Which stocks are at the forefront of India’s EV revolution?

India's EV industry trails China’s, but the country has big electric dreams, with Tata Motors leading the pack. Cheaper EV models that are accessible to all are expected to win over luxury brands.

– SoftBank-backed Ola Electric plans to invest $920m to establish the world’s largest EV manufacturing hub in India.

– The country needs significant investment to scale up its lithium-ion cell and battery production.

– ADR shares in Tata Motors are held by the First Trust S-Network Future Vehicles & Technology ETF.

The electric vehicle (EV) race in India may not be as fast as it is in the US and China, but Tata Motors [TATAMOTORS.NS], Uber [UBER], and SoftBank [9984.T] could stand to gain as it picks up speed.

Uber announced last week that it had signed a deal for Tata Motors, one of India’s leading automakers, to supply it with 25,000 EVs. This is part of the ride-hailing firm’s push to be a zero-emission platform by 2040.

Following the announcement on 20 February, the share prices for Uber and Tata Motors fell 1.6% and 1.5%, respectively. Since the start of 2023, however, the stocks have made respective gains of 35.1% and 7.7%.

In other news, Ola Electric, an e-scooter brand backed by SoftBank, is planning to invest $920m in the manufacture of EVs and batteries in the southern Indian state of Tamil Nadu, which could become the world’s largest EV hub. Ola Electric sold its 100,000th vehicle last November, and the new investment will take its annual production capacity to 140,000 units.

Tata’s cheaper EVs most popular

Some 48,000 EVs were sold in India in 2022, a fraction of the 6.9 million sold in China. But while EVs accounted for just 1.3% of total car sales in India last year, they were up 223% year-over-year, according to analysis from Canalys.

“The overall sentiment around the auto industry remained strong in India during 2022, propelled by pent-up demand and rising consumer buying power,” wrote automotive analyst Ashwin Amberkar.

Two of Tata Motors’ EV models, the Nexon and the Tigor, led the way with 86% of market share. They’re popular because of their lower price range, which is “the sweet spot among buyers wanting a second, city commute car”, Amberkar added. By contrast, models from BYD [1211.HK] and Hyundai [005387.KS], which cost more than $25,000, are targeted at “wealthy eco-conscious professionals and EV enthusiasts”, according to Amberkar.

Luxury models, including those from BMW [BMW.DE] and Mercedes-Benz [MBG.DE], made up 34% of the EV market share last year but less than 1% of total cars sold.

Lithium challenges as demand grows

Demand for EVs is expected to pick up pace as the country strives to meet its 2030 targets. The government wants 30% of private cars to be electric, as well as 70% of commercial cars, 40% of buses, and 80% of two- and three-wheelers.

SoftBank-backed Ola Electric announced earlier in February that it intends to launch its first four-wheeler in 2024.

“The cheapest Tesla [TSLA] costs $50,000, which most of the world cannot afford,” Ola Electric co-founder and CEO Bhavish Aggarwal told Bloomberg last year. “We’ve a chance to lead the EV revolution with a different set of options priced between $1,000 and $50,000.”

To meet accelerating demand, India will require investment of up to $4.5bn to meet the 50GWh target of lithium-ion cell and battery manufacturing capacity under its Production Linked Incentive scheme.

A recent discovery of 5.9 million tonnes of lithium within the country could help India to secure its lithium-ion battery supply chain, although mining it would pose geological risks.

Funds in focus: First Trust S-Network Future Vehicles & Technology ETF

India’s EV industry is still in its nascent stage, with few listed domestic players. As such, there are no funds offering exposure to the country-specific theme. However, there are a few other ways to play Tata Motors.

The First Trust S-Network Future Vehicles & Technology ETF [CARZ] has allocated ADR shares in Tata Motors 0.49% of its portfolio as of 24 February. The fund is up 16.4% year-to-date.

As of 24 February, the stock has a 1.01% weighting in the iShares MSCI India ETF [INDA], which is heavily weighted in favour of industrials. The fund has been dragged down 6.6% this year by the Adani [ADANIENT.NS] collapse.

Uber is the fourth-biggest holding in the MSCI US Transportation ETF [IYT], with a weighting of 5.48%. The fund is up 6.8% year-to-date.