Olectra Greentech Ltd – A Chinese Automaker’s Foray Into Indian Markets?


Company Name – Olectra Greentech Limited (Olectra)

Current Share Price – INR 571 (July 6, 2022)


Market Cap – INR 4,687 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. A 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 has 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 a net saving of roughly INR 3.9 Lakh Crore by 2030 at present oil prices. India’s focus on EVs started with converting its aging diesel-guzzling dirty State Road Transport Undertaking’s (STUs) buses into electric. India has historically been underpenetrated in terms of the ratio of cars per thousand individuals compared to developed countries like the 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, and China boast of more than 2 buses per 1000 population. This affects waiting time, which several citizens catered to.


Olectra Greentech Ltd (formerly known as Goldstone Infratech Ltd) was founded in 1992 in Hyderabad. It is a market leader in the 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 the environment led it to offer a 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 the world’s largest electric vehicle manufacturers. 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 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 are needed for this electric bus to run 1 km.


Olectra has a pending order book of ~1,400 electric buses from different STUs. The company had won an order of 2,100 electric buses from Brihanmumbai Electric Supply & Transport but it got canceled after Tata Motors won a case in Mumbai High Court.


Electric Charging Stations are crucial for running the Busses. Olectra has developed 16 charging stations, 24 charging stations having an average of 10 chargers per station are in the process of development for which space, input power, material procurements, and land development are in an advanced stage. To further speed up the adoption of EVs, NITI Aayog has appointed CESL as a 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 ~82% of revenue in FY22. The remaining 18% was contributed by the 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 concerning demand growth, energy mix, and market operations. Global Electric Insulator Market is expected to reach USD 13.7 Billion by 2024, stimulated by the Refurbishment of Aging Grid Technology. The 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. The present scenario suggests revenue from the Insulator segment to be minuscule compared to the Electric Bus 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 FY22.

  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 its 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

  • The Company has shown strong growth in revenue in the Q4FY22 quarter with EBITDA margins of ~12%

  • However, working capital seems to be stretched at 166 days as of March 2022 – 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

  • ROCE/ROE remains quite poor in FY22

3. What is my view on company valuation?


Olectra stock has seen a staggering ~130% returns in the past 1 year. It trades at a P/E (TTM) of 127x and EV/EBITDA (TTM) of 49x. Comparing these metrics with its direct competitors like Ashok Leyland, and JBM Auto, we see a huge overvaluation provided to Olectra. Ashok Leyland trades at an EV/EBITDA (TTM) of 23x while JBM Auto trades at a P/E (TTM) of 33x and EV/EBITDA (TTM) of 18x.


Although Olectra is completely debt-free & prides Nomura & Blackrock as its recent investors, its expensive valuations cannot be overlooked. Loss at Mumbai High Court reflect poorly on the governance standards of the Company. An 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 an EV manufacturing plant with state of art technology to expand capacity to 10,000 buses per year. 150 acres of land have been acquired from Govt of Telangana. Hence, if there is a delay in capacity expansion due to any shortcomings then it can create a 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 the future.

 

About the Author


I have over 7 years of work experience in the 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 the Indian Institute of Technology, Madras (IITM).


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


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the 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 purposes and not to be construed as 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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