What the implications of growing acceptance/prospects of EVs (Electric vehicles) on JLR are is one of the most frequent questions we hear from investors. An extraordinary response to Tesla 3 (400K bookings) and an ever stricter emission norms (2020 and beyond) has raised investors’ concerns for JLR. In our view, the cost benefit trade-off for an EV is still evolving and multiple constraints need to be addressed by OEMs before EVs gain meaningful share of the overall car market. The “cost vs range vs convenience” trade-off still needs to improve significantly for car owners to make EV an attractive alternative. This may take 5-10 years, based on our observations.
For now, we assume JLR will achieve 2020 norms without much traction into EVs
There is a long step wise evolution for “electrification of cars” to reduce emissions and improve mileage and efficiency. Continuous innovation in the traditional internal combustion engine (ICE) and designs should help JLR get closer to the 2020 emission target. More important, JLR should be able to achieve the 2020 norms by pushing more hybrid technologies into its vehicles. Thanks to the higher average selling price (ASP) of JLR’s cars, the average percentage increase in price from Hybrid variants will be easier to pass to the customers than mass car buyers. Over the next three to five years we expect a lot more mini and full hybrid cars from JLR. JLR tracked well to reduce its emissions in 2015 by 25% vs 2007 benchmark and should be on track to achieve a further 25% reduction by 2020, led by these initiatives on ICE and Hybrids. JLR continues to retain EU’s derogation, permitting more lenient fleet average CO2 targets.
While 2020 emission norms seem manageable, 2025/30 targets may need much stronger penetration for EVs
By then, battery and other technologies will be much more evolved; we expect JLR to not only invest on its own but also get into partnerships to acquire these capabilities. To sum up, R&D spend may remain high over the foreseeable future, but in our view, JLR may not be at a big disadvantage to peers despite its smaller scale as it is already spending c60% higher on R&D per car than its German peers and this is unlikely to reduce in the next three to four years until EV technologies standardise.
We lift our SOTP-based target price to R600 from R550, led by higher operating earnings, excluding hedging losses: We maintain our Buy as JLR’s growth outlook remains strong and recovery in the domestic market is a catalyst to the share price. We are often asked by investors about the potential implications of growing adoption/acceptance on EVs on JLR. It’s a multiple dimensional question. First, are EVs critical to achieving the 2020 emission norms? If yes, is JLR prepared to launch EVs and consequently meet the emission norms? Second, with growing customer acceptance of EVs, will the attraction of JLR vehicles lessen, even as JLR seems to be behind the EV curve? After all, Telsa 3 has already recieved 400K bookings, even though the launch is nearly two years away. In our view, the cost benefit trade-off for an EV is still evolving and multiple constraints need to be addressed by OEMs before a mass adoption of EVs. The “cost vs range vs convenience” trade-off needs to improve significantly for car owners to make EV an attractive alternative. This may still take 5-10 years. In the meantime, we assume JLR will be able to achieve the 2020 norms without much traction into EVs, pushing more hybrid technologies into its vehicles.
2020 should be easy but 2025 could be difficult on JLR
While 2020 emission norms seem manageable without much EV traction, 2025/30 targets may need much stronger penetration for EVs. JLR would need to prepare for that in the coming years, but by then battery technologies are likely to be a lot more evolved. The average CO2 emissions for JLR in 2014 was 178g/km, which is a 25% decline since 2007; and JLR is required to reduce this further by 25% by 2020. The Euro requirement was 130g CO2/km for EUR6 and targeted is 95g CO2/km for 2020. Considering JLR’s niche (small) status and that it still retains EU’s derogation, the weighted average CO2 emission requirement for JLR’s fleet remains relaxed compared to the overall European requirements. We believe JLR will be able to meet its target of another 25% reduction by 2020. This should be possible by further improvements in ICE/traditional powertrains and hybrid push. However for 2025, JLR would need to achieve much stiffer targets and would need traction in its EV strategy/portfolio. Capex/R&D spend in that regard is unlikely to come down for JLR in the foreseeable future.
Hybrid era is here, followed by EVs from 2020
Hybrids and EVs are still at a nascent stage when we analyse the penetration levels today. Despite the need to achieve EURO VI norms in Europe by 2013 and the CAFÉ norms for CO2, penetration of hybrids and EVs came in at less than 4% globally in 2015. For the US, where CO2 norms are more relaxed, penetration is even lower at 3%. JLR should be able to achieve the 2020 emission targets by further improving on the penetration of hybrids, but still the overall share of hybrids (full) and EVs may remain in single digits. However, for the 2025/30 targets, the need to accelerate EV penetration may be higher for OEMs and that’s when we could see the hockey stick effect (i.e. exponential growth) in the adoption rate, obviously depending on the progress in battery technologies and other innovations to make EVs attractive for car buyers.
EVs have garnered a lot of attention globally and there is a long range of options to improve efficiency of vehicles. To start, just improvements in the ICE can increase the efficiency of the engines (ICE 2.0). ICE 2.0 are the higher efficiency internal combustion engine (ICE)/transmission/powertrain. Higher efficiency could be achieved by reducing engine size (downsizing), turbochargers, start-stop technology, better evolved electronics, use of lower weight materials, etc. The key idea for ICE 2.0 is to reduce the inefficiencies in a traditional ICE and reduce the energy loss. This is the most cost effective way to reduce emissions. For instance, the new diesel Ingenium engine achieves just 109g/km CO2 in the new Evoque vs 130 g/km (lowest model) earlier. The all-new Jaguar XE has emission norms of 99g/km CO2. Earlier in 2013, the all new lightweight aluminium architecture by JLR was a good example of innovation that is possible in traditional designs and ICE. The new RR based on this architecture was 420 kg lighter than its predecessor. Consequently the CO2 emissions were reduced to 194 g/km from ~230 g earlier. Last year, JLR introduced hybrid RRs as well without compromising on its offroad capabilities.