Tata Motors was the top Nifty gainer of 2023. But this EV stock is a better bet

This company recently ventured into the EV space to manufacture lithium cells and packs, EV chargers, and energy storage solutions. (Bloomberg)
This company recently ventured into the EV space to manufacture lithium cells and packs, EV chargers, and energy storage solutions. (Bloomberg)

Summary

This Tirupati-headquartered company boasts better fundamentals than Tata Motors, and a wider exposure to the electric vehicle theme

As governments, industries and consumers around the world embrace cleaner alternatives, electric vehicles are set to redefine the future of transportation, promising a more sustainable and efficient era on the roads.

The EV megatrend is in full force in India as well.

As per media reports, electric vehicle sales in India surpassed over 1.5 million units in 2023, a historic feat. This was on the back of government subsidies, rising consumer awareness, and accessibility to newer models.

As a result, the share prices of EV companies rose higher. The stock that saw maximum traction was Tata Motors Ltd, India’s largest maker of electric vehicles. With a 101% rise in its share price, the company was the top Nifty 50 gainer of 2023.

Tata Motors commands about 70% of the passenger EV market, and has a clear plan to become a mostly EV company by 2030. It has backed the plan with billions in funding, leadership support, and technology partnerships, which seems to push its share price higher.

But what if there’s a better way to play the EV opportunity? Forget the fanfare, forget the brand recognition.

There’s a stock that boasts better fundamentals and a wider exposure to the electric vehicle theme. It’s not about size, it’s about strategy.

Amara Raja Energy and Mobility Ltd is a hidden gem that could electrify your portfolio far more than the established giant.

At the heart of the EV revolution

While electric vehicles are the pioneers of eco-friendly transportation, what makes them sustainable are the EV batteries. They release the vehicles from their dependence on fossil fuels. Amara Raja Energy and Mobility is at the heart of this transition.

The flagship company of the Amara Raja Group is one of the largest manufacturers of lead-acid batteries for both industrial and automotive applications in India’s storage battery industry. It is the largest player in this segment after Exide Industries Ltd.

The company ventured into the EV space via a new energy division to manufacture lithium cells and packs, EV chargers, and energy storage solutions. In FY23, it established a subsidiary called Amara Raja Advanced Cell Technologies (ARACT) for its new energy business.

ARACT is focused on developing advanced cell chemistries tailored to Indian conditions and supplying battery packs and chargers to makers of two- and three-wheelers.

The company has also laid the foundation for one of India’s largest lithium-ion cell and battery pack manufacturing facilities in Telangana. This 16 gigawatt-hour (GWH) plant will be built in a phased manner with an investment of 95 billion over 10 years.

ARACT counts Indian Space Research Organisation and nanotechnology company Log9 Materials as its technology partners in this venture for creating a portfolio of products catering to e-mobility and energy storage applications.

ARACT also plans to acquire Amara Raja Power Systems Ltd from the promoter family. ARPSL is involved in the manufacturing of industrial chargers, integrated power systems, EV chargers for two- and three-wheelers, and other energy management devices.

The new energy business has already started contributing to revenues, albeit marginally. It is expected to ramp up its revenue by three times ( 7.5 billion) in FY24, as begin supplies to electric two-wheelers.

Why Amara Raja is a better EV bet than Tata Motors

While Tata Motors has been the obvious choice for investors looking to ride the EV megatrend, the fact is that the company’s fundamentals are far from robust.

Source: Ace Equity
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Source: Ace Equity

As you can see, Tata Motors’s revenue has grown at a meagre compound annual growth rate, or CAGR, of 3% over the previous five years, with a lot of fluctuation in sales.

While some of that can be attributed to the weakness in the auto industry during the pandemic years, one cannot ignore that Tata Motors has been struggling since its acquisition of Jaguar Land Rover (JLR) in 2008.

On the other hand, Amara Raja’s revenue has increased at a CAGR of 11% over the previous five years, withstanding both industry and economic cycles.

Weak operating efficiency has also resulted in poor margins for Tata Motors.

This has not been the case for Amara Raja. The company’s 5-year average operating profit margins stand much higher at 14.8%, as compared to 10.3% for Tata Motors.

In terms of profitability as well, Amara Raja has reported better numbers. While the company’s net profit has grown at a CAGR of 10% over the previous five years, Tata Motors posted losses for four consecutive years before it turned profitable in 2023.

While there has been a turnaround in numbers for Tata Motors, it remains to be seen whether the company can sustain its profitability given stiff competition and inherent cyclicality in the domestic commercial vehicle industry.

The domestic passenger vehicle market also remains highly competitive. The segment is expected to witness increased competitive intensity as vehicle manufacturers introduce new models. This could pose a threat to the Tata Motors’s leadership in the EV segment.

Source: Ace Equity
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Source: Ace Equity

As for return ratios, Amara Raja’s return on equity (RoE) and return on capital employed (RoCE) stand robust at an average of 15.1x and 20.7x over the previous five years, indicating that the company has utilized both shareholder’s money and capital efficiently.

Tata Motors, meanwhile, posted negative ratios during 2019-2022. However, this improved in the previous two years. Yet, the numbers are far from adequate for such a hyped stock.

With respect to debt, Tata Motors’s debt-to-equity ratio stands dangerously high at 2.78x. Although the company has expressed its desire to become debt-free by the end of FY25, the feasibility of this goal remains uncertain.

In line with JLR’s commitment to transition entirely to electric vehicles, significant annual investments of £3 billion for product development are anticipated.

Additionally, the India business is expected to demand an extra investment of 70-80 billion annually for similar purposes.

Amara Raja, however, has a debt-to-equity ratio of 0.02x.

Moreover, despite its large capex plans, Amara Raja’s limited reliance on debt and accruals of 11-12 billion are expected to ensure its debt metrics remain at robust levels over the medium term.

All these factors make Amara Raja a much safer and sound investment as compared with Tata Motors.

The valuations race

The Tata Motors stock is currently trading at a PE (price-to-earnings) ratio of 61.5x. This is considerably higher than its historical average of 14.4x from FY2015 to FY2018—when the company was profitable—making the stock overvalued.

Tata Motors reported a string of losses from FY2019 to FY2022, finally becoming profitable in FY2023.

However, despite its growth plans and leadership in the EV segment, the stock does not warrant such a high PE ratio given its weak fundamentals.

On the other hand, shares of Amara Raja are trading at a PE ratio of 17.9x, slightly below their 5-year historical average of 18.5x, making the stock undervalued.

This is quite a puzzle and suggests there might be something temporarily buoying the share price. Alternatively, a lack of immediate triggers on the new technology front could also be holding the stock back.

Nevertheless, the Amara Raja stock is fundamentally sound and could see further upside in the months ahead.

A compelling choice

In conclusion, Amara Raja emerges as a compelling choice in the EV segment, outshining Tata Motors in several key aspects.

Amara Raja’s steadfast commitment to innovation, coupled with its robust expertise in battery technology, positions it as a frontrunner in the rapidly evolving EV landscape.

The company also has better fundamentals and has been able to withstand economic, industry, interest rate, and product cycles better than Tata Motors.

Investors looking for a reliable avenue in the electrified future of transportation may find Amara Raja to be an appealing choice.

Disclaimer: This article is for information purposes only. It is not a stock recommendation andshould not be treated as such. 

This article is syndicated from Equitymaster.com

 

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