Is Maruti's Skepticism of EV Adoption Hurting Shareholders?

Suzuki Motor Corporation has signed a memorandum of understanding with the State of Gujarat, and plans to invest Rs 10,400 crores in an electric vehicle (EV) and battery manufacturing plant in India. Of the Rs 10,400 crores, around Rs 3,100 crores would be spent on building the plant for electric vehicles, while the balance would be used to build batteries for electric vehicles. These investments would take place at Suzuki Motors Gujarat, where the company is already involved in contract manufacturing for Maruti Suzuki India Limited (MSIL).

Suzuki’s plans to launch a car in 2025 are in line with its subsidiary MSIL’s scepticism about the Indian EV car market. MSIL has maintained that the Indian market is not ready for EVs currently, especially in the passenger vehicle space. Though EV adoption has grown rapidly on a small base, the total size of the market remains quite small in comparison to the complete pie. So far, the company has maintained that it would launch EVs in India only after 2025, despite a growing call for rapid EV adoption. In contrast, the company believes that vehicles that run on compressed natural gas (CNG) offer a better business opportunity in India. With a focus on carbon emissions, automobile companies across the world have been looking at EVs, but Maruti believes that India’s average cost-sensitive customer would prefer CNG vehicles or hybrid vehicles, rather than pure-play EVs.

In an interview with the Economic Times, RC Bhargava, the chairman of MSIL, said that the strategies pursued by EV manufacturers in Europe and USA, might not work as well in a country such as India. Citing the relatively lower per capita income of Indians, when compared to Europe and USA, Bhargava said that Indians would find it difficult to afford EVs. Currently, India’s per capita income stands at 3 per cent of USA and 5 per cent of that of Europeans according to the ET report. As a result, it would take a long time for the product to be adopted by the masses.

Some critics have argued that MSIL is focusing on near-term profitability, rather than taking a longer-term view. Investors too, appear to be less enthused about Maruti’s prospects. Year-to-date, MSIL’s stock has risen 8 per cent, in contrast to its competitor Tata Motors, whose stock has moved up by 43 per cent over a similar period. Tata Motors’ stock had a lacklustre performance until October 2021, when it announced significant investments in the EV passenger vehicle space. It is clear that the market believes the shift to EVs to be a structural change as evidenced from valuations of companies connected to the EV space.

Wardwizard Innovations, a listed player involved in the production of two-wheeler EVs trades at around 20 times its trailing twelve-month revenues. In contrast, companies that depend on traditional two-wheelers such as Bajaj Auto and Hero Motocorp trade at 1.5-3 times their trailing twelve-month revenues. In part, the low valuations could be attributed to the de-growth in a domestic internal combustion engine (ICE) two-wheeler sales, due to a slowing economy. Similarly, auto parts companies that are involved in the production of parts whose use cases are limited to ICEs, tend to have a lower valuation compared to auto parts manufacturers who are focused on the shift to EVs. Exide and Amara Raja batteries, which produce vehicle batteries, have given low returns over the past year as the OEM business suffered, and lead-acid batteries remain a major focus area. Globally, EV manufacturers such as Rivian, which have not demonstrated any real-world abilities yet, have been valued at tens of billions of dollars.

In this light, Maruti’s reluctance to declare an immediate entry into the EV space might result in investor concerns about the company’s future. However, others believe that despite the noise, EVs would not capture the market rapidly yet. The issues relating to infrastructure for EVs, range anxiety, high initial cost, sourcing rare metals for batteries, affordability, among others could create roadblocks for rapid EV adoption in the PV space.

While the government has declared subsidies for EVs, manufacturers are working on charging networks, standardisation, and technologies such as battery swapping to reduce outright costs for consumers, and create an environment for widespread adoption. Some companies are looking at battery technology that wouldn’t require rare metals such as Lithium and would use elements that are more readily available. Whether Maruti’s contrarianism regarding EVs would create value, or hurt shareholders remains to be seen.