Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities
We believe that 2W EVs will exceed 1m units p.a. by 2025 and 8-10% penetration by 2026. Over the past six months, the effective subsidies on 2W EVs have increased to 40% of the effective price, bringing them at par with ICE vehicles due to additional incentives from state and central governments. Further, the new models (such as the OLA SI) offer a significantly improved range of over 100kms per charge, thus addressing range anxiety concerns. Within 4Ws, due to the lower energy density of lithium ion batteries, we believe the heavy truck segment will continue to be powered by combustion engines in the near/medium term. We prefer 4W OEMs/ancillaries over 2Ws due to the impending shift.
Government focus on electrification: Over the past six months (please see our earlier note dated Apr'21 - Will EVs impact the 'EV'), the environment has turned further favourable, particularly for 2W EVs. The total subsidy can be as high as INR 45-60K per scooter - while the effective price is now lower by 40% - bringing EVs at par with ICE vehicles. New products are significantly improved, with over 100kms range: Ola's models address range anxiety by offering a driving range of 121kms/181kms. Further, the S1 Pro offers the fastest 0-40kph acceleration time of 3sec (S1 Pro), which is higher than any ICE product.
EV penetration to ramp up substantially: With the increased subsidies and improved product offerings, we are building in a base case scenario of industry reaching ~10% electric sales by 2026. In our conversation with Mr. Amit Gupta - the co-founder and CEO of Yulu (in which Bajaj Auto is a strategic partner), he mentioned that EV sales will ramp up to 6.3mn units p.a. (~30% of the industry) over the next five years. There is an increasing demand for sustainable solutions and government's evolving policies favoring greener transportation alternatives will benefit. The battery technology is improving significantly to mitigate range anxiety to a large extent, especially when it comes to urban commute. Couple this with the scaling of charging infrastructure and we have highly promising factors, indicating a significant increase in EV adoption.
Four wheelers: the energy density conundrum: In the case of CVs, the truck segment will not entirely transition towards BEVs, due to the relatively lower energy density of lithium ion batteries. Daimler, in its long-term outlook, highlighted that Fuel Cells are a more sustainable technology for the Class 8/heavy trucks, as the driving range is significantly higher as compared to electric batteries. However, these trucks are expected to be commercialised in the latter half of the decade. Thus, combustion engines will remain dominant over the medium term.
Stocks outlook: We believe that as EVs become mainstream, the terminal growth assumptions for 2W OEMs are at risk as the threat from EVs is more near term (over the next 3-5 years). Thus, the second stage DCF assumptions will potentially be impacted for the incumbents. Based on our sensitivity analysis of Hero , if we assume lower growth rates, the impact on the stock values will be between 15-25%. We have downgraded Hero Moto and Endurance Tech to an ADD over the year and we have a REDUCE rating on Eicher Motors. Within auto ancillaries, we prefer Bharat Forge due to its higher dependence on MHCVs, which are less likely to be impacted by EVs in the near/medium term. We also have a BUY on Tata Motors and Maruti.