Electric Vehicle Value Chain- Stock No.1 | NALCO | Yadnya Investment Academy

Interested to know about the developing trend of Electric Vehicles in India and sectors likely to be bolstered by this shift in the automobile industry? Read the series of our articles on the Electric Vehicle Value Chain.

Introduction:

India’s automobile industry is the 5^th largest industry in the world. On account of progress in the automobile sector in India, it can procure 2^nd or 3^rd position by the year 2030. The focus of making this industry the largest in the world is also largely promoted by the Government. The government is also concentrating a lot on EVs in India. Union Minister Nitin Gadkari has also presented a target of the presence of 30% EVs out of total vehicles in India by 2030. Electric Vehicles are getting higher attention nowadays as they are environment-friendly vehicles.

Currently, 42% cost of EVs owes to their battery, which is also responsible for the high pricing of EVs. EV makers are projecting out certain alternatives, setting up research on Lithium batteries which is the prime component of EVs. As per projections, the cost of EVs can go down by 18%, if more resources are developed or any other steps wents successful.

Another major problem here is Electric vehicles cost 1.5 times to 3 times the upfront cost than petrol or diesel vehicles. This concern can also be sorted out in the coming 4-5 years, with the development of EVs in the market. The cost of EVs and IC engine vehicles can lie in the same ranges by 2025.

Sectors in Electric Vehicle Value Chain:

i) Mining Sector

ii) Sales and Component Sector

iii) Battery Parts

iv) OEMs

v) Infrastructure

Specifically in this blog, we will be discussing the Mining Sector the Electric Vehicle Value Chain. Under this sector, we will take the National Aluminum Company (NALCO) for our study.

NALCO:

• There is the possibility of high growth in demand for Aluminium with the increasing developments in Electric Vehicles. Earlier, steel was in high demand for petrol & diesel vehicles. Companies are stressing a lot about Lithium.
• NALCO is involved in Mining, Metal, and Power operations. It has an alumina (initial raw material) capacity of 2.27 million tonnes per annum (MTPA). Whereas the capacity of Aluminium is 0.46 MTPA.
• In India, NALCO is having a total market share of 24.3%.

Role of NALCO in Electric Vehicle Value Chain:

• Observing the shift in the automobile sector and upcoming demand for Lithium-Ion batteries, NALCO has categorized its business verticals into 2 major parts: Mining of Lithium and Merchant Mining separately.
• Taking step towards these business verticals, NALCO along with Hindustan Copper and Mineral Exploration Corporation Limited has formed a 3-way Joint Venture named Khanij Bidesh India Limited.
• This joint venture will scout for assets in ABC Lithium Triangle.

ABC acronyms for Argentina, Bolivia, and Chile. These ABC regions have almost 54% Lithium reserves of the world.

• NALCO along with its strategic joint ventures is trying to explore and operate mining activities in this ABC triangle.
• In India, there are no proven reserves of Lithium. But, the company is exploring the prospects of Lithium Sourcing in Gujarat and Rajasthan through a 15-20 Cr. pilot project.
• NALCO is not yet successful in these projects.

About NALCO:

• NALCO is a Navratna Public Sector Undertaking. Specifically, NALCO is a CPSE (Central Public Sector Enterprise) that has Mining, Metal, and Power operations as their main business verticals.
• The average PE ratio of NALCO has always remained below 10, but recently on account of developing focus, the PE has also gone beyond 20. Currently, NALCO is trading at a PE of 21x.
• Comparing to earlier valuation and looking at the potential of the company, the market is providing premium valuation to the company.
• NALCO is a Small-cap company according to its market capitalization of around ₹10,000 Cr.
• NALCO is a zero-debt company.
• The company is providing a healthy dividend yield of 4%-4.5%.

Concerns regarding NALCO:                             

• The major concern of NALCO is the company is having a very weak return ratio. The company is reporting return ratios between 1%-2.5%.
• It implies that the company is employing a large amount of capital but is not able to generate a good amount of return.

Conclusion:

Looking around the emerging market of EVs and considering the growth possibility of EVs in the automobile sector, companies in relation with mining, manufacturing, and marketing of Lithium and Lithium-ion batteries seem to be get benefited and bloom in the coming time-period.

Under the first sector of our Electric Vehicle Value Chain, we have chosen NALCO as our first company which can work well in the upcoming EVs era. As of now, NALCO suffers because of its poor return ratios but it can be transformed once its projects and strategic joint ventures are successful. Keeping this prospect in mind, one should keep this stock on their radar.