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3 backdoor stocks to play 15x EV Opportunity .pdf - October...

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Unformatted text preview: October 25 2021 Powered by: TABLE OF CONTENTS Page Introduction Stock # 1 Amara Raja Batteries Stock # 2 Fiem Industries Ltd Stock # 3 Minda Corporation Ltd 3 6 12 23 Disclosures under SEBI (Research Analysts) Regulations 40 Disclaimer 42 3 Backdoor Stocks to Play the 15x EV Opportunity | 2 Stock 1 Amara Raja Batteries ISRO-Backed EV Battery Player on the Fast Lane of Wealth Creation In January 2019, the Indian Space Research Organisation (ISRO) selected ten companies for transfer of its Lithium-ion cell technology. One of them was Amara Raja Batteries. India’s premier space research organisation, ISRO, has supported the successful deployment of indigenous lithium-ion batteries in various missions for a long time. It believes the lithium-ion (Li-ion) cell technology is one of the most promising electro chemical energy storage technologies. Due to its high voltage, high energy density, long life cycle, and good storage characteristics, it finds application in many industries. In fact, it already finds wide applications in electronic gadgets, tele-communication, and industrial as well as aerospace applications. Recent progress in Li-ion battery technology has made it the favourite power source for electric and hybrid electric vehicles. Why did ISRO select Amara Raja Batteries? The company has been at the forefront of producing such batteries for several years now. The agreement with ISRO for the lithium-ion cell technology transfer is without any royalty payment. Amara Raja Batteries is one of the country's biggest battery manufacturer and supplier. It’s the largest supplier of industrial storage batteries in India. As Amara Raja Batteries' website points out: Every second telecom tower in India runs on Amaron batteries, as does every third car in Singapore. Over 14 million Amaron batteries power Indian vehicles. Every minute, there are five Amaron batteries being fitted in vehicles in India (excluding two-wheelers). 3 | Stock 1 - Amara Raja Batteries Currently Amara Raja supplies auto batteries to Ashok Leyland, Ford India, Honda, Hyundai, Mahindra & Mahindra, Maruti Suzuki, and Tata Motors. It also exports industrial and auto batteries to countries in the Indian Ocean rim. In January 2019, ISRO named 10 companies from a list of 141, to which it proposed to transfer the technology to manufacture lithium-ion cells developed by the Vikram Sarabhai Space Centre (VSSC), Thumba, as part of the government's effort to push electric mobility. The 10 companies that got the tech licence from ISRO only 4 are listed entities: • Amara Raja Batteries • Bharat Electronics • Tata Chemicals • Thermax However, among them, Amara Raja Batteries is the first one to set up the lithium battery development hub. Under the tech transfer, ISRO will help these companies set up lithium-ion cell manufacturing units and train their staff. Under the new policies taken up by the government, adoption of Li-ion batteries will grow at a tremendous pace in the coming years. Rising sales of EVs and huge investments in clean energy sources will boost the demand for Li-ion batteries. Amara Raja Batteries, the country’s second largest auto battery maker and owner of brand Amaron, is at an inflection point in its business. The company is transitioning from being a lead acid batteries (LAB) maker to a new energy player. It’s diving into growth segments such as lithium ion batteries and solutions for electric storage. It’s also evaluating plans for a giga factory to produce batteries for EVs at scale. By repositioning Amara Raja Batteries as an Energy and Mobility player, the group is essentially future proofing the business. Stock 1 - Amara Raja Batteries | 4 Amara Raja Batteries’ New Energy Portfolio Source: Company data The company has established a New Energy business unit for lithium cell and battery packs, EV chargers, Energy Storage Systems, Advanced Home Energy Solutions, and related products and services. In a conference call, the management confirmed it has committed a US$1 bn investment over next 5 years for a 10-12 GWh (gigawatt hours) lithium-ion battery facility. This is under the Advanced Chemistry Cell (ACC), PLI (Production Linked Incentives) scheme of the government. But that’s not all. Amara Raja Batteries is also betting big on startups that are innovating disruptive technologies for EV batteries. Its 12% stake in battery innovator Log 9 Materials is a case in point. Log 9 Materials is a startup incubated at IIT Roorkee. It has developed rapid-charging batteries for electric two- and three-wheelers. It’s also developing an aluminium fuel-cell technology aimed at long-haul electric mobility as an alternative to diesel generators. The company won the Top Innovator Award at the ET Startup Awards 2021. 5 | Stock 1 - Amara Raja Batteries So, it’s not just the business transformation for a battery assembler to green energy powerhouse that could propel Amara Raja Batteries into a new orbit of wealth creation. By being in the right place at the right time, in the EV ecosystem, the company is an ideal backdoor play in the massive EV gold rush. With sufficient comfort in financials and valuations at current levels, the stock is one of the best bets for investors seeking long-term gains from India’s massive EV megatrend. Plus, there are few very long-term upsides… Global Supplier of the Lead Acid Batteries Having worked on and built expertise in the lead-acid battery space for more than three decades, Amara Raja Batteries is at an opportune position to seek global expansion in this segment of the business The global market for lead acid batteries in FY20 was estimated in the range of US$ 38-42 bn, of which 66% was Automotive and 29% Industrial. Amara Raja enjoys very strong positions in the Automotive (OE and Replacement) and Industrial battery space (UPS and Telecom). Even as India transitions to e-mobility, lead-acid battery demand could continue to grow alongside the internal combustion vehicle. Moreover, the growing traction of hybrid vehicles will further enhance volumes for lead-acid batteries. After having gained a healthy global presence, Amara Raja Batteries plans to consider inorganic opportunities to accelerate market share acquisition. The management has set a target of topline growth of 15-17% over the next five years, driven by organic growth in the domestic market and international expansion. Stock 1 - Amara Raja Batteries | 6 Lead Acid Batteries Could Continue to Dominate Industrial Uses Source: Company data Energy Storage Vertical a Gamechanger India, unlike other developed economies, has not been able to standardise the types of plugs, voltages, etc. In keeping with this reality, Amara Raja Batteries has developed an entire charging portfolio that will be able to deliver charging and swapping solutions as well as AC charging for residential applications. The company plans to offer a host of charging solutions as well as the battery management system, seamlessly connecting the user to the charging stations, the distribution, transmission and generation of renewable power (predominantly solar and wind). Presence in energy storage business will allow the company to offer round charging solutions for the electric vehicles. The company is evaluating the possibility of setting up a Giga factory. Typically, a large Giga factory of about 8-10 GW could require an investment of about US$ 1 bn over 5-10 years. 7 | Stock 1 - Amara Raja Batteries India’s Lithium Ion Battery Market to Grow 5x by 2030 Source: Company data Risk to Our Assumptions Although Jaydev Galla and the management of Amara Raja Batteries have put forth a solid business transformation plan for the electric vehicle foray, their involvement in regional politics could have a bearing on the company’s growth. The Galla family have strong political presence in the state of Andhra Pradesh. Managing Director Jayadev Galla is the MP from Guntur representing TDP in the Lok Sabha, His mother Galla Aruna Kumari was a minister in the N Chandrababu Naidu government. In recent past, the family has been accused of land grabbing by the local government, and also received pollution control notices. Political repercussion could strongly impact the growth prospects of the business. Financial Profile of Amara Raja Batteries Amara Raja Batteries has grown its sales and profits at a compounded rate of around 13% over the past decade. With minimal leverage on its books, the company has sustained average return on capital of 31% during this period. While growth in lead acid battery business could recover strongly, achieving the management’s target of 15-17% CAGR in volumes over five years is largely dependent on successful execution of its export strategy. While its entry in the New Energy business is a step in the right direction, its success will be dependent on the technology partnership with ISRO, cost competitiveness etc. Stock 1 - Amara Raja Batteries | 8 For lithium cell manufacturing, it is targeting 8-10 GW capacity to attain global competitiveness. Considering that that US$ 1 bn capex in the New Energy business will be over 5-10 years, Amara Raja Batteries can fund this capex through free cash flows of the core business, while keeping its balance sheet lean. At What Price Would the Stock be Attractive? Amara Raja Batteries has traded at an average PE multiple of 24 times over last 5 years and 29 times over last 10 years. The stock is currently trading below its 5-year average multiple. I have valued the stock at 20 times forward earnings. Since the bet on the electric vehicle megatrend is a very long term one, as per my estimates, the stock can be expected to compound at average annual rate of 14 to 15% over the next decade. This means, from the current levels, the stock can at least triple over the next decade. Given the elevated valuations of the broader markets, I recommend taking a partial exposure (50% exposure) to the stock at the current price of 690 or lower. The best buy price (for full exposure) for the stock is Rs 600. We will let subscribers as and when the stock offers an opportunity to take full exposure. Action to Take • Recommend buying Amara Raja Batteries (50% exposure) at current price of Rs 690 or lower. • Best buy price for 100% exposure is Rs 600 • Target price Rs 2,300 (from 10-year perspective) A Gentle Reminder About Asset Allocation In a scenario of ideal allocation of funds, I recommend holding at least 60% of one's total equity portfolio in bluechip stocks. 9 | Stock 1 - Amara Raja Batteries Further, we believe that a single bluechip stock should ideally not form more than 5-6% of the total portfolio. However, please note that this allocation will vary from person to person. For something that works best for you, we recommend you talk to your investment advisor. Market Data Price on 25 Oct 2021 (Rs) 52-week High/Low (Rs) NSE Symbol BSE Code No. of Shares (m) 690 1,025 / 665 AMARAJABAT 500008 170.8 Face value 1.0 FY21 DPS 11 Dividend Yld (FY21 at current prices) Market Cap (Rs m) Price to earnings (25 Oct 2021, x) Stock 1 - Amara Raja Batteries 1.6% 117,860 16.6 | 10 Shareholding (Sept 2021) Category (%) Promoters 28.1 FPIs 20.8 Banks and MFs 34.8 Public 16.3 Total 100 Financials at a Glance FY17 FY18 FY19 FY20 FY21 Net Sales Growth 15.1 14.0 12.1 0.7 4.5 Net Profit Growth (2.7) (1.5) 2.6 36.7 (2.1) Net Profit Margin 9.0 7.8 7.1 9.7 9.0 Return on Equity 18.5 16.0 14.5 18.1 15.4 Return on Capital 29.2 25.4 23.1 23.9 22.0 Debt to Equity (x) 0.1 0.1 0.1 0.1 0.1 11 | Stock 1 - Amara Raja Batteries Stock 2 Fiem Industries Ltd EVs Transition is a Gamechanger for this Smallcap Auto Ancillary Few years ago, a study was done in the auto segment trying to decipher what influences vehicle buying decision in Indian markets. The study had some very concrete results. It turned out that one of every three Indians had turned down a vehicle he/she liked, for another that on account of one factor. Could you guess? The answer is mileage. To appeal to mileage conscious nation, the very famous Maruti Suzuki India came up with a series of ‘Kitna deti hai’ promotions. The auto sector may go through a wave of digital and electric vehicle disruption. But mileage will continue to remain an obsession for a vehicle buyer. And this is where lies a great opportunity for companies supplying LED based automotive lighting products and solutions. The Connection between Mileage and LED-based Auto Lights In a conventional vehicles, the lights could be halogen or LED based. In an ICE fuelled vehicle, the reasons for choosing LED could be better style and aesthetics. For EVs, this is a functional need. That’s because LED car bulbs typically consume much less energy. And the energy saved on LED based vehicle lighting can add multiple miles to the journey as compared to traditional lights. No wonder then almost all EV models, existing and to be launched in future, are going with LED based lights. Stock 2 - Fiem Industries Ltd | 12 In short, EVs disruption comes with a huge opportunity for auto LED makers. And could be a game changer for Fiem Industries. You see, 2 wheelers are likely to be the most promising segment for EV transition. The company derives almost 96% revenue from this segment. Fiem Industries was the first to introduce LED lights in 2-wheelers. Unlike other players that have been sourcing the technology, the company is reliant on in-house R&D. The company is one of the leading manufacturers of automotive lighting (headlamps, tail lamps, and blinker lamps, fog lamps, warning triangles, interior lamps, and beacon lights), signalling equipment and rear view mirrors in India. While its products could be classified as EV agnostic, the EV transition and incremental demand for auto LEDs has been a big inflection point for the business. Here’s why… The realisations in conventional or halogen auto lamps range from Rs 800 to Rs 1,500. In case of LED, the realisations are more than double – Rs 2,000 to Rs 5,500 or even Rs 6,000 – depending on the design and configuration. The business is 1.8 times to 2 times in LED-based electric vehicle as compared to an ICE based vehicle, along with better yields and margins. While higher realisations/yields on LEDs will benefit the company from a value perspective, even volume wise, the opportunity is huge. Sole Supplier to Ola Electric – A Game Changing Proposition Fiem has been selected by Ola Electric as the sole supplier for headlamp, tail lamp, indicator, rear fender assemblies (all LED based products) and mirror for its electric 2-wheelers. Ola Electric is setting up a facility near Bangalore to churn out 10 million electric 2-wheelers by 2022. This is more than half of annual ICE based 2-wheelers sales in India. Such scale will catapult the company to be the world’s largest e-scooter maker. Fiem could be a perfect proxy play to ride this opportunity. Fiem’s plant at Hosur is strategically located to cater to Ola’s requirements. The first phase in Ola Electric manufacturing facility itself is aimed to produce 2 million vehicles, which is significant. The existing base is just 1.5 lakh electric 2-wheelers. The revenues from this alliance are likely to figure from second half of FY22. 13 | Stock 2 - Fiem Industries Ltd Ola Electric will have a learning curve in terms of technology, investments, and competition to deal with. But Fiem, as its sole supplier, has latched on to a huge growth opportunity. It could also offer company huge visibility in the global electric market in the long term. Besides this big win, the company is already a supplier to Revolt, Okinawa, Hero Electric, Electrotherm and Ampere. It’s the sole supplier to Electrotherm and Okinawa. The management has suggested there are more customers in the EV segment in the pipeline and expects EV-based opportunity to grow at a CAGR of 20%-25% year on year. Overall, the management expects the share of LED in automotive lighting segment to grow from 40% to up to 70% over next three to four years. With higher yields, the shift in the product mix expands the opportunity for revenue and profit growth for the company. About the Company Founded in 1989 by Mr JK Jain, a first generation entrepreneur, Fiem Industries is a leading manufacturer of automotive lighting (headlamps, tail lamps, and blinker lamps, fog lamps, warning triangles, interior lamps and beacon lights),signaling equipments and rear view mirrors in India. It was among the first to introduce LED lights in 2 vehicles. Besides, its products find use in integrated passenger information systems for railways and buses with LED display (IPIS. Here’s a snapshot of product profile: Most of the company’s products are EV agnostic, i.e, they find usage in both internal combustion engine (ICE) and electric vehicle. Stock 2 - Fiem Industries Ltd | 14 In the plastic moulding parts, the company has over 450 injection moulding machines that make parts ranging from 20 gms to 2.5 kgs. Plastic parts are integral part of auto lamps and rear view mirrors, and needed in the final assembly for all products. 2 Wheelers account for 96% of company’s revenue. The rest comes from the 4 wheeler segment. Revenue Contribution in Automotive Segment (FY21) 7% 4% Honda Motorcycle 7% 35% 8% TVS Motors India Yamaha Suzuki Motorcycle Others 13% Replacement Eicher Royal Enfield 26% In four wheeler space, its top clients are Tata Marcopolo, Force Motors, Honda Siel, Hyundai, Daimler, Mahindra Reva etc. Domestic OEMs contribute to 91.2% of revenue, while exports comprise 2.2%. The export markets include Japan, Austria, UK, Germany, Thailand, Indonesia and Vietnam. The domestic replacement market contributes to the remaining 7% share. The company has three world class R&D/Design centres (in India, Italy and Japan) and testing facility with inhouse capabilities in LED technology and manufacturing. It has also entered strategic technological tie ups with global players for advance and cost efficient products. Its wholly owned subsidiaries include Fiem Inds Japan Co (Japan), Fiem Research and Technology SRL (Italy). Further, it has two joint ventures (JVs) – Asian Fiem Automobiles India and Fiem Kyowa (HK) Mould Company Ltd (Hong Kong). 15 | Stock 2 - Fiem Industries Ltd The company has 9 manufacturing facilities for automotive lightning in states of Haryana, Tamil Nadu, Himachal Pradesh, Rajasthan and Gujarat. The facilities are strategically located to offer logistic efficiency and just in time deliveries. About the Management Mr JK Jain, Chairman and Managing Director, has over four decades of experience in manufacturing of automotive lighting and signaling equipment. He is involved in advising on business strategies and growth and expansion plans of the company. Mr Rahul Jain, Whole time Director, is involved in strategic affairs and corporate planning, apart from customer interaction and initiatives of new projects. Reasons to Invest • Strong Tailwinds for Auto LED business Over the next three years, the management expects auto LEDs to contribute to 60% of revenue from 40% in a normal year. Such shift in the product mix will be positive for company’s growth and profitability. That’s because the realisations in conventional or halogen auto lamps range from Rs 800 to Rs 1500. In case of LED, the realisations are more than double- ranging from Rs 2,000 to Rs 5,500 or Rs 6,000, depending on design and configuration. A typical EV has a lot lesser moving parts than ICE based vehicle. But auto lights is one area where design, aesthetics and fuel economy requirements will ensure premiumisation of content. As such, EV transition will be positive for the product mix. It is worth noting here that order from Ola is for LED based products. In fact, all the lighting products for EV based vehicles are LED based. • Strong Potential Upside from Existing Capacities The capex this year is projected at Rs 350 m (150 m for new line and rest for maintenance) that could be met from internal accruals. Th...
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