Are EV stocks the next multibaggers?
Industry Analysis of the highly anticipated Electric Vehicles sector
Tech giant Elon Musk's announcement of launching electric vehicle (EV) cars in India has certainly created a buzz among us about the future of EVs here. Would the Indian market resort to that, making them the next multi-bagger?
What's the hype about?
India, though at a nascent stage, is deemed to be the largest untapped market for electric vehicles. The inflow of capital into EV startups till 2019 shot up by nearly 170% reaching US$ 397 million. Several reports boast that the EV market in India is likely to increase at a CAGR of 36% until 2026.
Overall, the production of all vehicles reached 1,875,698 units in April 2021, two-wheelers boasting its sales increase of 21%.
The Concept of this Innovative Machine
Let's understand what an electric vehicle is, first.
An electric car is a car powered by an electric motor rather than a gasoline engine. They function by plugging them into a charge point and taking electricity from the grid. These storable and rechargeable batteries then power an electric motor, which turns the wheels.
But why change the system of automobiles, you may ask.
Electric vehicles are around 3-5 times more efficient in utilizing energy. They accelerate fast, and are silent.
The speed of innovation in EVs is so fast that analysts predict that by 2022, there will be over 500 different EV models available globally.
That's a whole range, right?!
With people trying their best to save the planet, electric vehicles based on renewable sources of energy should be the future, ideally. Sky-rocketing oil prices and binding international treaties for most countries are major factors leading the transition to e-mobility. Also, electrically powered vehicles would make us less dependent on oil rich countries.
Backbones of an EV industry
The main component of an electric vehicle is the battery, its market projected to grow at 30% CAGR by 2026. They make up to 30-40% of the cost, high prices being passed down to consumers. Producing an efficient and lasting battery at minimum cost is one of the main challenges for a manufacturer.
By far, the biggest hurdle for this industry remains the establishment and adoption of EV charging points with optimum voltage. Who will pump in the money? The private players, who seem to have the bandwidth aren't adopting it as fast as needed because the engine vehicles are still more profitable than adopting a new system.
Not to mention the monopolistic approach of US-based electric car maker Tesla which uses high-performance superchargers that are unique to them and cannot be used for other EVs.
Global investment in electric transport has gone up dramatically, surging 28% y-o-y in 2020 to USD139 billion. Although the US is the leader of innovation, the Asia Pacific EV market is not quite behind with China being the world’s largest EV producer and pioneer in manufacturing batteries.
There are some second thoughts about this sector doing well in India.
Firstly, the cost of building a manufacturing unit is humungous and relies on huge capex. Secondly, the great Indian consumer's most crucial factor in decision making is price. Since the existing EVs in India are not cost-competitive enough or have that much mileage compared to the proven regular vehicles, big carmakers also won't change their model for at least the next 3-5 years.
India's demand is still skewed to the two-wheeler segment, people perceiving it to be cheaper and more cost-efficient.
Concerns like the lack of charging points and high maintenance costs remain.
Also, since the charging infrastructure demands large-scale electricity generation, if India continues with its old coal burning fossil fuel methods, the whole point of introducing environment-friendly EVs will be ineffective.
On a positive note,
A total investment of roughly Rs. 12.5 trillion until 2030 could possibly create 5 crore jobs by 2030, changing the face of our economy. Electric vehicles, especially two-wheelers, are likely to witness positive sales in 2021-22.
The country's young population and rising middle class seem eager to invest in new-age products too.
If the government and big corporations vouch for transitioning to renewable energy sources like wind and solar power, this sector can actually be quite profitable.
NaMo's Ambitious Targets
The government has set some sky-high targets of going totally electric by 2030 by introducing the voluntary vehicle scrappage policy in the 2021-22 budget and introducing various PLI schemes for automobiles. Under the NATRiP, the government aims at building globally standardized R&D centers and aims to introduce EV-led public transport systems.
The states of Karnataka and Tamil Nadu are also working on structural infrastructure developments and rolling out investor-friendly policies.
Ather Energy, India’s first intelligence EV manufacturer is said to have an annual production capacity of 0.11 million two-wheelers. Another public favourite is Ola Electric, the car rental leader in India is making heavy investments in setting up an electric two-wheeler market.
Approach to investing
Since batteries would be the main component, auto manufacturers will most likely produce their own to differentiate their product and rely less on outsourcing; restricting gains for battery companies like Amaraja Batteries and Exide Industries.
Tata Motors has already started producing passenger cars like the successful Tata Nexon and indigenous electric buses. Along with Tata Elxsi developing software for such cars too, they look like an EV ecosystem leader in the making.
Indian auto giants like Maruti Suzuki, Mahindra and Hero Motocorp also look promising.
In the international circuit, companies like Tesla, BMW, BYD, and Nissan are already doing wonders in this niche.
The private giants like Reliance and Adani are likely to have the first-mover advantage to gain from setting up charging stations across the country.
In a nutshell, success depends on initial capital for production, enough charging stations, and supportive government policies. Competitive pricing remains a key factor to drive demand in a country like India.