Hello Friends,
As promised, here I am with the first idea of the year.
The idea is in line with our most loved thesis on the rise of Electric Vehicles (EV), if you are still not convinced, you can read last year's anti-thesis and forget this post, otherwise, let’s move on.
We have been discussing the EV ecosystem in India and as you saw last year, IEX and TATA Elxsi were a few stocks that rose in line with this theme, so what is new this year? Though these names are still considered good but they are very costly at this time, so we have to find new avenues of growth.
Taking a cue from rising of Tesla in the US (it took almost a decade for them to make good money in both business and stock market), we have been focussing not only on quality and ecosystem but the scale of EV production as well.
Last year, when OLA announced their EV scooters and the frenzies associated with them, we were certain that stocks associated with it, shall make money. And we were on the money when their sole light supplier FIEM Industries made new highs.
Fiem industries grew 71% post announcement of OLA tie up.
Though it looks like a lot of steam is left in this stock, the further course shall be decided by the performance of both ola scooters and fiem’s execution capability. Please monitor them regularly if you wish to bet on this stock.
Now coming to our thesis, India has one of the highest numbers of two-wheelers in the world, so the rise of EVs (whenever it happens) will create new opportunities in this area. The bet of new-age startup-like OLA, Ather, and others in this direction is testimony to that belief.
But as we know from Tesla history in four-wheeler space, it needs massive scale to achieve that kind of profitability and hence not easy to replicate.
Also, there are a few other points to which Indian two-wheeler consumer has to adapt, like the online purchase of bikes, remote maintenance, and virtual service stations. Imagine if your scooter doesn’t start midway, would you like to take it to the nearest service station or call customer care, do a remote checkup, wait for the pickup truck to arrive in case it’s not possible to fix it remotely?
This sounds great for four-wheelers, but for two-wheelers? pushing to the nearest service point is the best bet (in case you have one), both in terms of time and reliable outcome. Also since we mostly drive two-wheelers within nearby areas, it’s imperative that we seek services nearby.
Any new-age startup, that has to achieve massive scale, has to produce this kind of serviceability in order to succeed. So just mass production is not enough.
Also, the pricing of electric scooters is one pain point, most of the new age scooters are in the range of premium pricing (above 1 lakh), that’s a big turn-off to achieve scale.
So is there any company in India, which already has mass production capability, massive service infrastructure, and can produce a new-age EV in the price range of petrol scooters? Also, it is the company with negligible debts, a good amount of cash to invest in the EV ecosystem, and greater tech capability with a proven track record?
Well, with a bit of research we found that there is only one name that fits all the bills.
As usual, I am not going to put a research report on Hero, there are plenty available on google, but would highlight some facts about it that can help you to arrive at decision.
The sales and profit growth of Hero is a paltry 2% in the last decade.
Consequently, it has not made any substantial return in the stock market for the last 8 years (since 2014).
It has expanded globally and supplies its motorbikes to 40+ countries.
Apart from India, Bangladesh and African countries are its major consumers.
Also, it has a substantial stake in new-age EV startup-like Ather and Gogoro.
There is also a court case pending among family members, on using the brand Hero electric.
You can easily make out that, the amount of problem it is facing has clearly reflected in its price and hence the returns are negligible for last decade.
Why now? what’s the trigger?
We have seen multiple times in the past that, one tiny trigger is enough to offset a horde of bad news and catapult the price, so what’s that trigger now?
Hero is launching its first electric scooter in March 2022.
It has increased the stake in new-age startups.
But are these enough to reverse the price decline, see how it melted in the last six months?
In the stock market, nothing can be said with firmness, you never know what can go wrong, so it’s always advisable to assess the risk-reward and your financial capability to take risks before buying any stocks. But let me tell you what I think?
Risk~Reward~Rules
There are plenty of bad news, press, and rating about Hero, but the best thing is it’s all out in public and the same is reflected in the stock price as well, so I think all negativity is already factored into the stock price.
Any positive event, like the above, should boost investor confidence, and since Hero has a proven track record in executing things at a mass scale, this can be the tiny trigger we were waiting for.
There are other risk factors as well, like a crash in oil price, consumer sentiment about EV turning sour, other competitors making better vehicles, etc. These factors are beyond our control, so you have to keep an eye on them as well.
I hope you enjoyed the first discussion of the year, if you have any queries, post them in the comment section, I would try my best to conclude them.
In these tough circumstances, stay safe and be your own HERO!
Please spread the idea, if you like it.
Updates:
Most of you asked about it's performance, but as I was off due to this https://betaideaz.substack.com/p/hang-on-before-moving-on, couldn't reply.
The obvious factor to the price stagnation are two
1. Delayed launch of Electric scooter (almost delayed by year or so)
2. IT raids.
For me personally, the delayed launch does not affect much, because economies at scale takes time.
But I am not inclined towards anything which messes up with corporate governance.
Though Hero has competent management and great history. the IT raids at the beginning of FY 22-23 was an off for me.There are lot of theories going on in market regarding IT raids, it's your choice to believe or deny them.
But as an investor, please get comfortable with it, else get out of it.
I follow simple principle, when in doubt, I am out. Thanks.