Analysts prefer auto ancillary stocks over OEMs as states push EV policies

Nomura believes that if new players' vehicles sell well, multiples of incumbent OEMs like Hero MotoCorp and Bajaj Auto may de-rate

Maharashtra on Tuesday joined Gujarat, Delhi, Himachal Pradesh, and Telangana and announced an Rs 930 crore electric vehicle (EV) policy. The development triggered an up move in auto ancillary stocks, especially battery makers on Wednesday that moved up between 2 per cent and 13 per cent at the bourses.

Going forward, as more and more states warm up to the idea of promoting EVs and related infra, coupled with a preference for personal mobility, the transition from incumbent ICE (internal combustion engine) vehicles to EVs will hasten, believe analysts. This, they say, will keep investor interest alive in the related stocks at the bourses. However, investors will have to be patient as EVs is a relatively new concept in India and the benefits will take time to flow in to company’s top and bottomlines.

“We believe that policy direction (subsidy, high fuel tax, road taxes, manufacturing/export incentives) by both state and central governments is likely to keep supporting EVs. We currently estimate EV sales to touch 5 per cent of the industry by FY26F and 10 per cent by FY30. This could have upside if new models get launched at price points similar to ICE models,” noted Kapil Singh and Siddhartha Bera, research analysts at Nomura, in a June sector report. 

The Centre, meanwhile, has extended its FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) scheme till March 2024 from March 2022. Besides, it has also put in place an Rs 18,100-crore production-linked incentive (PLI) scheme on advanced chemistry cell (ACC) batteries.

According to a note by Ambit Capital, EV component makers are eyeing a $4 billion market by the financial year 2029-30 (FY30) as incentives offered by both, centre and states, make room for incremental value addition worth approximately Rs 20,000/unit per e-2W compared with petrol models.

“This includes parts like motors, controllers, on-board chargers, battery management system, telematics, sensors etc. By FY30, we expect an additional opportunity of $4 billion for component makers, not including newly added expertise to build an export franchise, with rising demand for e-2Ws. On a base of $7 billion India 2W OEM ex-powertrain component market, there would be a boost of nearly 60 per cent from incremental domestic demand itself by CY30,” it said.

From an investment viewpoint, Ambit expects most of the capex to be done between FY22-25 primarily in setting up local battery cell plants, e-2W assembly plants, charging infra and making e-2W components. Within this, they expect $5 billion worth of investment in ~50GWh of cell manufacturing and $1 billion investment by component makers. Further, they expect $10 billion of investments related to charging infra by CY30 to cater to the potential e-2W fleet by then. A 10 million unit e-2W market by CY30, they say, would generate revenue worth nearly $12 billion per annum.

Investment strategy

Among the listed plays, analysts remain bullish on component makers like Minda Industries, Crafstman Automation, Varroc Engineering and Bosch but see the transition negative for original equipment makers (OEM) like Bajaj Auto and Hero MotoCorp. Those at Nomura believe that if new players’ vehicles sell well, multiples of incumbent OEMs may de-rate.

"New e-2W entrants like Ola, Ather, Ampere etc. would be able to price high-speed models competitively led by 8-10x fixed asset-turn for e-2Ws vs 3-4x for petrol 2Ws. This could drive price war and hit the profitability of incumbent two-wheeler makers. Hero Moto would be most exposed with nearly 75 per cent of EBITDA at risk of price war compared with 10 per cent/5 per cent for TVS/Bajaj Auto," highlighted Ambit's note.

Among players exposed to mass-market two-wheelers, Ambit prefers TVS given its diversified portfolio, rising exports/premium mix and improving EBITDAM. In components, powertrain-agnostic electrical component-focused companies like Minda Industries and Varroc would benefit from the e-2W transition.

Kotak Institutional Equities, too, believes Minda Industries' profitability will improve going ahead led by operating leverage benefits and localization of electronic products.