Ola electric is catching headlines these days and why not. Bhavish Agrawal, founder of Ola and Ola electric has set ambitious target of manufacturing 10 million (50% of total current 2-wheeler sale) with an investment of around Rs. 2,400 Cr. Media is calling Ola Electric as Tesla of India.
Elon musk, founder of Tesla, had set similar ambitious target initially. He missed the target in initial years by wide margin. But in Tech industry, “Fake it till Make” is so predominant that it has become marketing gimmick. It helps companies to create positive narrative around the company which excites investors. Narrative makes investors furiously competitive about owning the company. Investors start paying exorbitant value to the company. The company can thus bank up lot of money from these investors.
Market Cap of Volkswagen and Tesla
As you can see, Tesla’s market cap is 4 times that of Volkswagen. Is this kind of valuation justifiable?
Let us have a look at few data points.
Vehicle Units sold in Million
Sales in Billion USD
Profit after tax in Billion
As we can see, Volkswagen is 10 times bigger than Tesla in all above metrics i.e. vehicle units sold, sales value and profit after tax.
But what has happened in 2019 which propelled the value of Tesla by 10 times in one year.
When the pandemic hit in March-2020, economies around the world came to standstill. It was unimaginable that the virus could affect world economy that badly. Though many scientist were warning about consequence of virus for last few years, nobody paid serious attention. Even Bill Gates, founder of Microsoft, talked about consequence of virus outbreak few years ago in one of his ted talk. When the pandemic hit, people started realizing the impact of their actions and consequence of the climate change. That caught the attention of people and people started believing and betting on the companies which helped to clean pollution.
This way Tesla caught attention of people and people started betting heavily on it. Most of the traditional vehicle manufacturers like Volkswagen, General Motors etc. were earlier reluctant to switch to manufacturer electric vehicle. Investors punished them badly. As can be seen from the above chart
Market cap of Tesla is equivalent to combined market capitalization of next 9 vehicle manufactures.
Is this valuation sustainable?
If we go by announcement by traditional vehicle manufacturers, most of them have started setting target to manufacture electric vehicle. If we go by the numbers, they have cash flow from existing business to start manufacturing electric vehicle. Tesla has to raise capital to fund its capital expenditure. It has smartly raised billions of dollar when its share price rose sharply. Though Tesla is having first mover advantage, it can be temporary competitive advantage till all other companies start manufacturing EVs. Tesla may still trade at this high valuation till market see the progress of other manufacturers on EV front. Once this gap reduces, there will be rerating in the shares of traditional vehicle manufactures. The same can be seen when price of Volkswagen rose by 30% to 40% in one day when it announced their intention to manufacture EV in the next 4 to 5 years.
What it has to do with Ola Electric?
As what happened with Tesla, valuation of Ola electric may rise to astronomical level (if it was listed) and investor will punish existing 2W manufacturers like Bajaj Auto, Hero Motocorp, TVS etc. Though Bajaj auto has started manufacturing Chetak – EV and Hero Motocorp has invested in EV manufacturer – Ather, they are not scaling their EV business as compared to ambitious target of Ola electric.
E-Scooter Sales in India
As we can see, EV forms minuscule % of total 2W sales (over 20 Million) in India. The main reasons for slow adoption are high cost of vehicle, underdeveloped electric vehicle infrastructure, skepticism of people in adoption of EV etc.
Few Financial Metric of Bajaj Auto and Hero Motocorp
As we can see, existing manufactures have strong numbers and they can invest huge amount of money in EV space. Also these companies are trading at reasonable valuation considering sales and profit growth of last few years. But, if these company start trading at very low valuation because of narrative around EV space in the future, Investor can bet on these companies.
Investor should not get swayed by the euphoria. Investor should always remember below quote of Benjamin Graham, father of value investing-
“In the short run the Market is a voting machine but in long run it is weighing machine.”