Olectra Greentech - Electric Bus Opportunity

Background

Goldstone Infratech Limited is registered in the year 2000 with their only product segment as electric insulators. The company got listed in the stock exchanges in the year 2002.The promoter group is Trinity Infraventures limited who are also promoters of Goldstone Technologies which is another listed company in India.

The company started electric buses division in 2015 having a strong partnership tie-up in India with Warren Buffet backed BYD Auto from China.BYD is a pioneer in EV battery space and has a significant presence in EV ecosystem right from rechargeable batteries to electric buses, trucks, cars etc.As per Wikipedia BYD page - As of 2021, BYD Auto is the world’s second largest New Energy Vehicles carmaker in the world, with 329,408 units sold in January-September 2021

In the year 2018, the company’s name is changed to Olectra Greentech, and MEIL Holdings, which is a subsidiary of MEIL(Megha Engineering and Infrastructure Limited) company came up with open offer and increased stake in Olectra. At the moment, MEIL Holdings hold more than 50% stake in Olectra making it a subsidiary and all the previous promoter group entities have reduced their stake.
My understanding is, there was an unwritten agreement between the old and new promoters that the old promoters have to completely exit Olectra once new management takes over.

The new promoter group(MEIL) is one of the biggest and successful infra player in India and have been regularly featuring in the top 100 of Hurun India Rich list.

The bet on Olectra is primarily a bet on the E-Bus segment which has huge opportunity. The revenue growth in insular division is minimal from past 10 years.

Electric Bus

Industry Structure and Development:

The oath taken for Faster Adoption and Manufacturing of Electric Buses in India by NITI Aayog in 2017-18 through Department of Heavy Industries (DHI) has initially launched, FAME I scheme, facilitating “Capital Subsides” for 560 of Electric Buses has given encouragement to State Transport Undertakings (STUs) in 11 Indian cities, to own the EV Buses in their fleet, and their long awaited desire to operate and witness the performance of Electric Buses became a reality in India with the subsidy support provided .The Succeeding FAME II scheme notified in 2019-20 was initially aimed to deploy 5595 no. of E Buses in various STUs under Gross Cost Contract (GCC) Operational model, which has attracted attention of 64 cities to deploy Electric Buses without any investment from STUs. In 2020-21, DHI has sanctioned subsidies for additional 670 Buses. GCC model has enabled Private investments in this sector and STUs thus need not facilitate any finance arrangements for the After-subsidy costs of Electric Buses.

Since the deployment of Electric Buses under GCC Operational model is for the first time in India, STUs have taken some time to understand the technical feasibility, financial viability, economic feasibility and Operational compatibility of E-Buses, including Routes and Schedules management. Early deployment of E Buses under Operational Model in cities like Pune has given tremendous insights, analysis and study practices to all the other STUs in India. Delay in understanding the EV technology and viability factors has led to conclude projects in snail pace. The successful deployment of Electric Buses in GCC model has ignited the momentum in EV Bus adoption in India. Despite non-operation of Public Transport during COVID Wave I & II, Department of Heavy Industries – DHI along with State Transport Undertakings - STUs, and Urban Local Bodies (ULBs) have successfully implemented FAME II.

More than 1000 electric buses are running across the country with an additional 2600 electric bus orders are in execution stage under FAME -2 scheme. Accordingly, DHI has extended the FAME II scheme validity till 31st March 2024 for a period of additional 3 Years from 1st April 2021 It is also understood that in India that STUs having deployed Electric Buses with Longer Range have been be progressive in their next set of deployment. The COVID-19 crisis will create many new challenges for this sector, especially in urban areas and intercity segments with high travel demand. Finally, 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 Rs. 3.9 Lakh Crore by 2030 at present oil prices.

Source – Company’s 2021 Annual Report
The management discussion and analysis section starting from page 90 to 95 in the 2021 annual report is worth reading to understand the complete context

Main Products/Segments


Source – Company’s 2021 Annual Report



Source for the images above – Company’s Investor presentation dated 09.11.2021

Main Markets/Customers

The State Transport Corporations(SRTUs) are the main customers for Olectra. Olectra is the market leader in electric buses in India.


Source for the image above – Company’s Investor presentation dated 15.09.2021

Current Market/Industry Trends

Outlook

Electric Bus market is expected to grow rapidly in India considering various factors like hikes in Diesel prices, Diesel fleet purchase holiday during COVID-19 impact, EV Policies across country, State Government commitment to EV adoption,Grid balancing factors and Power surplus States, Lesser Bus ratio vs 1000 Population, etc., NITI Aayog has mandated aggregation of demand for 5,500 Electric Buses in India through Convergence Energy Services Limited (CESL) and World Resources Institute(WRI) , for which the process has already begun by CESL.

Diesel prices in India have been hiked 69 times in this Year, which is expected to be further increased. Huge financial impact is seen on the Public Transport Undertakings fleet operations with the increased diesel prices. Hikes in Fuel costs are one major factor that been shift Diesel to Electric. The said hikes are also impacting the Total Cost of Ownership for Diesel fueled Buses. The current Climate Policy in India is rightly addressing the challenges of electric buses and providing an environment to accelerate their adoption and implementation.

This current trend of increase in Diesel prices, seems consistent and expected to continue. Diesel Fuel cost is contributing to 40% of CPK in Mofussil NonAC Buses and 50% in AC Intercity Buses. Public and Private Transport fleet expected an early adoption with faster growth compared to previous Years adoption.

CESL entry into E Bus aggregation in India will further improve the Market opportunities as CESL will be acting as Aggregator between STUs, Operators and OEMs. CESL 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., In the FAME II Phase I Scheme, a New Segments like Intercity deployment has successfully taken off in form of concluding contracts by MSRTC, KSRTC and APSRTC.

Last Mile connectivity Project has also been initiated by Delhi Metro Rail Corporation – DMRC under FAME II Scheme. Opportunities in the form of Metro Neo projects in India will further open a new segment for Electric Buses. Few Green fund agencies are also aggressively preparing their strategies to deploy Electric Buses in India for Private Sector deployment.

Source – Company’s 2021 Annual Report


Many states have got their EV policy draft ready.

Source – Company’s investor presentation dated 15.09.2021

Bullish Viewpoints

  • Gross Cost Contract model will solve the biggest problem of SRTUs - huge Capex front load is no longer a viable option especially with many years of losses
    • The cost of operational costs and maintenance of electric buses is very less compared to diesel and CNGs

Source – Company’s investor presentation dated 09.11.2021

  • Well placed to attract ESG investors and Green funds
  • Government of India wants to reduce dependency on Oil and so pushing EVs, eventually pushing for only EVs after 2030
  • Leader in securing the orders and first mover advantage having operations from 2017. At the moment, they have a market share of ~40% of electric bus orders in India
  • The opportunity size is huge as the bet is not just on the Electric Bus alone as its future plans include manufacture of Trucks, LCVs, 3 wheeler’s etc


Source – Company’s investor presentation dated 15.09.2021

Bearish Viewpoints

  • Technology rests with BYD and BYD can start its operations in India on its own. They already have their plant in Chennai and were planning to venture into categories other than Electric buses on their own previously.
    • The mitigation to this is to have an exclusive partnership similar to Maruti-Suzuki model. At the moment, BYD Auto has zero stake in Olectra shares.
  • BYD being from China can affect company’s prospects adversely due to sentiments at border
  • Inherent risk of damages to public property (incl buses) in exceptional situations likes riots
  • Regulatory risk as government can enforce new policy unfavourable to EVs or delay EV adoption to save existing industry like postponing scrappage policy
  • The target customer market segment is government backed State Road Transport Undertakings(SRTUs) and B2G segment is very tough nut to crack
    • The new promoters (MEIL) are well known for executing government projects(50% of order book) and have a successful track record of completing big projects
  • Electric Bus technology is relatively new and we don’t know all the risks associated with it
  • Promoter is new to bus industry and the other competitors like Tata Motors, Ashok Leyland, JBM Auto are well entrenched in this industry from long
  • Currently, government is supporting EV push by giving subsidies in the form of FAME-I and FAME-2, no idea whether they will continue to support
    • However, with Gross Cost Contract(GCC) model, there is no CAPEX load on SRTUs
  • The cost of battery(Lithium Ion) is around 40 to 50% of the overall cost of the electric bus. Any significant increase in the price of Lithium will adversely impact the sustainability of the business model
    • China has 12.2% of world’s lithium production in 2020


Source – Trading Economics

  • Elon Musk. No idea, what are his plans in electric bus space or even new battery technology

Interesting Viewpoints

  • Olectra is either in trails or presence in 40 STUs


    Source – Company’s investor presentation dated 15.09.2021

  • Promoter is not just looking at Public Transport but other adjacencies like inter-city/inter-state, private transport segment and also into TARMAC buses in Airport


    Source – Company’s investor presentation dated 09.11.2021

Barriers to Entry

  • There are almost no barriers to entry
  • The target customer segment is State Road Transport Undertakings and dealing with government organisations is very difficult
  • Olectra is the only company giving more than 250 kms for single charge. This is a great barrier especially if one is interested to run inter-city buses
    • If I remember correctly, Ashok Leyland uses replaceable batteries to mitigate this risk
  • To execute GCC contracts of bigger scale and long payback periods, you need to have very good money muscle and so smaller players may not be able to compete

Business Model

Olectra has BYD as the technology partner which basically provides the most important components of electric bus like battery and technology.

Olectra mostly does the assembling of parts. Usually, the cost of electric bus will be in the range of 1 to 2.5 crores.

The most important target customer segment for electric bus is SRTUs and they are all usually running in operational losses.

This is where Gross Cost Contract model will help as SRTUs don’t need to do Capex but agree on paying bus operators with price per km.

This model is already operational in some diesel buses and compared to diesel buses, the cost per km is very less for electric buses.


Holding Structure

Evey Trans which is a subsidiary of MEIL Holdings, buys electric buses from Olectra and creates Special Purpose Vehicles(SPV) for each Gross Cost Contract(GCC).

Hence, you see many related party transactions. I just mentioned only two in the above structure


Source – Company’s investor presentation dated 09.11.2021


Source – Company’s investor presentation dated 15.09.2021

Valuation Model

The bet on Olectra is basically a bet on the number of E-buses it sells.



Source – Company’s investor presentation dated 09.11.2021

Based on my back of the envelope calculations – Olectra delivered 120 E-buses in Q3 FY22 so far

  • Order Book on 08.11 – 1450
  • Order Book on 09.11 – 1550
  • Fresh Order on – 01.12 – 100
  • Order Book on 01.12 – (1550+100) – 1650
  • Order Book after deliveries made on – 01.12 – 1530

So, 120(1650-1530) E-buses have been delivered in Q3 FY22 so far. This itself generates revenue far greater than H1 FY22(29 buses) ~ 234 crores(1.95 Cr as average bus price)

Olectra is a growing company and we are currently at the start of EV bus adoption. The below analysis shows the opportunity ahead.


Source – Company’s investor presentation dated 09.11.2021

Considering that Olectra is able to get 5% of 200,000 buses – it will translate to 10,000 buses per year. Let’s say, we consider the average price of Olectra bus as 1 crore, it will translate to 10,000 crores.

Olectra is currently having a market cap of ~7,000 crores. It will translate to Price/Sales of less than 1. The estimates provided do not include other adjacencies like Trucks, LCVs and 3-Wheelers etc

If the question is whether the company is really prepared for manufacture of 10,000 buses per year, I think yes. I have been hearing about this number from at least 2 years.

The recent land acquisition of 150 acres in Telangana substantiates the conviction that company is moving in the same direction.

Corporate Governance Scan

  • Promoter cancelled 91,00,000 convertible Warrants on 10.04.2020 during peak of covid which were allotted on 10.10.2018. The subscription amount received at the time of allotment of warrants was forfeited
    • The main reason is due to the fact that the share price was way below compared to the warrants price of 175 rupees per share
    • However, they increased the stake in multiple tranches recently at around 400
  • The previous promoter was not known for best corporate governance practices
    • The new Promoter is now having more than 50% stake in Olectra and the earlier promoter sold most of their stake
  • MEIL itself wants to list their company in next 1 or 2 years. After they taken over Olectra, there is a significant improvement in their disclosures and investor relations
    • Olectra website is showing all kinds of transparency in disclosures.
    • I believe, they will stick to their highest corporate governance standards at least till the IPO of their flagship company

Forensic Scan/Red Flags

  • MD Salary ~2 Crores. PBT ~8.44 for H1 FY22. Annualizing it to 16.88 which means ~11%
  • As it is a growing company with much growth expected in future, the salary doesn’t seem to be a red flag
  • No Stock options offered to MD which means no “Skin in the game”
  • Subsidiary Evey Trans was sold to parent company MEIL Holdings. The reason for this transfer is to ensure that the promoter will shell out the money to buy buses from Olectra and in the process, de-risk the financial liability
  • There is a risk of related party amounts between the promoter entities. This will be majorly with Evey Trans which buys the buses from Olectra. Having a tab on Cashflow will help in identifying in any lapses of payment


Source – Company’s 2021 Annual Report

Resources

The opportunity is similar to how Jio disrupted telecom. There is neither past baggage nor debt and incumbents have debt and incumbents will also need to work on their existing services.

The other advantage is Olectra has the edge in technology in terms of electric bus among the existing competitors.

The promoter has the money muscle, best technology partner(BYD) and all he needs to do is hire/nurture best talent.

Can Olectra disrupt the bus industry like how its promoter MEIL did in infra? Only time will tell.

Looking forward to the views of other investors.

Disclosure(s) – Invested 6% of PF and biased. Actively tracking from 2018.

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But promoter stake has been gradually reducing, from around 61% to 51% till September 2021, they have even sold off recently in November too.

Is it just an encashing of some shares owing to current high valuations, similar to what Elon Musk did with Tesla shares?

Or something else?

With the stock already 29x in last 5 years and 8x since the last year , do you think market has already identified and discounted the huge market oppurtunity availabe to Olectra, provided revenues and profits and cash flows have made no extraordinary jump in last 5 years

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Will Olectra be able to assemble hydrogen fuel powered buses in future. Reliance Industries has already shown they are in it 100% and hydrogen being more compatible with commercial vehicles than personal vehicles, have the management given any heads up in this direction ?

Yes, its something else.

Above are images from Trendlyne.

As you can see, MEIL Holdings which is the new promoter group is continuously increasing the stake and the earlier promoters are exiting gradually as mentioned in the first post. We should be concerned only about share-holding of MEIL Holdings.

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Hey, thanks for the quick reply. What about what @Dhyani01 asked, is there still any room for further growth of the stock as the company had already grown 29x despite negligible growth in revenues and profit?

Not sure why a new post on this company when an old one already exists.

Also check out my previous comment on the company background. Beware before investing.

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Screener Screen-shot for standalone

If we look at E-Bus division revenues the trend is generally up however this is impact due to Covid.
52.4 - 144.5 - 278.7 - 155.8 - 65.4(H1FY22)

Revenue till FY20


FY21 revenue for E-Bus is 155 Cr due to Covid Impact

H122 - Also has Covid Impact, especially Wave 2

Like I mentioned in the first post, there is good number of deliveries expected in this quarter, so I see highest ever quarterly revenue from E-Bus. In each of the disclosures provided by the company, it has been mentioned about delivery to be completed in next 12 months.
[Announcement under Regulation 30 (LODR)-Award_of_Order_Receipt_of_Order]

So, in next 1 year, there will be at least 1530 E-Bus deliveries, generating revenue around ~2300 crores, translating to price/sales of ~3 which is high. However, the story has just started unfolding as it took some time for the SRTUs to witness how the GCC model works and electric bus are operating. I would suggest you to go through the “Management Analysis and Discussion” section in 2021 Annual report to understand more on this.

If you are looking to get a 2x (24 CAGR) return on Olectra in 3 years, the market cap also has to reach around ~13000 crores. As per the management, the new plant will come in 12-18 months which gives 10,000 buses per year capacity. In 3 years, if Olectra delivers 5000 E-Buses per year, the price/sales comes under 2. If adjacencies also add to the revenue, it will further increase the market cap.

What I like the most here is the GCC business model. It is a win-win situation to both Olectra and SRTUs and so adoption will be quicker.

The stock price certainly increased manifold. It depends on your investment horizon and return expectation whether to buy at this price. Please note that I did not consider the calculations of insulators division here.

Hope this answers your question.

Thanks for bringing this up.

As of now, there are no concalls from Olectra and did not hear about them.

Is the Indian automobile industry ready for hydrogen?

The Council of Scientific and Industrial Research field-tested a homegrown hydrogen fuel-cell car last year. Tata Motors even went as far as developing a hydrogen fuel cell bus developed in partnership with ISRO, back in 2018. Neither of these efforts bore any fruit primarily because fuel-cell technology isn’t cheap to produce, and neither is green hydrogen.

Secondly, fuel cells are sophisticated and intricately built devices susceptible to damage under extreme temperatures. And thirdly, having an on-board hydrogen tank does present a hazard, in the same way having a CNG tank does. Furthermore, hydrogen is pressurised and stored in a cryogenic tank, which adds to the risk. Of course, with enough R&D, these issues can be ironed out, but for the moment, battery electric vehicles have a considerable advantage over hydrogen fuel cell cars.

Not only are they more readily available, and comparatively cheaper compared to hydrogen, they are much further along in terms of a supporting ecosystem than hydrogen cars. They are also more durable and energy-efficient with next to no idle power loss from charger to charger.

From the looks of it, it will take at least 3 years to get a working model, provided that the costs come down. No doubts on Reliance’s execution capabilities though. Did not do much research on Electric trucks but have seen Olectra posting jobs in trucks category.

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I see the previous one is closed and so created new one.

As I mentioned in the first post, the previous promoter is not best known for corporate governance.

MEIL are the current promoters and from the information I got, they usually get projects whatever the political party is power in AP and Telangana. I felt this can actually help in getting more contracts. If you can post the links on their bad corporate governance standards, it would be helpful. I saw IT raids in 2018/2019 article.

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Anybody tracking Olectra Greentech? This particular company has taken great leap towards EV segment. They have already proven it with their sales and product segment? Biggest competetor can be tata motors which is still catching up but have aggresive plans.

Does this company also deals with semiconductors segment? This area can have higher potential to grow

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Olectra is not into semi-conductors. Apart from E-Bus where they are second biggest player, they just started Electric 3-Wheelers and planning to launch Electric trucks in Q1 FY23.


Here are the details of E-Buses registered against the makers from the beginning as well as year wise break up for past few years.

The government is trying to push E-Buses by using an aggregator called CESL. This is to ensure there will be more sales at the same time for lesser cost. Win-Win for Road Transport Corporations and E-Bus makers.

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I personally see a great results can see in the given link around 230+ qoq and 300%+ yoy looks impressive but due to its nature of order based so can happen but one key reason to worry is margins are quite low around 10-12% only and also much lower then most quaters.
There other segment is going down quite significantly and can be hurtful in short run.

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Indeed, the results are good and near the E-Bus numbers estimate.

The company has guided for 100-110 E-Buses delivery in Q3 FY22 as per Nov 21 ICRA rating report and delivered 103 E-Buses as per the below article. The price per E-Bus is turning to be ~1.8 Cr.

The ICRA report also mentioned that Olectra is planning to deliver 200-300 E-Buses in Q4 FY22. So, the revenue will be double than Q3 FY22. So, the overall sales for FY 22 will reach ~531 Cr without considering the Q4 insular division(will be minimal) revenue for ~332 E-Buses(considering 200 E-buses delivery for Q4). The company is planning to deliver some e-3 wheelers in Q4 FY22 but we are not sure how many they will deliver.

With the current market cap as ~6500 Cr, this works out to be Price/Sales of ~12 which is optically expensive but the demand pick up has started just now.

Supply Side

The current facilities of E-Buses cater to a maximum of 1000 buses per year. Olectra’s new capacity addition of 10k E-buses per year will be operational in 1.5 years time by which we will have more clarity on their Electric Truck sales as well.

All the competitors, JBM Auto, Tata Motors, PMI Foton and Ashok Leyland are getting orders and also delivering. However, as there is huge opportunity, it seems the underlying infrastructure is also set up properly.

Here are the details of all E-Bus and E-Omni Bus delivered till date. PMI Foton has delivered 326 E-Buses this FY and going strong. The advantage I see for PMI Foton is, the charging completes in less than 30 minutes for 170 kms range. It is not listed.

Demand Side

Now, coming to the demand side, apart from rest of India where there is already traction, Delhi and Mumbai are aggressively planning to ramp up their E-Buses.

So, apart from aggregator CESL which is 5580 E-Buses, there is more demand individually from big cities, like in the case of Mumbai, they would like to have only E-Buses in its fleet by FY27. As of now, they have ~4000 buses.

Brihanmumbai Electric Supply and Transportation (BEST) will have only electric buses in its fleet by 2027, and plans to procure 2,100 electric buses, provide dedicated services to corporate houses and business hubs, and set up 55 electric vehicle charging stations in the city.

The reason for all this aggressive push seems to be availability of green funds which are ready to disburse the loans, like in the case of Tamil Nadu, German kfw development bank is ready to fund 1600 crores and Green Cell co-funding PMI Foton E-Buses in UP.

The narrative is about value migration from ICE to EV(ESG funds support), Optimal capacity utilisation(STUs to private) and Capex(Upfront cost) to Opex(Gross Cost Contract) along with the tailwind in the form of government push of EV policy and active engagement of regulator.

Risks

  1. Olectra mentioned that they are partnering with a new E-Truck maker and no longer dependent on BYD. This gives the key risk that whether BYD will continue partnership with Olectra within E-Bus segment as well. Based on scuttlebutt, as of now the technical tie-up with BYD is for 3 years. If BYD backs out, that is the end of thesis to invest in Olectra

  2. Evey Trans(Another subsidiary of promoter) is currently paying Olectra and then running the buses on Gross Cost Contract. The key challenge here is, Evey has to collect the money from government STUs in majority of the cases. In case of any delay from STUs, it can impact the payment to Olectra as receivables will be very high. Most probably, Evey Trans gets the funding from green funds for a long tenure with less interest rate of ~2%. With promoters already deeply entrenched in government projects, they may know a thing or two on getting the receivables. However, having political connections is a double edged sword.

  3. PMI Foton, competitor of Olectra is aggressively delivering E-Buses - 384 till date Vs 383 for Olectra. Apart from that, their technology partner Foton has started on hydrogen buses. So, whether there will be disruption to electric buses is yet to be seen. Preliminary investigation says that both hydrogen and electric buses will co-exist. Also, based on the Electric Buses adoption time estimate, it will be at least 3 years for hydrogen bus to come into picture.

  1. There is a high chance that bureaucracy favours some vendors only irrespective of quality of the product or price. For example, I am almost sure only JBM Auto will secure orders in Delhi. PMI Foton will secure orders in Haryana, Olectra in Telangana and AP. So, if the number of orders doesn’t come in large numbers, the valuation for Olectra will take a hit and the thesis will go for a toss

  2. There is a funding side risk associated with BYD as technology partner but so far it has happened only within US. In Europe, there are no issues. It’s just that China border issue can affect the bus contracts as well.

https://www.washingtonpost.com/transportation/2021/12/17/electric-buses-federal-funding/

  1. NMC slaps 17L fine to Olectra due to alleged delay of electric buses. Initially I thought, can it be due to chip shortage but as per the article, Olectra did not deliver the prototype bus as well. This seems strange as at least they can send one prototype bus as they delivered 103 E-Buses in Q3 FY22.

I found this link but not sure about the authenticity.

  1. There is a chance that Olectra may lose out some contracts in the case of vendor consolidation as Olectra delivers only E-Buses whereas its competitors delivers Diesel and CNG as well.

Discl - Invested, transactions in last week, 7% of PF

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