The rocky road to EV financing

It seemed unusual for Tata Motors, the country’s largest electric vehicle maker, to drop out of a second tender for electric buses that was mooted under the National Electric Bus Programme (NEBP). The deal for 6465 e-buses was part of the ongoing Rs 30,800 crore phase 1 of the NEBP.

Tata Motors' decision was taken despite the fact that the company had bagged 66 percent of the business in the first phase of the tender in 2022, where the company was supposed to deliver and operate about 3,600 electric buses for State Transport Undertakings (STUs).

This incident has come as an alarm bell in a nascent yet fast-transforming electric vehicle market in India, which is set to touch about Rs 20 lakh crore by 2030. So, when a big player like Tata Motors decides to sit out, eyebrows are raised as to why and the reason behind it.

It seems that the sole reason for the drop-out by Tata Motors is uncertainty over financial returns.

As most of the STUs operating in India continue to bleed and there is often a possibility of payment default or delays. The auto major's decision appears to have been motivated by its concern about the lack of payment assurances in tenders.In a recent post earnings call P B Balaji, Group CFO of Tata Motors said, “Credit risk or collection risk is something neither one of us wants. I am sure there will be a solution for it.” Over  50,000 electric buses are expected to be in operation by the end of the decade, according to Convergence Energy Services (CESL), a division of Energy Efficiency Services (EESL), a subsidiary of the Indian government under the Ministry of Power.

The blueprint was based on the Grand Challenge, which was finished successfully and led to the lowest prices ever for e-buses, that would be operated under Gross Cost Contract (GCC) model.

Sudhir Mehta, Founder and Chairman of Pune based Pinnacle Industries and EKA Mobility which is a newbie in the space agrees. Mehta noted that there is still a clear divide globally between those who sell buses and those who finance them, asserting that “no automotive company in the country has that kind of financial clout.” Mehta's company took part in the CESL tenders and has added a few more contracts, bringing its total e-buses order to 400 units.

According to Manish Chourasia, MD of Tata Cleantech Capital, a joint venture between Tata Capital and the International Finance Corporation (IFC) of the United States, much of the funding was initially based on the strength of the promoters' group, but as volumes are rising, so is the reticence.

“When strong groups implement the project, the lenders fund it as they have faith in these large groups. There is an assurance that even if the project goes bad, the group is strong enough not to default,” he explained adding if the project has to scale up, “then obviously the project boundaries have to be strengthened, especially in terms of the payment risk,”Chourasia noted, whose firm has funded a few OEMs participating in the tenders.

Speed bump
Till now, none of the e-buses have been  deployed from the tender. CESL had managed to discover prices that were 27 and 25 percent lower than diesel and CNG, respectively, without considering the subsidy.

On the one hand, the tender pricing has been at an extremely rock-bottom level— where an OEM will be barely able to make money, on the other hand, some of the STUs where these buses are likely to be deployed have had a chequered history of endlessly delaying the payments. If not an outright default — the state government often having to chip in and bail them out.

Even where contracts are executed, the cost of financing remains high — making the entire business proposition a risky affair for the organisations.

The way out
According to industry stakeholders, there are four structural modifications needed in the context of EV financing.

The first factor is the cost of financing — if the industry gets access to green financing, it will help them secure affordable loans from international organisations like the World Bank and big pension funds.

The second requirement is to get ‘priority lending status’, so that banks and other financial institutions are compelled to allocate a dedicated portion of their credit to EVs and its ecosystem.

The third and the most critical step is to create a payment security mechanism that can give OEMs some assurance that their payments will not be missed and that if they do, there will be a recourse.

The fourth factor is that contracts need long-term loans to match their 10- and 12-year terms, which are similar to infrastructure contracts with moderate but constant returns.

The resolution on the payment assurances is still being worked out, said Mahua Acharya, the former MD and CEO of the state-owned energy transition business Convergence Energy Services Limited (CESL), under whose leadership the e-bus tenders took off stresses that a payment security mechanism on the lines of Solar Energy Corporation of India (SECI) performs for the renewable energy industry, can be an alternative.

SECI serves as a link between power developers and distributors. “In doing its job, it (SECI) provides comfort to those who sell power, knowing that the power will be taken and they will be compensated,” noted Acharya, highlighting that a similar mechanism can be adopted for the EV industry.

One was hoping that the recent Budget would grant the Prime Lending Status to EVs, which will address the challenge of high cost of financing, but it didn’t come through. Industry players say there is definitely a serious thought given on the subject and it is not a matter of if, but when.

Hanif Qureshi, joint secretary, Ministry of Heavy Industries (MHI) agreed there are some challenges, but he questioned the attitude of some players and told Autocar Professional: “What more do you want the government to do? We have allocated e-buses Rs 6.87 billion ($84.60 million) as subsidies for 7,090 electric buses. We do understand that some banks and financial institutions have reservations about lending funds to OEMs due to the history of the state transport undertakings. The government is aware of issues and a long-term solution is being worked upon. But that should not stop OEMs from finding ways to do business and raise funds.”

Legacy players wait and watch, newbies eye a head start
Conventional players like Tata Motors, Ashok Leyland, VE Commercial Vehicle amongst others are treading the subject carefully, there are series of new-age companies like Green-Cell Mobility, Olectra EV, JBM Auto appears to be managing the situation much better. Mumbai headquartered Greencell Mobility has already secured an order of over 1,500 buses across multiple cities and states including the CESL tender.

Sumit Mittal, COO, Director (Finance) at GreenCell Mobility claims financing has never been a challenge for his company and Greencell has more than seven or eight banks financing its business with SBI being its lead financer. 

In November 2022, the Asian Development Bank (ADB) signed a $40 million financing package with GreenCell Express (GEPL) to develop 255 electric battery-powered buses.

“Not all the STUs are bad pay masters. Many pay but there may be small delays but that's how this market has worked for the past several years and conventional OEMs have played the waiting game before. The challenge for them is to wait for 12 years which is a hard stop,” opines Mittal.

Hyderabad based OlectraGreentech’s Vice President Venugopal Rao Nellutla says their experience with states like Maharashtra, Karnataka, and Telangana has been positive. But there are some issues that most bus makers have to cope with.

Similar challenges are being faced by vehicle procurement in other commercial vehicle segments as well. Sudhindra Reddy, Co-Founder & COO of Turno, an EV commercial marketplace says getting a fair value for underwriting the asset in case of new technology machines like EVs will take more time.

Banks and NBFCs who have a deep understanding of underwriting assets will wait for the organic market to emerge. We expect them to take time four to five years to have a similar understanding for EVs and extend capital advantage a large institution can offer, added Reddy.

Industry expects lending rates to normalise with time
The lending industry is beginning to warm up to the EV loan business and the list of players includes banks and non-banking financial institutions. Mayank Jain, Co-Founder, Director at Crayon Motors said, “Fleet financing is something that is starting to happen, But there is a scope of improvement in lending rates.” With the rising volumes, banks' attitude is also changing, say industry players. 

Diego Graffi, the CMD of Piaggio Vehicles, says bankers have changed their stance over the past one year. If the EV business in India were to be given priority lending status, it would receive a significant boost, he felt.

Restructure and participate
Unlike the usual CNG or diesel bus tenders that were based on sale or lease and operate contract, the EV tender system is somewhat different as they follow the Gross Cost Contract (GCC) model. In the latter case, the commercial vehicle maker will not only manufacture the bus, but it will run and operate them.

Given the order books that run in large volumes for buses, bus makers have been compelled to form an operating company which will manage the GCC for the State Transport Units. The common practice is that the manufacturer will sell the buses to its sister company instead of booking the expense on its book. For example, Switch Mobility is manufacturing electric buses and its arm OHM Mobility will be operating the GCC.

Other e-bus players are working their respective modus operandis.

Winter funding or not?
Even as India's developing EV industry continues to face numerous roadblocks, persistent discussions about the impending ‘financial winter’ — an euphemism for an economic slowdown — seem to be deterring investors from making fresh investments. For the OEMs, this means they aren't getting the right valuation to raise more funds.

Take the case of Ashok Leyland’s Switch Mobility, which received $18 million for a one percent stake from DANA in July 2021, has been in the market for an investor for over a year now. The company's top executives say the economic that the delays are caused by things like the recession in Europe which is causing difficulties in fund raising. 

Gopal Mahadevan, director and CFO of Ashok Leyland, told Autocar Professional that fund raising is taking longer than planned because the effort is similar to establishing a new business. “We will hopefully have some updates over the next quarter,” Mahadevan said.

Switch Mobility is also in talks with states like Maharashtra and Uttar Pradesh about opening numerous plants across the nation. The company now has an order book of nearly 2,500 e-buses. The management of the company predicts that in order to fulfil the order book, including that of its mobility arm as a service arm, OHM Mobility, will require an infusion of more than Rs 6,000 crore in business capital over the next three to five years.

Mahesh Babu, CEO of Switch Mobility explained that because EVs are a relatively new mobility segment, it is taking some time for financiers to comprehend its dynamics. But he is hopeful that things will gradually get better eventually.

“In order to democratise sustainable mobility, priority and access to funds, with payment guarantee by STU’s is a pragmatic solution for EV bus adoption. Hence, we hope to see measures aimed at supporting financing and funding of electric public transportation projects, as bankability of contract is seen as high risk. Government’s support through priority lending would also help meet the aggregated demand. We hope the government continues its thrust on infrastructure and drives us forward on the path to higher growth,” Babu added. He expects the FAME subsidy to continue for a few more years.

According to Maxson Lewis, founder and MD  of Magenta Mobility, from September to December 2022, people were wondering, “What is this winter?” However, as the current year started off, investors understand there is uncertainty in the tech sectors such as fintech, edutech, etc. However, certainty continues in the EV sector. As a result, some funding is available for EV industry. Lewis added that in the next two or three months there is going to be huge investment/announcement not only for Magenta but others as well.

For large bus contracts funding may be a challenge but smaller e2W and e3W ventures are facing less trouble. Lewis thinks more funding may get funneled into the EV industry.

Magenta Mobility said in September 2022 that it wanted to raise Rs 200 crore to put 9,800 vehicles on the road by 2023. Among its existing clientele are all of the main e-commerce companies, including Amazon, Flipkart, BigBasket, Porter and Udaan, among others.  The ‘funding winter’ notion, though, does not appear to be widely accepted by many in the business.

Cheaper debt funds scouting for opportunity
Despite the challenges, interest in the opportunity has never been so big before amongst numerous ESG and Sovereign Wealth Funds. While there may be funding winter for equity, climate-based debt is blooming with global funds chasing India's rise as a lead market for clean energy climate funds.

Reports say India is expected to attract climate tech funds worth $180 billion for electric transportation by 2030 as a lot of global money raised for this cause is finding its way into India which is turning out to be one of the world's hottest investment zones for such funds

The global climate funds are able to raise clean energy capital from as less as six percent around the US economy inflation rate which is currently pegged at 6.5 percent and deploying it between 9-14 percent on the asset class and nature, informed an early stage start-up who is doing the rounds for his A-Series funding.

“Such kind of spread is not available anywhere in the world and India is the place where if you bargain hard you can get debt cheap, but it comes with a lot of trappings. Promoter’s personal guarantees, collateral, and penalties,” says Arun Sreyas who is also looking to raise funds for expanding his battery swapping venture RACEnergy which is backed by Micelio Mobility. “For start-ups equity is precious and in India, it is available for those who have scaled up. The scaled-up don't need it as they are happy not to dilute but pay back through earnings,” Shreyas further added.

The best case of this would be Yulu, who has already raised equity through a strategic partnership with Bajaj Auto and Magna. Amit Gupta Co-Founder and CEO of Yulu in a recent interaction with Autocar Professional had said: “Moving forward, it will be all debt-based transactions for which there is a good appetite amongst the investors.”

Shailesh Vikram Singh, Partner of Climate Angels is also making a pitch for his fund to be a part of the new start-up's growth plans. Like Climate Angels, there are more than a dozen green energy financing funds which today are chasing Indian start-ups. Traxcn data, which tracks climate tech companies' data, has said that India's share of climate funds has jumped by close to 80 percent from $836.7 million received in 2021 to $1.4 billion in India till September 2022.

Venture Capitalists want proof of concept
Since the industry is in its infancy, there is no track record for financiers or investors to follow and this aspect makes the situation difficult. Akash Gupta, co-founder and CEO of Zypp Electric, EV as a service platform, says venture capital (VC) firms typically follow trends and like to wait for others to take it up before deciding to engage.

Since many EV companies are young and have only been in operation for the previous three to four years, it’s difficult for the experts to forecast on such short data. “Also, there is a bit of funding winter that has set in. So, they don't want to take bets on a new industry very quickly,” Gupta explained.

Zypp Electric was able to raise $25 million recently from multiple investors lead by Gogoro to expand its fleet.

Is winter funding haunting India’s EV sector?
Mitesh Shah, co-founder of the angel investing platform Inflection Point Ventures (IPV) says there is no slowdown in investments or signs of winter funding.

Shah noted that early-stage funds continue to flood into the EV market. He has attributed his perspective to the previous six months' EV funding trends. On his part, a US $50 million AIF fund, Physis Capital, has been launched by IPV to invest in Series A and B growth-stage firms, particularly those in the e-mobility sector.

“Even at this late stage, quite a lot of entities that have a sustainable business model-either profitable or at least have the ability to have a profitable growth story for the time to come—have been again funded,” Shah said.

Vivek Gulati, co-founder and COO of alternative investment firm Grip Invest, claimed there is no winter for fundraising in India because large players like Tiger Global have allocated sizable funds to start-ups recently. Vecmocon Technologies, an EV firm received around Rs 41 crore in a pre-Series A fundraising round from Tiger Global and Blume Ventures in October 2022, with participation from a number of key angel investors. The start-up makes mobility solutions to help original equipment manufacturers (OEMs) get access to components that have been tested in the field and are reliable.

“Now the ecosystem has grown and people are confident. Larger private equity firms are also entering the picture and deploying capital for this ecosystem,” Gulati added. Grip, which has over 30 EV players in its portfolio, has so far deployed around Rs 220 crore of total debt in the segment.

Even while capital is still needed to get the EV system going, new business models are being developed by the new-age financiers to make it easier for EV enterprises, especially start-ups, to acquire loans. GetVantage, a revenue-based financing (RBF) platform, and Inflection Point Ventures, an early-stage investing platform, joined forces in January 2023 to give their combined portfolio of 1,500 digital start-ups and businesses access to both equity and revenue-based financing.

Karun Arya, the Chief Growth Officer of GetVantage, says revenue-based funding models are increasingly preferred as a means of raising money, particularly for addressing the demands of short-term working capital.  He said that this was because, unlike other types of financing, it lets business owners keep ownership and control without having to sell equity in their company or give lenders collateral. “Because it is based on future earnings, it has a flexible repayment timeline,” said Arya.

Industry experts noted that investors are increasingly devoting more time and effort to due diligence, even after the funding round has ended. The experts concurred that although this has extended the time needed for due diligence, it ultimately benefited all parties involved and the business as a whole.

Getting retail loan still a struggle
Financial institutions (FIs) have not yet raised lending to the level that would be necessary, which is expected to reach Rs 40,000 crores by 2025 and Rs 3.7 lakh crores by 2030, according to the government think tank NitiAayog’s assessment. FIs, including banks and non-banking finance firms (NBFCs), are reluctant to lend EV companies due to related asset and business model concerns as attributed to the EV technology and uptake. These dangers are both actual—like the unknown resale value and imagined, like product quality. Therefore, EV customers are unable to get loans on terms similar to those for an ICE vehicle, even if financing is offered. Generally, the retail loan on an EV tends to be around two percent higher than that offered on an ICE-fuelled vehicle. Similarly, even the vehicle insurance remains on the high side. 

Fire incidents impacted the funding
Industry observers say a spate of incidents linked to EV fires added to the uncertainties around financing. Increasing cases of fire meant the credibility of the brand gets hampered and hence their ability to repay.

“So, the moment the fire incident started happening, when we were approaching the financers, they had lots of doubts, and it took us two to three months to educate them and to make them understand why this vehicle will not have the same problem,” said Visakh Sasikumar, CEO and co-founder of  Fyn Mobility. 

On the other hand, there are some, like Saera Electric Auto, who have different plans to keep their business growing. Using examples from his previous fund-raising efforts, Saera Electric Auto's managing director, Nitin Kapoor, said that when he entered the electric vehicle (EV) market in 2011, there was no infrastructure in place to help him. He added that the business is at a point where it no longer needs outside capital. "No debt is being used at this time. We don't need that anymore. "We're keen on an initial public offering (IPO)," he told Autocar Professional. Kapoor made it clear that he doesn't want private equity capital because it limits the business owner's freedom.

Kapoor asserts that during the previous three years, despite the pandemic, his company has had annual growth of more than 100%. He claimed that despite the fact that demand outpaced supply, Saera Electrics was nevertheless able to generate sales of Rs 152 crore in FY22. Revenues of more than Rs 320 crore are now anticipated for FY23 by the company. To accommodate its growing client base, Saera Electric intends to build two new plants at a cost of more than Rs 100 crore. Kapoor predicts that once these facilities are fully operational, beginning in the following fiscal year, output will increase by roughly twofold.

This feature was first published in Autocar Professional's February 15, 2023 issue.