How to Invest in EV Stocks

Electric vehicles (EVs) are the next big thing.

As the cost and affordability of EVs drops in the coming years, we are not far from when most vehicles will be electric.

In this ongoing EV revolution, it is important that you find good quality companies which are involved in this space because not every EV stock will turn out to be a multibagger.

– There are various ways to play the EV opportunity. You can...

1. Buy stocks of automobile companies that manufacture electric vehicles.
2. Buy stocks of EV component makers such as batteries as the rapid penetration of EVs will drive the need for lithium ion batteries.
3. Invest in EV charging infrastructure providers
4. Invest in commodities that are widely used in EV battery production such as silver, nickel, copper.
5. Invest in electric mobility services and financers.

Now let’s take a look at some important points you need to keep in mind when buying EV stocks...

Expand your vision and look beyond EV automakers. Shift your focus to the EV supply ecosystem.

The leading names in EVs are probably not going to be the biggest beneficiaries of the EV transition as most of these players still derive majority of their sales from ICE (internal combustion engine) vehicles.

Even if the EV part of the portfolio grows exponentially, the disruption and cannibalisation will lead to shrinking in their legacy portfolio, which will outweigh the growth aspects.

Consider players involved in charging infrastructure, battery swapping operators, EV ancillary manufacturers, companies with expertise in product and EV software designing, battery makers, metal, mining and chemical companies.

Have a look at the chart below for a deeper understanding of the EV ecosystem.

The EV Ecosystem

In the listed space, the EV ecosystem includes companies like Amara Raja, Exide Batteries, Minda Industries (sensors and controllers), Minda Corporation (safety, communication systems, lightweigting), KPIT and Tata Elxsi (software, design and architecture) to name a few.

With great fundamentals and attractive valuations, such companies will be relatively safer bets in the EV transition.

Look for companies that benefit from both premiumization plus increased volumes /applications in electric vehicles.

As the EV market develops, players in the entire value chain will be forced to evolve. As a result, companies will look to premiumize their products in a bid to set themselves up for tomorrow.

Companies that will see their share price soar are the ones that will be able to manage this transition smoothly.

Those that manufacture products in increasing volumes and with various applications will also see their share prices skyrocket as higher volumes would result in higher sales and earnings visibility.

Now that we have reviewed some key steps to selecting the right stocks, here’s a list of don’ts that could help you avoid dud stocks.

To be on the winning side of the EV bet, it is critical you avoid players where product portfolio is suited to internal combustion engines only.

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

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

Be cautious about companies betting aggressively on electric vehicles in a way that require huge capital investments, and doing so while taking debt.

This is because the technologies to fuel EV are still evolving rapidly, and what works now may not work in future, and will lead to poor returns.

A promising company must have a low debt-equity ratio, a strong track record of profitability, strong cash flows and a high ROE. It must also have solid backing of its promoters.

You are now on a strong wicket to go out and find the right EV stock for yourself.

If you need some more help, you can check out our list of Electric vehicle stocks here.

You can also check out the playlist on electric vehicles on Equitymaster's YouTube channel.