Veteran investor Raamdeo Agrawal finds the auto sector “slightly confusing” right now given the disruption happening in the industry, which is unlike past disruptions that have happened in other sectors.
“Because the industry is in transition and it's one of the biggest transitions. At the same time, customers want the vehicles, whether it is a two-wheeler, three-wheeler or a four-wheeler but adoption of EV is also not happening at a very rapid pace,” observed Agrawal, in an interview with Moneycontrol.
He was alluding to the fact that there is demand available for vehicles even though a transition is happening. Plus, the pace of transition is slow. Moreover, the disruption is mostly coming from within the industry rather than a new player.
In the past, when the banking sector faced disruptions, it was new private banking players such as ICICI Bank or HDFC Bank that took away market share. In telecom, it was the entry of Jio that changed the face of the business. Unlike those, Agrawal said he finds no new electric vehicle companies taking away market share from existing ones.
“I don't see those (new) companies in India taking away the share. It is quite possible that evolution may happen in India under the banner of the same established players,” said. “I'm very bullish on the demand for automotive in India as the economy scales up but I'm a little confused about what happens to the EV and non-EV market share.”
More and more new EV models are being launched by existing automakers. Many more are in the pipeline. For instance, Tata Motors, which is the biggest-selling EV brand right now, plans to have 10 EV models on road by 2025. M&M has also outlined its ambitious plan to lead the EV market. Two-wheeler makers such as Bajaj Auto and Eicher Motors are also trying to spearhead the transition.
He also wondered what will happen to the terminal value of internal combustion (IC) businesses, in case a few years down the line the world realises that the auto industry is moving towards electrification. IC refers to the current generation of vehicles that burn fossil fuel to generate power that drives an automobile. EVs don’t have combustion chambers to burn fuel.
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The terminal value of any business is dependent on the future growth that a business can deliver. In case EVs take centre stage, IC businesses will have to wind down their operations as there will not be additional demand for them.
“Since the terminal value of the IC business is not going to be so high then the P/E multiple of IC businesses in the next three or four years time might come down to 10 or 15,” Agrawal said. “In that case even if companies’ earnings double, (investors) may not make money.”
The Nifty Auto index has performed quite well thanks to a recovery in demand and enthusiasm towards new models in recent months with a year-to-date return of 17 percent.
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