‘Yeh Duniya Gol Hain’, It can be interpreted to mean, ‘Life comes full circle’.
If I ask you to name at least a technological change which was likely to be mainstream over the next decade, I’m sure electric vehicles would have been at the top of your list.
However, very few people know that 110 years ago…
38% of all automobiles sold in USA were battery powered (electric) compared to a 22% share for petrol cars. Steam powered cars had a 40% share.
Currently, the share of electric cars sold out of the total vehicle sales globally is barely 9% with countries like USA having a share of 4%.
In my opinion even if the share of EVs jumps to 40% by the end of this decade, we will have reached where we were 110 years ago.
And that is the reason I say ‘Duniya Gol Hain’,
Everyone I meet these days who wants to build a portfolio for the long term asks me which EV stock to buy for long term.
The word ‘electric’ is so much in fashion these days that companies adding this suffix to their name suddenly get noticed.
The shift to EVs is happening quickly across the globe. The numbers in India are encouraging too, especially in the two/three-wheeler space and in the bus segment.
So, the imminent question is…
If the share of EVs is expected to rise in India, why am I not recommending a pure play EV stocks?
The two word answer is… ‘Valuations’ and ‘Uncertainty’.
Let’s start with the latter – uncertainty.
The number of EVs sold in FY22 were at 0.23 m units as compared to 41,000 units in FY21.
While the numbers look very encouraging despite the negative publicity about fire hazards and battery issues, the point I’m trying to make is different.
EVs as a trend is expected to grow exponentially. From a customer’s point of view this is a big positive. However as an investor is it equally positive?
Well, the answer is no.
The reason is in the table below…
There are 10 formidable known players in the Indian EV sector with many small, unregistered players too.
The competitive intensity is high. Pricing power is extremely weak.
As an investor, even if you want to bet on incumbents like Hero, Bajaj or TVS, isn’t the competitive intensity too high?
Also, players like OLA which are backed by private equity players have unlimited capital to burn.
It’s going to be a treat for customers when two-wheeler players are fighting for market share.
But where is the profitability? Will Hero do business at a loss?
Till the time we don’t get a clarity on profitability, it’s better to be a customer rather than an investor in the EV revolution.
Now the second point – valuations.
A lot of people tell me that when economies of scale kick in for manufacturers, costs go down and profits will go up.
Yes, that is true. But the point is the valuations at which EV stocks trade is insane.
Last week I was analyzing a company which makes EV buses.
The company has a strong order book. It has received orders from state transport departments of various states across India. But the valuations were more than unreasonable.
When I say valuations, I’m not even looking at historical numbers. Investing is all about predicting future earnings.
On a best-case scenario of net profit growing 4x from here in the next 2-3 years, the valuations still looked unreasonable.
The company fits in to my investment thesis. However the valuations make it a bad investment. Such companies should be kept in your radar and bought during a bear market.
So, if I’m against buying pure play EV stocks, does it mean we sit on the fence and just watch the EV space explode.
So how do we play the EV space without directly playing the EV space?
Auto Ancillary Companies
It’s a known fact that the global EV landscape in terms of EV charging infrastructure firms and purchasing power is at least 10 years ahead of India.
The table below tells us how fast the world is shifting to EVs
So why not bet on auto ancillary companies which supply to the Teslas and Volkswagen’s of the world.
You can play the domestic auto story as well as the global EV story. In the meantime, if the domestic EV picks up faster than anticipated, that’s an additional boost to your portfolio.
Also, the valuations are also reasonable here.
So here’s a check list for investing in the global EV space…
- The company’s order book should have an EV share of at least 25%.
- At least 10% of its revenues should be from EVs presently.
- The company should be among the top 10 suppliers globally in its niche.
- The stock’s forward PE should be less than 30 times.
While the next decade will be dominated by EV, I recommend you pick your stocks very carefully.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com,
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)