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Valuing the unvalued

Finding net beneficiaries from value migration to EVs

* While the advent of electric vehicles (EVs) is causing disruption for incumbents, it is creating big opportunities for smaller players, new entrants, and start-ups alike. Globally, and in India, this has created substantial interest among financial investors in this emerging ecosystem.

* The recent fundraise by TTMT in the e-PV business and the resultant re-rating of the stock has made us curious about a) how investors should look at the valuations of the EV businesses of incumbent OEMs and b) whether a re-rating should depend on the external fundraise.

* We believe the valuations of pure EV businesses are driven by a) the expected pace of electrification in the segment and b) the competitive landscape in the EV segment. In the Indian context, the speed of electrification would differ substantially across segments. Over the next five years, we expect electrification to be faster in 2Ws (~15% penetration), 3Ws (~19%), buses (~23%), and LCVs (~18%).

* India is still in the early stages of electrification across segments, and the competitive landscape is yet to evolve, making it difficult to pick the winners from this disruption. While there would be a value inflow from EV forays of the OEMs, we believe the value would be largely migration away from the existing ICE business. Hence, our approach to navigating this uncertain transitory phase is to focus on players that are less vulnerable to electrification in the first phase, but could potentially benefit from it.

* Net value accretion from the EV disruption for the incumbent OEMs could occur from a) an increase in segmental market share and/or b) sub-segment expansion owing to inter-segmental changes (for e.g., the shift from motorcycles to e-scooters).

* In this context, we perform a top-down analysis of each segment and sub-segment w.r.t to the estimated roadmap for electrification, the EBITDA pool, and the competitive landscape. Additionally, we analyze the exposure to segments (by OEM player), with a higher probability of electrification.

* We expect BJAUT/HMCL to be the net beneficiary of the EV disruption in the 2W industry in the initial phase on account of having no or low exposure in the Scooter segment. AL could be a potential beneficiary in the e-LCV segment and may see a fundraise-led re-rating.

Recent fundraises for EV players have been at rich valuations

* While the advent of EVs is causing disruption for incumbents, it is creating big opportunities for smaller players, new entrants, and start-ups alike. Globally, and in India, this has created substantial interest among financial investors in this emerging ecosystem.

* Globally, pure EV OEMs are richly valued, driven by the expectation of rapid value migration from ICEs to EVs across segments. Excluding Tesla, globally listed pure EV OEMs are valued at an average of 4.5x CY23E EV/sales, with pure e-PV OEMs valued at ~6.2x EV/sales and e-CV OEMs at 3.3x EV/sales.

* Even in India, the recent fundraises in the EV segment have been at very rich valuations for businesses that are at the very nascent stage of evolution. Ola Electric raised USD200m in Sep’21, valuing the start-up at USD3b. Similarly, Tata Motors raised USD1b in Oct’21, valuing its Electric PV business at USD6.7–9.1b.

* Based on our estimates of the level of electrification, the aforementioned deals imply the valuation stands at EV/sales of 3–4x on FY27E EV revenues.

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