Olectra Greentech : more room for growth?
Be fearful when others are greedy and greedy when others are fearful ~ Warren Buffett, The Oracle of Omaha.
March 2020.
I remember when the news of COVID had caused widespread panic in the markets. The broader market indexes were crashing like a house of cards. Lower circuits causing trading to halt. Everything was RED. Quality stocks were available at attractive valuations. It was like a sale that happens once in a decade.
Around that time, EVs were quite the buzzword. Brokerage houses were recommending stocks to own in this sector. Tata Motors, Hero Motocorp, TVS Motors, Amara Raja Batteries were some of the prominent names that were estimated to be the biggest beneficiaries of the EV boom in India.
One of those companies benefitting from the boom in EVs was Olectra Greentech. If you had invested INR 1 lac in Olectra Greentech in March 2020, and had the patience [and the nerve] to hold onto the stock upto now — you’d be sitting on a profit of INR 26.5 lacs. That’s a 2650% return in a little over 3 years.
What has caused this supernatural surge in the stock price?
Business + Market Size
Incorporated in 2000 in Hyderabad, Olectra Greentech is one of the largest manufacturers of electric buses in India. It is also one of the largest manufacturers of silicon rubber/composite insulators for power transmission & distribution networks. Two very distinct businesses, however it is the EV business that the investors want a piece of.
It has a manufacturing capacity of 1500 buses/year. The company has an existing order book of > 3,300 electric buses worth INR 4,125 crore from various state transport authorities and private customers. On 7th July 2023, the company bagged an order worth INR 10,000 CRORE from the Maharashtra State Road Transport Corporation (MSRTC) for the supply, operation & maintenance of 5,150 electric buses.
Olectra recently unveiled a Hydrogen powered bus in a technical partnership with Reliance, which it plans to commercially launch within a year. The company is also expanding into electric autos and electric trucks.
Exciting times ahead for the company and the investors are buying into that.
The market for e-buses is HUGELY under-penetrated in India at just 4%. The government understands this and to build a cleaner public transportation infrastructure has launched various programmes like FAME II, Production Linked Incentives (PLI), exemption in road tax & lower GST.
E-bus penetration is expected to increase to 30% of total buses by 2030. Existing players (including Olectra) are ramping up production capacities. More money is going into building charging infrastructure. Battery prices are expected to fall by 15-20% in the next few years, which would make e-buses viable without government subsidies.
Should I invest in Olectra?
You can see that there are multiple industry tailwinds. Demand for e-buses are increasing. Olectra already has a robust order pipeline and sticky customers in the form of state transport authorities.
The Positives
Investing in capacity expansion: Olectra is investing in a greenfield plant which would have a manufacturing capacity of 5000 units/year [scalable to 10,000 units/year if required]
The construction of this plant is ongoing & the plant is expected to go live in Q4FY24. Management expects to product 3.5K units per year from this plant.
Megha Engineering & Infrastructure Limited (MEIL) — which is the holding company of Olectra, is tasked with building the factory.
The new factory will not be fully automated [like the current one] and initially involve certain manual procedures with automation kicking in gradually.
Robust Order book: As at 30 September 2023 — Olectra had an order book of 8,209 e-buses and 25 e-tippers.
Management has given a broad guidance in terms of the execution of the Order book. They want to deliver 2500-3000 e-buses in FY25 and 4000-5000 e-buses in FY26.
Expecting good order inflow for e-tippers in the next 6-12 months primarily from infra / construction companies.
The company is expecting a tender of 10K e-buses to open up from Prime Minister e-Seva — which is likely to come up in the next 5-6 months. The company could win a share of the tender.
Technology partnership with BYD: Olectra has a partnership with BYD for technology / knowledge transfer with respect to the EV technology.
The management has emphasized that the partnership with BYD is strong and will continue beyond 2025.
Olectra was initially dependent on BYD but has been slowly acquiring technology + knowledge transfer from BYD + investing a significant amount in building it’s own R&D capabilities.
It sources battery cells and certain child parts related to the powertrain from BYD (which constitute 25-40% of total components). The other components are all sources from local vendors and the battery cells are assembled into a battery pack in India.
High Margins Insulator Division: The insulator division has been performing quite well and is a high margin contributor. [EBITDA margin of 27% for H1FY24]
Olectra has a market share of 45-50% in this segment and is exporting to the US / Other countries.
The market opportunity for these insulators is limited at INR 350 - 400 crore and the management expects overall topline from the insulator segment to be close to INR 150 - 160 crore for FY24.
Points of Concern
However, there are a few things that you should be aware of before you invest in Olectra.
Low margins = Expensive valuations: The company’s revenue for FY23 was UP 83% YoY to INR 1,100 crore which is a significant milestone. For FY24, the revenue guidance looks strong based on the robust order book. However gross margins declined YoY and the net profit margin of the company is only 6%. At a P/E of 177 times (as at 29 January 2024) — the stock looks quite expensive unless it is able to expand its profit margins.
Negative Cash Flows: Olectra made a net profit of INR 67 crore (approx) for FY23 — however the net cash flow from operations were negative. This signifies that the company is not quick in realization of its receivables and is not the most efficient in managing its working capital. However since the receivables are mostly from state transport undertakings (STUs), the chances of default on such receivables are very low.
However for H1FY24 — the company reported positive cash flow from operations.
Increasing competition: Various players in the e-bus market like PMI Electro Mobility, Switch Mobility, JBM Auto and Tata Motors are also investing in increasing their manufacturing capabilities. Competition is heating up which could delay margin expansion for Olectra.
Halt in production: The company suffered a halt in production for 3-4 months which impacted sales (upto 200 units) due to completion of testing / obtaining certification to comply with change in battery norms.
The management however believes this to be a one off issue and do not foresee future situations where the production would have to be halted for extended periods of time.
Pricing benefit is passed on: Decrease in lithium prices would not directly benefit the company, since it follows a cost plus model and raw material price benefit is passed on to the end consumer.
Debt to fund Capex: The company is contemplating to use a mix of debt and internal accruals to fund it’s capex expansion plans. Use of debt could lead to higher interest costs and impact profitability.
Conclusion — Olectra is doing a lot of things right. It has built good relationships with STUs which will provide a recurring source of income. Delivered > 1,000 e-buses in India since 2017. Got a robust order book of around 8,200 e-buses for which it is increasing manufacturing capacity from 1500 units/year to 6500 units/year. Venturing into e-trucks and hydrogen buses.
Government push for electrification of public transport is going to benefit the company.
The valuations look expensive at the current market price. Would be interesting to see how the next year plays out for Olectra. It has generated MASSIVE wealth for its long term investors — but will it continue to grow from here?
Only time will tell.
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[Note: The author is not a SEBI registered investment advisor and the contents of this article do NOT constitute investment advice. Always do your own research before you invest in a company]
Edit version:
Original post written on
First edit done on 29 January 2024 (incorporating learning from the Q2FY24 earnings call)