It Is Time To Make Your Portfolio “EV-Friendly”
Currently there is quite a buzz revolving around electric vehicles (EVs) and allied segments. With the Indian government’s support, the question that lies ahead is: ‘Will 2021 see the beginning of India’s electric vehicles’ revolution?’ In this article, Geyatee Deshpande shares her thoughts about the future of the Indian EV segment while DSIJ Research Team recommends a couple of stocks
The recent news about Tesla’s entry into the Indian electric vehicles’ market has become a talking point among many. Tesla is looking at starting operations in India by the end of 2021. This is not only a symbolic move but also a much needed boost for the domestic electric vehicles (EVs) segment. With this, the necessary shift towards electric vehicles in the Indian economy has taken forefront again since, until recent years, the EV market in India was filled with concerns regarding lack of proper infrastructure, constricted variety available in the markets, pricing issues and confidence in the technology.
Support for Electric Vehicles
Electric vehicles (EVs) are generally considered to be a better alternative than fuel-based automobiles to mitigate the problem of air pollution. And hence, the Indian government has been aiming to achieve this shift to e-vehicles in the next nine years. By 2030, the government has underlined an objective to make India a 100 per cent e-vehicle nation. In an attempt to significantly remove the barriers in the EV industry’s growth, the government has been coming up with a number of aids and initiatives. For example, to reduce higher pricing of the vehicles, Faster Adoption and Manufacture of Electric Vehicles (FAME) subsidies of up to Rs 3 lakhs for EVs in commercial use with a reduction in GST rate to 5 per cent and road tax and registration waivers across several states is one offer on the palette.
Additionally, the government plans to have a single charging station across 60,000 petrol pumps in the country while it is said that the Department of Heavy Industry is to invest around Rs 1,000 crore towards the development of proper and adequate charging infrastructure for EVs across India. In 2021, additional measures for boosting the EV segment are expected to be rolled out by the government throughout the year. The EV segment in India has seen considerable growth in sales of EV units in FY20 compared to FY19 but the number of car sales individually has been down due to various reasons
Automotive Sector
Automotive stocks have been in the limelight with manufacturers now rolling out various EV models. The automotive sector no doubt is the biggest beneficiary of the growth of the EV segment. Sector leaders are expected to continue to highly benefit from the growing demand. There are already many players in the electric vehicle market in India. Tata Motors’ brand of electric vehicles starts at Rs 15 lakhs, Mahindra Electric currently sells eVerito cars which are battery-operated and Morris Garage and Hyundai also offer battery-operated vehicles. Meanwhile, Mercedes-Benz currently retails the EQC, which is an electric car that is considered to be not only among the costliest but also the most advanced of electric cars in India.
Slated for 2021 are many upcoming electric cars by domestic manufacturers as well. Mahindra XUV300 Electric is expected to be launched around June 2021. It is an all-electric version, powered by a 130 hp electric motor with a 30 kWh battery to deliver a range of over 300 km on a single charge. There is also the BMW i3, which is expected to be a lighter vehicle in the segment and travel a distance of 128-150 km on a single charge. Another introduction to the sector’s product portfolio is Tata Altroz EV with a 30 kWh battery that will offer a range of around 300 km on a single charge.
Additionally, Triton Electric Vehicles also has plans to introduce its N4 sedan in India. These new additions are surely expected to grab the attention of customers. Majority of the Indian population is expected to consider opting for EVs in the coming years if the pricing is affordable with advanced technology offerings. Currently, the main aim of the domestic automotive companies is to offer the latest battery technologies and ‘in car’ experience at affordable pricing to attract more consumers and wean them away from petrol and diesel versions.
During Q3FY21, over 50 per cent of Tata Motors' retail sales came from that of electric vehicles. And hence, the EV sales contribute towards 43.3 per cent of the company's total sales. Such a gradual shift indicates the increasing demand for EVs. EV sales across automotive companies have slowly start to create a larger significant space in the total respective net sales.
Allied Sectors
Along with the automotive sector, other allied sectors will also benefit from mainstreaming of EVs. The power and battery segments have already been in focus for the same. Tata Power, for example, has already introduced 180 operational charging stations in 20 cities and is further expected to ramp this up to 700 in the coming quarters. More specifically, companies that develop batteries for electric vehicles are set to see a huge upturn in the adoption of these vehicles worldwide. If the sale of electric vehicles continues at the anticipated rate, then studies expect a requirement of a total of USD 60 billion worth of batteries to cater to this demand.
This will signal a substantial shift away from crude oil, allowing the manufacturing industry to reset somewhat. As compared to earlier days, battery technology is stronger now with lots of efforts being put into research and development. Additionally, governments across the world are offering incentives to manufacturers who can improve battery storage capacity and performance. Cobalt is a blue metal that is needed for many types of batteries including those in EVs since energy-dense cobalt is used as a stabiliser in batteries.
It helps protect the battery’s cathode from corrosion that can lead to a fire. Hence, with a rush of interest in EVs, the price of cobalt has seen an upward trend with at least a gain of 20 per cent globally, showing that the whole world is stressing on EVs. Thus, car and battery makers have been joining hands to create synergies for both and benefit from the rising EVs market. Specialty chemical companies are also slowly starting to gain attention since lithium-ion (Li-ion) is an important element for EVs.
Recently, MG Motor and Tata Power installed a 60 kW superfast public EV charging station in Mangalore, just within 10 days of the inauguration of the station in Coimbatore. The EV charging station is available to all vehicles compatible with CCS (combined charging system) fast-charging standard and is in line with MG Motor’s commitment to provide a five-way charging ecosystem to its customers. The initiative is part of the company’s recent partnership with Tata Power for the deployment of 50 kW and 60 kW DC superfast charging stations across India. Previously, Amara Raja Batteries had set up EV charging stations and battery-swapping stations in collaboration with Tirupati Municipal Corporation.
Amara Raja Batteries has set up such stations in the temple town of Tirupati in Andhra Pradesh along with a fleet of electric auto-rickshaws as part of the central government’s ‘Smart Cities’ program.
The EV segment has gained a renewed interest since around 2018. The subdued automotive sector has also seen recovery in the last six months. Tata Motors and Ashok Leyland have more than doubled their operations in the last six months. The BSE Auto index jumped by around 44 per cent in the last six months while it has surged by around 128 per cent since its sharp dip in April 2020. The table below highlights a list of automotive and allied companies that have gained the most in the last six months.
Tata Group Initiatives
To concentrate their focus on EVs and further sustainability, many corporate entities are aiming to utilise all available resources at hand. One such example is Tata Group which is leveraging its companies to make an impact in the EV segment through its newly launched EV ecosystem, Tata UniEVerse. The key elements of the ecosystem include charging solutions, supplier base for EV components, vehicle financing and mobility service providers. For its charging solutions, Tata Motors (TML) has partnered with Tata Power in order to cater to the concerns regarding the challenge of charging. Both companies decided to work together to provide a suite of charging solutions for homes and workplaces and for captive and public charging.
And as its supplier base for EV components, TML has collaborated with Tata Chemicals for manufacturing lithium-ion battery cells, exploring active chemicals manufacturing and battery recycling and also with Tata AutoComp for the localisation of battery pack assembly and motor assembly. Vehicle financing will be offered through Tata Motors Finance and Tata Capital to introduce affordable financing solutions for both fleet and personal segments. To enhance the digital experience, Tata Croma stores are to host a store-in-store concept to provide an immersive digital experience for the Nexon EV.
The table highlights the fact that along with the growth in EV segment, various other companies have seen a good rally in the last six months on the hope that the future of the EV segment will be very bright. This supports the rationale that in the automotive sector the way forward for investors is to hold stocks of companies which focus on diversifying their portfolio to include EVs. Additionally, investors can venture into a variety of sectors such as specialty chemicals, power, electrical equipment, etc. to choose companies which have joined hands with automobile companies to supply products for the manufacturing of EVs.
India has the potential to be a global electric mobility hub and the mass production and acceptance of electric vehicles is an inevitable step in human history which will drive high demand growth in various sectors. While some sectors will gain from the electric vehicle revolution, companies engaged in acidbattery manufacturing or in fuel-based products will underperform as the spotlight shifts to EVs.
A recent report states that by 2025, on the back of deep domestic supply chains and innovation, India will become a manufacturing hub for electric vehicles. Looking back from 2025, experts will see the pandemic as the catalyst that led to a shift in supply chains and government policies which precipitated the rise of the EV industry.
Recommendations
Here are a couple of recommendations related to the EV sector:
Tata Chemicals
BSE CODE : 500770
Face Value : Rs 10
Mcap FF (Cr.) : Rs 8,162.01
52 WK High / Low : Rs 554.30 / Rs 197.40
CMP (Rs ) : Rs 492.90
Tata Chemicals Limited is a manufacturer of soda ash and sodium bicarbonate for diverse industries such as glass, detergents, silicates, textiles, food, pharmaceuticals, animal feed, mining and chemical processing. The company’s main business interests lie in chemicals, crop protection and specialty chemistry products. It is considered to be one the largest chemical companies in India with operations in India, Europe, North America and Africa. Tata Chemicals is a subsidiary of the Tata Group.
The product range of Tata Chemicals includes basic chemistry products such as soda ash, sodium bicarbonate, caustic soda, chlorine, liquid bromine, etc. It also offers energy science products such as Li-ion battery packs and recycling of spent Li-ion batteries. Its material science unit is engaged in products like nano zinc oxide and specialty silica while its agro science unit offers products like crop protection and hybrid seeds. The company also has a nutritional science division catering to the demand for nutrition products.
On the consolidated financial front, for Q2FY21 the company reported net sales of Rs 2,609.35 crore, which is a decrease of 5.84 per cent compared to net sales of Rs 2,771.27 crore reported for Q2FY20. The operating profit declined by 30.11 per cent to Rs 454.80 crore in Q2FY21 from Rs 650.75 crore in Q2FY20. The company reported net profit of Rs 121.67 crore in Q2FY21, which is a decrease by 66.68 per cent as compared to the net profit of Rs 365.12 crore posted for Q2FY20. On the annual front, net sales rose by mere 0.19 per cent to Rs 10,356.75 crore in FY20 from Rs 10,336.72 crore in FY19.
Operating profit expanded by 3.21 per cent to Rs 2,260.29 crore in FY20 from Rs 2,189.92 crore in FY19. Tata Chemicals witnessed a significant increase in its net profit to Rs 7,232 crore in FY20 from Rs 1,287.64 crore in FY19. Currently Tata Group companies, including Tata Motors, Tata Chemicals, Tata Autocomp, Tata Power and Tata Croma, are pooling resources and expertise to build an electric vehicle (EV) ecosystem. While Tata Power is expected to provide the charging solutions, Tata Chemicals will manufacture lithium-ion battery cells and Tata Autocomp will work for localisation of the battery pack assembly and motor assembly for the electric vehicle.
Tata Chemicals also has been pooling the necessary resources for this EV ecosystem. It is building an energy storage system facility for mobility and stationary charging with labs in Pune and Chennai. The company is working on a circular economy concept, wherein it will manufacture battery, cells and in the end recycle them and take out chemicals like cobalt which can go into building lithium-ion batteries. Based on the positive growth prospects for Tata Chemicals with increasing attention towards electric vehicles, we recommend BUY.
Himadri Speciality Chemical
BSE CODE : 500184
Face Value : Rs 1
Mcap FF (Cr.) : Rs 490.55
52 WK High / Low : Rs 70.90 /Rs 27.30
CMP (Rs ) : Rs 45.05
Himadri Speciality Chemical is a coal tar pitch manufacturing company, a product that is used in the manufacture of aluminium, which is used in automobiles, televisions, rockets, beverage cans, wires, cables, smart phones, furniture and foil wraps, among others. Coal tar pitch finds downstream use in the manufacture of graphite electrodes in electric arc furnaces; specialised coal tar pitch which is used in long warhead missiles; advanced carbon, which is used in the manufacture of lithium-ion batteries; and coal tar-based thermoplastic polymeric coating, which is used as an anti-corrosive material in underground and offshore pipelines.
It also makes carbon black, which is used for reinforcement of elastomeric materials; and specialty carbon black with specific applications in plastics, fibre, inks and food grade materials. The company also manufactures sulfonated naphthalene formaldehyde (SNF), poly carboxylate ether (PCE), and wood preservatives and fuel oils. Looking at its quarterly consolidated results, net sales declined by 20.11 per cent to Rs 389.24 crore in Q2FY21 from Rs 487.19 crore in Q2FY20. The operating profit de-grew by 41.39 per cent to Rs 50.85 crore in Q2FY21 from Rs 86.76 crore in Q2FY20. The net profit decreased by 54.18 per cent to Rs 20.66 crore in Q2FY21 compared to Rs 45.09 crore in Q2FY20.
Looking at the annual trends, net sales decreased by 25.45 per cent to Rs 1,805.80 crore in FY20 compared to Rs 2,422.39 crore in FY19. Operating profit decreased by 49.21 per cent to Rs 280.29 crore in FY20 from Rs 567.62 crore in FY19. Net profit contracted by 36.67 per cent to Rs 205.35 crore in FY20 as compared to Rs 324.24 crore in FY19. Himadri Speciality Chemical Limited (HSCL) is considered to be a market leader in multiple product segments and also has diversified its product portfolio by way of forward integration which includes advance carbon material and other value-added speciality products.
Advance carbon material and other specialised carbon materials are mainly used by the automobile sector, and are also the main ingredients for lithium-ion battery manufacturers. The application of advanced carbon is in the making of anodes for Li–ion batteries and is likely to witness exponential growth given the rising demand from portable electronic equipment, electric vehicles and energy storage systems. HSCL is also planning an advance carbon project (main raw material for lithium-ion batteries) of 20,000 MTPA at a project cost of around Rs 300 crore, expected to be funded out of internal accruals. Considering the strong growth potential for the company, we recommend BUY.
(Closing price as of Jan 27, 2021)