stop the production of cars that run on petrol or diesel within the next two decades? The answer is that they are being led by the nose by the global automobile industry. As of now, Volvo, Toyota, BMW, Daimler-Benz, General Motors, Chrysler-Fiat, Renault, Honda, Kia, Mitsubishi, Nissan, Volkswagen and Tata have announced plans to make electric cars. They have done this because they know even if their governments do not, there simply isn’t enough rare earths and metals in the earth’s crust to permit a complete shift out of petrol and diesel. So their massive investments in the auto industry will remain safe while they exploit the consumers’ growing fear of climate change to make a fast buck.

Electric cars are therefore a blind alley up which the giant oligopolies that dominate the market economy are taking the world. It is not the first one, for wind and solar photovoltaic power are also in no position to replace even a small part of the electricity that the world consumes. Had there genuinely been no alternative to oil-based petrol and diesel, the mad dash to electric cars would have been excusable. But the technology for converting carbon monoxide and hydrogen, obtained from biomass, into any olefin or transport fuel via the Fischer-Tropsch synthesis has been known for a hundred years and was first used to convert urban solid waste into methanol commercially in the US in 1922.

Today, it can do this with any kind of biomass in the world. Thus the determination of big businesses to lead the world up the blind alley of electric cars at a time when climate change is very obviously accelerating is utterly inexcusable. For the Indian government to fall for it is just plain dumb.

Prem Shankar Jha is a senior journalist and the author of several books including Crouching Dragon, Hidden Tiger: Can China and India Dominate the West?. This article was first published on India Climate Dialogue and has been republished in WIRE with permission.

Like (16)

B B Raina

Oct 9, 2017

Excellent post. It has come at the right time for investors to be kept under "watch" list. EV industry is going to grow by all means. The only moot point is when. But I would say with certainty, "It would be sooner than later."

Like (2)
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