Navigating EV Investments: ICRA’s Insights into Financial Evaluation and Market Dynamics – Srikumar Krishnamurthy, Senior Vice President & Co Group Head, ICRA Limited

Key Highlights :

1. ICRA Limited evaluates EV companies’ creditworthiness based on industry prospects, technology, finances, and compliance.
2. ICRA assesses EV investment risks such as regulations, tech obsolescence, financing challenges, and supply chain stability, emphasizing stable raw material supply and financial flexibility.
3. Emerging EV market trends drive shifts in India’s finance, with ICRA noting increased investments in infrastructure, batteries, and collaborations, expecting sustained government support to drive future growth.

1. Given ICRA Limited’s role in credit rating and investment information, how do you assess the creditworthiness and investment potential of companies in the electric vehicle (EV) sector?

While assessing the credit profile of entities in EV sector, ICRA considers various parameters – industry growth prospects, demand cyclicality, competitive intensity, financing availability and regulatory norms and OEM’s ability towards compliance. ICRA also considers the business parameters like scale and market position of the entity, its product portfolio, brand recall, technology and product development capabilities, sales and service network, geographical diversification, extent of localization, and strength of the vendor and ancillary network. Financial metrics like profitability, leverage, coverage, capital expenditure plans and liquidity position are also assessed while evaluating the entity’s creditworthiness. This apart, factors like support of parent (if any), financial flexibility, debt servicing track record etc., are also assessed. 

2. What are the primary risks and challenges associated with investing in EV sector, and how does ICRA Limited evaluate these risks for investors?

EV sector presents long-term opportunities and growth, however investing in the sector presents itself a set of risks and challenges. Some of the key expectations of stakeholders, include continued regulatory support from government, ability to achieve early break-even volumes given the inherent demand and market risks, challenges associated with technological obsolescence (on vehicles and battery), battery prices, creation of conducive EV ecosystem (like charging infrastructure), managing supply chain risks, standardization of components, skill development etc. On the sourcing of raw material, the manufacturing operations in India are presently limited to the assembly of battery packs, and OEMs import battery cells. While investments are under implementation, battery manufacturers consider factors like high capital costs, lack of visibility over stable raw material supply, technical capabilities etc. Other key headwind is financing. Significant share of India’s vehicle sales is dependent on financing and hence availability of adequate, affordable, and timely financing is a key expectation of the industry players. Uncertainty of residual value of vehicle and batteries, absence of secondary market, and lack of historical data make it difficult for financiers to assess the risk profile for EV lending.

3. How are the emerging trends in the electric vehicle market influencing the financial and investment landscape in India? What key indicators are you focusing on in this sector?

Apart from the investments towards capacity creation and new product models, capex spends in EV sector is increasing with investments towards setting up of more charging stations, advanced battery technologies, recycling, software / connectivity solutions, etc. Strategic tie-ups with major domestic / global counterparts to strengthen the capabilities in product and technology offerings, a differentiated distribution and supply chain models are also observed. As the thrust on alternative fuels continue, a change in stance from select financial institutions is also observed in recent times. From creating flexible models towards meeting the changing customer needs to collaborating up with OEMs and charging infrastructure providers, financiers are adapting themselves with innovative, tailored financial structures thus catering to the unique needs of the players. Over next few years, trends like battery swapping, leasing etc., are expected to gain more prominence although the same will remain dependent on the extent of penetration.

4. How have recent government policies and initiatives in India impacted the investment and credit scenarios in the EV industry? What shifts have you observed post these implementations?

Electrification in India was kickstarted by the supportive policies and regulations of government (both centre and state). Spurred by the support in the form of subsidies (under the FAME policy) coupled with other factors like improving customer awareness, and more product launches, EV demand has seen a material upturn in prospects in the last two years. Also, the policy measures around dedicated outlay under the FAME scheme, favourable land and electricity procurement guidelines and subsidized electricity procurement tariffs for EV charging stations aim to proactively promoting more EV charging stations. In the recent interim budget 2024-25, the government’s proposal to create payment security mechanism and emphasis on increasing support to the manufacturing of charging infrastructure is a step in the right direction driving faster adoption of e-buses for public transport networks.

Fueled by the healthy subsidies and other supportive factors, electric two-wheeler (e2w) segment currently accounts for ~85-90% of total EV sales (excluding e-rickshaw). However, with reduction in subsidy benefits (under FAME II) for e2ws from June 2023, the pace of adoption slowed down to an extent. Stakeholders expect a longer and sustained period of support to drive investments.

5. From ICRA’s perspective, what is the future outlook for finance and investment in the EV sector over the next decade? What key areas should investors be focusing on?

EV penetration remains low in India, with a share of ~4.5% of total vehicle sales in FY2024. Nevertheless, the electrification of vehicles in India is expected to gather momentum supported by continued government support, favourable total cost of ownership and growing awareness about environmental concerns. As EV adoption is likely to gather more pace in the next few years, investment will continue in technology, battery and overall EV ecosystem. However timely fund raise to support the capital structure/competitiveness and OEM’s ability to ramp up volume and achieve faster break-even will be key monitorables. Among the product segments, buses, three wheelers and two wheelers shall witness faster adoption while commercial vehicles and passenger vehicles are expected to catch up gradually. That said, in PV segment, even as hybrids are viewed as intermediate step towards acceptance of EVs, mitigating range anxiety and offering superior mileage, EV penetration is likely to improve at a healthy pace, aided by enhanced customer acceptance.