Leapfrogging from ICE to EV? Early times

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Automobiles
26th August 2019
Leapfrogging from ICE to EV? Early times
India ready for mass EV adoption? not really
India predominantly has been the fastest growing
automobile market in the world. The Indian auto
sector presently manufactures 30mn vehicles
annually (contribute 7.5 to GDP) and employ
gt37mn people (directly and indirectly). The
Govts push for the electric mobility coupled
with incentivization of EVs (GST reduced to 5)
makes a strong case for higher EV penetration in
India over the next decade. Govt is advocating
the faster EV adoption to curb the pollution,
combat the high crude import bill (17 of total
imports) and thus improve Indias balance of
payments.
However, we believe that the shift towards EV
will happen rather gradually and the growth will
largely be driven by the establishment of a
robust EV ecosystem which the country lacks at
present. A number of measures would be needed to
create a sustainable EV demand in the long term
such as 1) the setting up of charging
infrastructure 2) Localize battery technology
through setup of gigafactory (battery
facility) 3) Incentivise the sector through duty
cuts on battery related technologies 4) Make the
vehicles affordable (2- 3x the cost of ICE
(Internal combustion engine) based vehicle) with
renewed focus on localization 5) Improvement in
rural and urban roads and infrastructure. Given
the current scenario, the EV ecosystem needs a
massive overhaul without which EV penetration
failing which the efforts for EV adoption
would remain a futile proposition. We hereby,
assess the underlying opportunities as well as
the challenges which emerge along with EV
adoption.
Global Electric mobility outlook
The global electric mobility gathered sharp
momentum in 2018. The cumulative global passenger
car fleet stood at 5.1mn up 90 YoY. China
remained worlds largest car market with 45
market share followed by Europe and USA with 23
and 22 market share respectively. India remains
the third-largest automobile market in the world.
Norway has the worlds highest EV penetration at
46 followed by Iceland and Sweden at 17 and 8
respectively.
In 2W/3Ws, the cumulative EV fleet stood at
gt300mn worldwide in 2018 largely driven by strong
acceptance for electric bikes in China. The
global electric buses stock stood at 460k units
(up by 28 YoY).
The total EV chargers in 2018 stood at 5.2mn
worldwide and consumed a combined 58 TW of
electricity. Out of the total electricity
consumed by EVs globally, Chinas consumption
stood at 80 in 2018.
Globally, the EV penetration has largely followed
a favourable macro policy and a strong charging
eco-system. India will have to invest upto
gt20-50bn US over next decade to become an EV
power-house.
Exhibit 1 Developed economies have seen a rapid
growth in EVs
Source IEA, Arihant Capital Markets
Arihant Capital Markets LimitedResearch Analyst
SEBI Registration NoINH000002764 1011, Solitaire
Corporate Park, Bldg No.10, 1st Floor, Andheri
Ghatkopar Link Rd, Chakala, Andheri (E), Mumbai
400 093.
Arihant Capital Markets Ltd
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Automobiles
India EV outlook Mass EV adoption can lead to
metamorphosis across the industry EVs have a
simpler manufacturing mechanism vs the ICE
vehicle (parts get reduced by 2/3rd in EV) and
thus will definitely lead to entry from the
global peers in this segment. As we can see in
exhibit 1, the shift from ICE to EV will lead to
battery pack will form 35 of the vehicle cost
and the drivetrain will undergo
significant transformation as the electric
motors, inverter and control units replaces the
exhaust system and transmission. We expect a lot
of auto component players to undergo significant
amount of de-risking of their businesses over
next five years through introduction of new
products with JVs/tie-ups with international playe
rs.
Endurance Tech Minda Industries Minda Corp
As EV technology evolves, focus would be on
light-weighting through aluminium
die-casting/alloy wheels, DC motors, battery
module, wiring harness and ADAS (advanced driver
assisted system) and advanced telematics.
Bharat Forge
Exhibit 1 The shift in vehicle composition from
ICE to EV (battery pack forms 35 of the vehicle)
EV
Battery pack
ICE
Others 5
35
Electric motor 40
Chassis 15
Exhaus system 10
Aux system 12
Drivetrain 20
Others 7
Drivetrain 35
Engine 42
Vehicle body 20
Aux system 16 Transmission 32
Inverter and control unit 48
Chassis 8
Equipment 20
Vehicle body 10
Equipment 25
Source Company, Arihant Capital Markets
Challenges and opportunities in EV Sprucing up
the charging infrastructure remains key for EV
adoption The success of EVs will be driven by
Pan-India installation of charging stations. The
Govt is taking necessary steps to address this
challenge through adequate tie-ups coupled with
incentivization through the FAME II scheme (Rs
10k Cr subsidy) to attract EV buyers. Presently,
there are 150 public charging stations in India
(vs 976k stations in China including 401k public
stations). We thus believe the installation of
public charging stations will be required to
firmly roll out EV adoption. The charging
stations shall attract investments upto 15-25bn
over next five to eight years which remains a
concern. Companies in India such as ABB,
Acme Industries, Fortum India have shown interest
to setup battery charging stations in India.
Breakthrough in battery storage technology shall
drive EV affordability
The high battery costs attached (35 of vehicle
cost) coupled with low volumes lead to high cost
of ownership for EVs and make them unaffordable.
Any breakthrough towards reduction of the cost of
battery modules can make the EVs inexpensive. The
most common battery modules comprise of 1)
NMC-graphite batteries cells which use the
nickel-manganese-cobalt as cathode and Graphite
as anode. These are the most commonly used
battery cells and cost 150-200/kWh however have
a low life-cycle of 500 chargings. 2) NMC-LTO
These cells use lithium-titanium-oxide as anode
vs the graphite and come with life-cycles of
10,000 charging and costs 450/kWh. 3)
LFP-Graphite lithium-ferrous-phosphate-graphite
higher life-cycles vs the NMC-LTO battery cells
costs. Research is underway to increase the
battery storage by 10x thus making the vehicle
more affordable.
EV adoption Buses 2Ws/3Ws PVs
Public transport, specially the intra-city
transport buses could see earliest EV adoption as
they are known to emit highest polluting
materials followed by 3Ws/2Ws in tandem. The PVs
could be the last segment for EV adoption due to
high costs attached. The Govt had recently
drafted a proposal for all 3Ws and all 2Ws
lt150cc to convert to electric by 2023 and 2025
respectively. However, the OEM backlash coupled
with the unviability of the charging
infrastructure resulted in a softer stance by the
Govt recently. This underlines the
hurdles towards EV adoption.
Arihant Capital Markets Ltd
26 August, 2019
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Automobiles
We expect EVs to see gradual adoption over
FY19-FY32e
We firmly believe EV adoption likely to see a
gradual increase on account of 1) a viable
charging infrastructure 2) Increased awareness
about EV 3) Focus on cost reduction in battery
storage through localization. We thus believe,
FY20e to be an inflection point for Indian
automobile industry where OEMs will be
technologically well verse with the EV adoption
by FY32e thus leading to fastest adoption in
buses (75) followed by 2W/3W with 61/64
respectively and the PVs to adopt gradually (38)
until FY32 on account of higher cost of ownership
vs ICE vehicles.
Exhibit 1 The shift in vehicle composition from
ICE to EV (battery pack forms 35 of the vehicle)
100
75 64
80 60
59
51 49
61 38
39
40
30
26
20 0
18 7
9
12
FY19 FY20e FY21e FY22e FY23e FY24e FY25e FY26e
FY27e FY28e FY29e FY30e FY31e FY32e
3W 2W PV Buses
Source Company, Arihant Capital Markets
Hero in 2Ws and Maruti in PVs to drive the
e-mobility over next decade
We firmly believe, amongst the 2Ws, Hero shall
benefit from the 2W adoption on account of its
strong presence in EV segment with proprietary
products and its investment in Ather Energy
(electric 2W startup). The company shall enable
smooth transition to EVs over the next decade.
Other 2W OEMs like Bajaj Auto and TVS are working
on electric bikes/scooters however tie-ups with
other OEMs. In PVs, we firmly believe,
Maruti shall lead the pack with a strong
technology partner available at its behest and
thus drive the affordable electric mobility
juggernaut over the next decade. While MM has
been vocal about EV aspirations and also remains
a pioneer in this space, its present models have
not able to garner decent volumes in EVs.
Rating scale
CMP (Rs)
TP (Rs)
EPS (Rs) FY20e 5
P/E (x) FY20e 12
ROE () FY20e 17
Reco
Company Ashok Leyland Bajaj Auto
FY19
FY21e
FY19
FY21e 10
FY19 26
FY21e 17
60
75
ACCUMULATE ACCUMULATE HOLD
7
6
9
2750 6250 365
3021 6004 431
151 248 14
165 257 16
183 286 19
18 25 26 16 9
17
15 22 19 14 10 6
21 17 22 27 17 12
21
21 16 22 25 10 14
Maruti Suzuki TVS Motor Co Hero Motocorp MM
24
16
HOLD
23
21
2642 533
2114 590
REDUCE HOLD
169 39
166 33
184 32
16
25
10
11
Fiem Industries
367
599
BUY
42
47
60
9
8
12
Arihant Capital Markets Ltd
26 August, 2019
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