»Smart Contrarian by Equitymaster

On This Day - 9 OCTOBER 2017
Electric Vehicles Boom: Stocks to Watch Out For

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

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