Olectra Greentech – A Chinese automaker’s foray into Indian markets?


Company Name – Olectra Greentech Limited (Olectra)

Current Share Price – INR 606 (February 25, 2022)


Market Cap – INR 4,971 cr


 

1. What is interesting about the stock?

Diesel prices have been hiked 69 times in 2021 reaching an all-time high of INR 98 per liter before tax reductions came as a respite during Diwali. The Public Transport Undertakings (PTUs) & common man often bear the brunt of such irrational rate hikes. Huge financial impact is seen on the PTUs fleet operations with the increased diesel prices. It impacts the Total Cost of Ownership (TCO) for Diesel fueled Buses. Hikes in fuel costs are one major factor that been behind the shift from Diesel to Electric lately.


The Government of India’s goal to achieve net-zero emissions by 2070 as committed during the COP26 summit, presses the need to focus on Electric Vehicles (EV) as the ‘future of mobility’. The vision of NITI Aayog that only electric vehicles should be sold in India after 2030 would result in a reduction of 156 million tons in Diesel and Petrol consumption with net saving of roughly INR 3.9 Lakh Crore by 2030 at present oil prices. India’s focus on EV started with converting its ageing diesel guzzling dirty State Road Transport Undertaking’s (STUs) buses into electric. India has historically been underpenetrated in terms of ratio of cars per thousand individuals compared to developed countries like USA, UK and Australia. Hence its population’s dependence on public transport is expected to continue. India typically has 1.3 Buses per 1000 population. Countries like Mexico, Brazil, China boast of more than 2 buses per 1000 population. This has an effect on waiting time, number of citizens catered.


Olectra Greentech Ltd (formerly known as Goldstone Infratech Ltd) was founded in 1992 in Hyderabad. It is a market leader in manufacturing of silicon rubber polymer composite insulators in India, with this Olectra has been a part of building the power transmission and distribution in India. Olectra’s vision to support environment led it to offer green solution to public transport by introducing Electric Buses in collaboration with BYD Group of China. BYD Group is not only a battery maker but one of world’s largest electric vehicle manufacturer. BYD is backed by Warren Buffett’s Berkshire Hathaway. Olectra at present produces four types of electric buses. K6, K7, K9 & C9. Their running cost is just INR 6.5/km, against INR 11/km for CNG buses and INR 33/km for diesel buses. To understand the unit metrics better, bus services run by KSRTC got a profit of INR 57/km, including the electricity cost, out of the fare collection of INR 110/km. only 0.8 units of electricity is needed for this electric bus to run 1 km. Olectra has a pending order book of 1,523 electric buses from different STUs. Electric Charging Stations are crucial for running the Busses. Olectra has developed 16 charging stations, 24 charging stations having average 10 chargers per station are in the process of development for which space, input power, material procurements and land development are in advanced stage. To further speed up the adoption of EVs, NITI Aayog has appointed CESL as demand aggregator between STUs, Operators and OEMs. CESL’s main focus is to aggregate the demand in 9 cities taking into consideration Public Transport, Last Mile connectivity for Metro, Airport Tarmac Electric fleet, etc.


EV contributed to ~90% of revenue in Q3 FY22. Remaining 10% was contributed by insulator business.


Olectra is one of the largest domestic manufacturers of insulators for power transmission & distribution networks. In the current decade (2020-2029), the Indian electricity sector is likely to witness a major transformation with respect to demand growth, energy mix and market operations. Global Electric Insulator Market is expected to reach USD 13.7 Billion by 2024, stimulated by Refurbishment of Aging Grid Technology. Insulator market will grow upwards by a CAGR of ~5% from 2020 to 2025. The composite insulator segment is estimated to be the fastest growing segment. Present scenario suggests revenue from Insulator segment to be miniscule compared to Electric buses segment.


Key Strengths

  1. Technology collaboration partner BYD Auto Co Ltd provides support for assembly, manufacture, sales, marketing and aftersales service of Electric Buses in India.

  2. Improved revenue growth & sustainable increase in EBITDA during FY21-22.

  3. Olectra has the first mover’s advantage with its product offerings, operational info from STUs can help refine its products.


Key Weaknesses

  1. STUs are the only customers they currently cater to, hence every STU will have different requirements based on geography & practical use cases. Olectra might lose its only customer base if their expectations are not met.

  2. Stiff competition from JBM Auto, Tata Motors & Ashok Leyland in terms of better pricing & products can prove detrimental to Olectra’s vision.


2. Key Historical Financials

  • Company has show strong growth in revenue in Q3FY22 quarter with EBITDA margins of ~15%

  • However, working capital seems to be stretched at 400 days as of March 2021 – this has come down from 900 days as of March 2020. But the cash conversion is expected to remain poor with this level of working capital.

3. What is my view on company valuation?


Olectra stock has seen a staggering ~250% returns in the past 1 year. It trades at a P/E (TTM) of 172x and EV/EBITDA (TTM) of 63x. Comparing these metrics with its direct competitors like Ashok Leyland, JBM Auto, we see a huge overvaluation provided to Olectra. Ashok Leyland trades at an EV/EBITDA (TTM) of 22x while JBM Auto trades at a P/E (TTM) of 51x and EV/EBITDA (TTM) of 20x.


Although Olectra is completely debt free & prides Nomura & Blackrock as its recent investors, its expensive valuations cannot be overlooked. Investor should look to enter the stock on meaningful corrections & when valuations are reasonable.


4. What are the risks to the investment analysis?


Key risks to investment analysis are:

  • Olectra will construct EV manufacturing plant with state of art technology to expand capacity to 10,000 buses per year. 150 acres land has been acquired from Govt of Telangana. Hence, if there is delay in capacity expansion due to any shortcomings then it can create negative impact on the stock.

  • Plans to enter into Light Commercial Vehicles, Three-wheelers, Electric trucks & other EV products in the new plant. There are already established domestic players in these segments hence making headway can prove challenging & counterproductive in future.

 

About the Author


I have over 7 years of work experience in Automobile Industry & Technology Sector in India. Currently I am working as a Research & Development Engineer at a Global Automobile major helping them scale their Electric Vehicles ambitions.


I hold Master’s & Bachelor’s degrees in Engineering from Indian Institute of Technology, Madras (IITM).


I am an insignificant public investor & have avid interest in Trekking, Photography, and Cybersecurity.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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