Stocks like TATA Power and JSW Energy have been bracing for this transition by focusing on setting up renewable power capacity – mainly solar.
By Divam Sharma and Sreeram Ramdas,
In the auto industry, change is constant. Companies that are able to embrace change and innovate their product offering with time will continue to command higher valuation premiums than their counterparts. The transition towards EVs will be a transitional change rather than an overnight disruption. With 2W’s and public mobility vehicles being electrified first, the journey has begun for the Indian automotive and Energy sector. Currently, EV 2W adoption is at 2% which is forecasted to enlarge to 38% by 2030. Hence, EV adoption in India is surely becoming a reality.
When the dynamics of the end product are changing the players in the entire value chain will be forced to evolve, and the market will premiumize companies that are innovating and setting themselves up for tomorrow. If we were to screen the valuation of well-known players in the energy and power sector, this case of premiumization is evident – those that are innovating and gearing up for transition towards renewables command higher valuations.
Stocks like TATA Power and JSW Energy have been bracing for this transition by focusing on setting up renewable power capacity – mainly solar. New capacities announced by these players are futuristic, mainly comprising wind and solar capacity, and in the case of TATA Power, they aim to set up 10,000 EV charging stations in PAN India. JSW Energy has stalled the setting up of new thermal units and expects to ramp up its renewable capacity by 10x by 2030.
Energy is a commodity and historically commodity stocks have commanded a single-digit price multiple. However, the entities mentioned above now trade at record valuations as the market foresees growth in revenues and margins as they embrace the change.
Other players down the value chain like Exide Industries and Amara raja Batteries have come out with their own ambitious plans. Amara Raja for instance has committed to setting up a lithium-ion cell manufacturing unit under the PLI scheme and setting up EV charging stations as part of its transition.
Auto component manufacturing companies are doubling down on their R&D for developing components that find special utility in EVs going forward. Taking the drive train for instance, in an ICE engine, you have close to 2,000 moving parts, and when it comes to EVs you only have 20 such moving parts. Hence, as the transition gains momentum along with the 4W space, the incumbent players who are adamant to innovate will eventually face hardships.
Markets do not price in what’s happening today, in fact, markets are forward-looking, and prices in the expectations of tomorrow.
Renewable energy has now become much cheaper than coal. India set up a target of achieving 500 GW of renewable energy capacity by the year 2030, and in order to achieve this several wheels have to be turned to make this a reality. Firstly, India has one of the most inefficient transmission mechanisms in the world with a T&D loss of 20%, which is twice the world average. Hence, lithium-ion batteries and storage systems will be essential as India ramps up its renewable capacity.
Investors must focus on these dynamics – the undercurrents and transitions happening in the automobile and energy sector. EVs are becoming a reality faster than anyone had expected and investors’ appetite will favor those companies that are spearheading the transition. Companies that are primarily manufacturing ICE components, battery manufacturers that aren’t budging, and energy companies that are doubling down on coal capacities will feel the wrath of negative investor sentiments.
(Divam Sharma is the co-founder, and Sreeram Ramdas is an Analyst at Green Portfolio, SEBI Registered PMS. Views expressed are the author’s own. Please consult your financial advisor before investing.)
Reference Link:- https://www.financialexpress.com/market/cafeinvest/how-electric-vehicle-push-is-reshaping-energy-and-auto-sector-on-dalal-street/2504026/