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Understanding deal-making in electric vehicle space

A chat with Koushik Bhattacharyya, Executive Director and Head, Industrials Investment Banking, Avendus Capital

Avendus Capital is a financial services firm based in Mumbai with a dedicated practice focusing on electric vehicles (EVs) and industrial space. The practice is led by Koushik Bhattacharyya, who believes that the Indian Electric Vehicle ecosystem collectively represents a 60-billion-dollar opportunity by 2030. Below are the excerpts from a recent conversation with Koushik about deal-making in the EV space.

Please tell us about some of the recent fundraising deals you helped execute in the electric vehicle space.

There are a couple of deals that we have closed in the last year and a half.

  • One is a USD 60 million deal for the leading electric commercial vehicle manufacturer Euler Motors, led by GIC. Euler is currently manufacturing three-wheelers and graduating to four-wheelers, which will be launched over the next few months.
  • The other deal we did last year was a USD 30 million raise for the electric 2W company Hero Electric.

We are running a few other deals which are in various stages of finalisation. These deals are being pursued across the EV ecosystem with companies ranging from battery technology to OEMs to e-mobility-as-a-service providers.

Within EV domain, which business lines do you find more active than the others?

The most active segment with respect to fundraising is the OEM category, where people manufacture vehicles and sell them to end customers. That is the most well-understood part of the ecosystem because it is consumer-facing, brands play a role, and one can understand the product well. Also, it is easier for investors to compare the EV OEM space to the internal combustion engine (ICE) OEM market and predict future outcomes vis-a-vis some other parts of the EV ecosystem where there is no direct comparison in the ICE industry. Hence, you see more action in the OEM Space.

As an investment banker, how do you see the current EV ecosystem? What kind of potential does the sector have?

I think the potential is humongous. Look at the two-wheeler segment. In the last 2 years, the monthly sales have gone up from nearly 10,000 to 60,000+ units. In many of the vehicle categories, including two-wheelers, and small commercial vehicles, we expect EV penetration to exceed 50% over the next five to seven years.

I think there are two important levers which are slightly under-penetrated today, and once they come up the curve, the adoption can accelerate even more. One is financing – it’s important as the upfront cost typically becomes a barrier for the consumer. Financiers today have very limited data and conviction about EVs as, in most vehicular categories, vehicles have not passed their full life cycle, which is a four to five-year journey. I am hopeful that financing will kick in meaningfully in the next 12 to 18 months. For some of the bigger vehicular categories, charging infrastructure is also a necessity. It is a mental block for the first-time buyer more than a real problem. However, in order to remove that, we’ll need to set up some bit of charging infrastructure.

What are investors looking for while evaluating EV start-ups? What are the main factors at play here?

The three most important things that investors are looking at are:

  • Scalability: Scalability is a function of two things – the total addressable market (TAM) that you are targeting and the scalability of your business model.
  • Differentiation: What gives you the right to win in a market? If you are a 2W OEM, what stops an incumbent ICE OEM who knows the distribution game from beating you? What stops the leading new-age EV companies with a great product and perception in the market from beating you?
  • Path to profitability: A vast majority of the business models in the EV space today are negative margin businesses. Investors want to look at the unit economics and how you plan to be profitable eventually over a three to five-year horizon.
How do you figure out the synergies between EV companies looking to raise funds and potential investors?

Most investors have started looking at this space in the last 12 to 24 months and are still trying to freeze their investment thesis on electric vehicles. You must go to a wider set of guys than in the case of a mature, steady-state business. There are certain categories of investors for whom e-mobility start-ups are a great fit.

  • The first category would be sovereigns, as they are focused on long-term impact and value creation and have social impact built into their investment thesis.
  • The second is a category of DFIs (Development Finance Institutions), which also want to deploy different forms of capital, including debt.
  • The third category, especially for early-stage start-ups, is VCs (Venture Capitalists). VCs look at outsized outcomes, and their outcome parameters are very different from a growth-oriented private equity fund.

EV is the kind of market where one can make that kind of value by backing the right entrepreneurs and the right business model. So, VCs are taking a lot of bets in the early stages across the value chain to play the overall EV story.

So, there are three kinds of investors who are more active at different stages, VCs in the early stages, DFIs in the Middle stages and then sovereigns in the late stages. Increasingly, the bulge bracket private equity funds are creating an impact pool. Well-known names like TPG, KKR or General Atlantic are creating pools from where they can make smaller targeted ESG investments aimed at creating impact.

Please tell us about your valuation approach for EV start-ups.

As I mentioned, most of the business models today are in a state of evolution and not profitable.  Valuation is typically based on the revenues, either current or forward-looking, and a multiple is placed on that number. Typically, we look at forward-looking revenue like a 12-month forward revenue or a projected annualized revenue run rate (ARR), six months down the line and then place a multiple based on the business model.

How do you perform risk assessment when evaluating an EV start-up?

Risk assessment dovetails into those metrics I spoke about. I think TAM is less relevant from a risk standpoint, while differentiation and path to profitability are more important. Investors spend a lot of time understanding whether the model is truly differentiated or not. The path to profitability is strongly correlated with risk. We assess how easy or difficult it is for a business to raise capital frequently enough to sustain the burn in the business. So even if the business model is very differentiated, but the path to profitability is a long way out, and you cannot raise external capital to sustain that kind of loss – it is challenging to raise the capital.

With the wave of new EV companies coming up, do you see consolidation happening in the market, in, say 2-3 years’ time?

I think there will be consolidation, but two-three years is probably a short time to expect large M&A activities. Some bit of M&A has already started happening with business groups, who wanted to make a foray, buying small 2W OEMs or BMS companies etc., but these are sub USD 50-million acquisitions mostly. Consolidation with larger businesses being acquired by even bigger groups will take some time. Some of these successful companies are being run by very competent entrepreneurs, they would want to grow their business to a certain level till the time they see the unhindered growth curve. At some logical point when they think that at least 80% of their journey is traversed, they might look at exit options for their investors and for themselves.

You could still see some start-ups failing to scale up and hence selling out, but that would probably fall in the small ticket acquisition bucket. People will make very opportunistic deals to get a place on the table. But the larger ticket deals will start happening five years down the line.

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