PE money floods electric vehicle firms with good technology base

Private equity funds are giving an emphatic thumbs up to domestic electric vehicle (EV) companies with a strong technology and software base and the aim to scale up, as compared to incumbent vehicle makers as well as other EV startups.

This was clearly reflected in the deal that Tata Motors announced yesterday, raising Rs 7,500 crore from PE firm TPG and Abu Dhabi ADQ for a newly formed subsidiary which will make EVs, valuing the company at $9 billion.

Similarly, sources say that Ola Electric, which is yet to deliver its electric scooters to consumers, is raising another $200 million, which will push up its valuation to $5 billion. Currently, the company’s valuation is at $3 billion.

The big jump in Ola Electric’s valuation contrasts with many other EV startups which started operations earlier. According to Tracxn, which tracks valuations, Ather Energy, in which Hero Motocorp has a 35 per cent stake, is valued at $199 million as on November 2020. 

A query to Ather on its latest valuation did not elicit any response.

The Delhi based Hero Electric, which is currently the largest EV two-wheeler player, is valued at $157 million as on June 2021. The company also did not respond to queries on the matter.

PE players are betting big on the future growth of electric vehicles, which is why they are willing to pay for a hefty valuation in contrast to the market cap of traditional incumbent vehicle giants, even though the latter have a stable business, large cash reserves and are profitable. 

For instance, Bajaj Auto which has a market cap of Rs 1.15 lakh crore —three times that of Ola Electric’s valuation — and is also getting into electric two wheelers, has seen a much more staggered conversion from ICE to electric. Yet it is the second largest two-wheeler company in the country, profitable, and is India’s largest exporter of two-wheelers. 

A day after the Tata Motors announcement, the company’s shares rose by 20.4 per cent, to close at Rs 506.75, pushing up its market cap to 1.80 lakh crore, clearly reflecting the bullishness of investors with regard to EVs. Tata Motors’ EV subsidiary, in which the PE funds are investing, is valued at close to a third of parent company’s market cap, showing the huge upside which can come from this business if it takes off.

So what explains the rationale of PE valuations? Says a former auto company CEO who consults with top EV players: “Investors are offering higher valuations to only those EV players with technology strength, especially in embedded software, and the capability of building them on their own or with partners. EVs have huge components of software which powers the vehicle. So the expertise required is very different from making ICE- powered vehicles.” 

He explains that the Tatas are leveraging their group companies like TCS, Tata Technologies and even Tata Elxsi to build the software platforms for powering the vehicles.  Says a spokesperson of Tata Technologies: “While we can’t share specifics, we are working with Tata Motors and JLR in most of the automotive vehicle programmes, leveraging our experience to help them develop competitive products.”

Ola Electric, too, has built the electric battery, motor and the controller in-house, and the display, connectivity and computing software have also been developed by the R&D team. It has roped in top chip design makers like Qualcomm to provide the hardware to power the software platform which runs the scooter.          

The other important factor here is scale. Many of the early EV startups failed to push the envelope in this area. They looked at limited capacity production, which kept the costs of the vehicles unviable. “We are looking at scale of operations, because that is the only way you can bring down costs. So companies with a clear investment plan and who are thinking big is critical for us to put in our money,” says a senior executive of a PE fund which invests in green technology.

The Tatas, for instance, have already talked about rolling out 10 electric vehicles in the next five years and setting up charging stations with Tata Power. They are also planning to invest Rs 16,000 crore to build EVs.

Ola has a similar game plan. It is building the largest two-wheeler plant in the world, with the capacity to churn out 10 million two-wheelers a year by 2022. This would account for half the total two-wheeler market in India. The company also plans to aggressively go for exports to Europe, south east Asia, and other countries.

Of course, this does not mean that the incumbent players are out of the EV game. With cash reserves of Rs 16,000 crore, Bajaj Auto is quietly putting together the various pieces of its EV plan, both in India and in Europe, where it has acquired companies. Tatas are also incumbents taking a different route to enter the EV space. The large vehicle players argue that the valuation game is pegged on subscriber acquisition even if the product is sold at a loss (partly funded by PE money and by subsidies).  

The incumbents feel that many of the startups will find it difficult to make profits and that will get worse as the government slowly reduces and removes the subsidies. “Such a model is not sustainable in the long run for startups but is only the means to get a premium in an IPO,” says a senior executive of a leading two-wheeler company.