Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities
We believe 2W EVs will exceed 1 million units per year by 2025 and 8-10% penetration by 2026. In the past six months, effective subsidies on 2W EVs have increased to 40% of the effective price, bringing them to the same level as the ICE vehicles. due to additional incentives from state and central governments. Additionally, newer models (such as the OLA SI) offer significantly improved range of over 100km per charge, addressing range anxiety issues. In 4W, 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 short / medium term. We prefer 4W OEM / auxiliaries over 2W due to the impending change.
Government focus on electrification: Over the past six months (please see our previous note from April 21 – Will electric vehicles impact the ‘EV’) the environment has become even more favorable, especially for 2W electric vehicles. The total subsidy can reach INR 45-60,000 per scooter – while the effective price is now 40% lower – putting electric vehicles on par with ICE vehicles. The new products are significantly improved, with a range of over 100 km: Ola models address range problems by offering a range of 121 km / 181 km. In addition, the S1 Pro offers the fastest 0-40 km / h acceleration time of 3 seconds (S1 Pro), which is superior to any ICE product.
The penetration of electric vehicles will increase dramatically: with increasing subsidies and improving product offerings, we are building a baseline scenario that the industry would reach around 10% of electricity sales by 2026. In our conversation with Mr. Amit Gupta – the co-founder and CEO of Yulu (of which Bajaj Auto is a strategic partner), he mentioned that sales of electric vehicles would reach 6.3 million units per year (about 30% of the industry) over the next five years. There is a growing demand for sustainable solutions and evolving government policies promoting greener transportation alternatives will benefit. Battery technology is improving dramatically to alleviate range anxiety to a large extent, especially when it comes to urban commuting. Add to that the scaling up of the charging infrastructure and we have some very promising factors indicating a significant increase in the adoption of electric vehicles.
Four wheels: the energy density conundrum: In the case of CVs, the truck segment will not shift entirely to BEVs, due to the relatively lower energy density of lithium-ion batteries. Daimler, in its long-term outlook, pointed out that fuel cells are a more sustainable technology for Class 8 / heavy-duty trucks, as the range is significantly greater than that of electric batteries. However, these trucks are expected to be marketed in the second half of the decade. Thus, combustion engines will remain dominant in the medium term.
Inventory Outlook: We believe that as EVs become mainstream, final growth assumptions for 2W OEMs are at risk, as the EV threat is shorter term (over the next 3-5 years) . Thus, the second stage DCF assumptions will potentially be impacted for the incumbent operators. Based on our sensitivity analysis of Hero, if we assume lower growth rates, the impact on equity values will be between 15% and 25%. We downgraded Hero Moto and Endurance Tech to ADD during the year and we have a REDUCE rating on Eicher Motors. Within automotive auxiliaries, we prefer Bharat Forge due to its greater reliance on MHCVs, which are less likely to be impacted by EVs in the short / medium term. We also have a PURCHASE on Tata Motors and Maruti.
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