Auto Companies Are Looking To Rope In Investors To Grow EV Business

Around a month back, Tata Motors had raised funds from private equity company TPG Holdings, and Abu Dhabi’s state holding company to fund its electric vehicles (EV) business. The $1 billion fundraise valued the EV subsidiary at $9 billion, and allowed the indebted company to raise funds without taking on more debt.

Bringing In External Investors

It appears that other automotive companies are following in the footsteps of Tata Motors as well. In a conference call, Anish Shah, the managing director of automotive company Mahindra and Mahindra announced that the company is looking to bring in external investors to fund the EV business.

"We are looking at very bold growth plans in multiple areas — in EV from an automotive standpoint and on the farm machinery side, there is a huge potential beyond tractors and across many of our growth gems,” Shah said during the conference call.

However, he clarified that the investors would be brought in not just for the capital, but also domain expertise in the space. “And in many of these areas, we are now open to looking at funding coming in from outside that will help us grow much faster. But it is not just for capital, it is also for any expertise that the investor may bring in,” he said.

A report by Economic Times said that TVS Motors was looking to rope in investors to fund its EV business as well. According to the report, the company was looking to raise around $500 million for the EV business. However, the company has denied the reports and clarified that it is yet to incorporate a separate subsidiary for electric vehicles.

The company had received the board of director’s approval for the creation of a subsidiary.

Similarly, Bajaj Auto had announced plans to create a separate domestic subsidiary for the EV business. It is likely that these companies are looking to raise external capital after carving out the EV businesses into separate subsidiaries.

The Companies’ Perspective

The EV business is still in a nascent stage as the market and the technology evolve. In terms of charging infrastructure, India is still in a developmental phase. Hence, from the companies’ perspective, raising debt to grow the business could be risky, especially as the auto sector faces commodity cycle pressures. As low-cost capital becomes more easily available, it is likely that companies would opt for equity funds to finance the EV business.

Tata Motors is a leader in the EV segment and plans to invest Rs 15,000 crore over the next four years for its 10 new EV launches planned in the same period. Mahindra and Mahindra, appears to be more cautious as the company looks to invest Rs 3,000 crore over the next three years by fiscal 2024. The companies are looking to develop affordable, quality products tailored to Indian requirements.

The Investors’ Perspective

For investors, the EV business is a hot sector to invest in as more funds take cognisance of “environmental, social and governance” themes in investing. In addition, companies like Tesla have been outperformers in the markets. Tesla is one of the world’s most valuable companies, despite not being consistently profitable. The stock rise propelled Tesla founder Elon Musk to the position of the world’s richest man.

In addition, the Indian government has a strong focus on reducing India’s dependence on fossil fuels, while promoting renewable energy. It has already set up schemes to incentivise EV adoption among the masses. For India, reducing the dependence on petroleum could help reduce the large import bill that the country draws up each year.

India To See Increasing EV Adoption

In a 2020 report, ratings firm CRISIL had said that automotive firms had been slow to push for EV. On the supply side, manufacturers are faced with a chicken-and-egg conundrum wherein they require volume to make up for the low margins on high-cost batteries and other components.

However, CRISIL expects the two-wheeler and three-wheeler EV spaces to do well in terms of growth and adoption.

“By fiscal 2024, EV penetration is expected to improve to 12-17% of new vehicle sales for e-two-wheelers and a whopping 43-48% for e-autos. However, offtake of passenger cars for personal mobility will be subdued given poor cost economics and the lack of demand incentives under FAME II, though cab fleets will move up a gear,” said CRISIL.

Another report by ratings firm ICRA highlighted that despite the pandemic, EVs saw a 40 per cent growth over the previous years. Globally, EVs now account for 4.4 per cent of vehicle sales according to the report. Like the CRISIL report, the ICRA report highlighted the fact that two wheelers and three wheelers are likely to do better due to a lower dependency on charging infrastructure, and decreasing costs. In contrast, it expects the car segment might see lower adoption rates.

Overall, the EV space is likely to see increasing adoption in coming years as companies raise capital and prepare their warchests for the EV push. The ease of procuring low-cost external capital can help these companies scale up the business rapidly. The focus on green mobility could allow these companies to attract more investors in the public markets as well.