At Torrent Capital, we run a concentrated investment portfolio comprised of high conviction small cap names.  Our core holdings have a defined value proposition, a clear competitive advantage, barriers to entry, strong management teams, and are due to enjoy a rerating in the market or enter a phase of accelerated growth.

We are inclined to support these companies as they move through their lifecycle by adding to our position during times of weakness or we take part in capital raises to fund future growth. Our ongoing involvement hinges on management achieving key milestones, demonstrating the creation of tangible shareholder value and maintaining a leadership position in their respective segments of the market.

One such holding is Electrovaya (EFL:TSX, www.electrovaya.com). We initiated our position in EFL during Q3 2020 and have been adding to our holding at opportune times.

Electrovaya is a pure play lithium-ion battery manufacturer that is a standout in the increasingly crowded and highly promoted cleantech sector. We have seen a wave of green economy investments come across our desks and all too often these companies are defined by lofty promises, questionable economic propositions, unproven technology, no clear competitive advantage, and frankly, limited probability of success as investment flows into the sector moderate and investors become more discerning.

EFL is growing revenues at a sector leading rate, is focused on profitability, has proven technology with deep IP, has fortune 500 clients and is on strong financial footing. Select investment highlights include:

• Anchor clients consisting of Walmart, Mondelez, and Raymond Corp (a Toyota subsidiary), with yet to be mentioned Fortune 500 clients across multiple industries;
• Proven battery economics with industry leading cycle-life, safety and power dynamics;
• Deep IP with 100+ patents covering electrode manufacturing, composites, cell design and battery management systems;
• FY2020 Revenues up +196.4% YoY and TTM Q1 FY2021 revenues up +315.4%;
• FY2020 EBITDA margin of -4.1%, with +10.4% margin in Q3 FY2020 and +11.6% in Q4 FY2020;
• An improved balance sheet with total debt of US$8.2M in Q1 FY2021 (-33.3% YoY);
• Near term growth optionality in the nascent e-bus, e-truck markets and energy storage.

The stock has taken a breather after a strong run and is forming a base as volume moderates.

Year to date softness in EFL has coincided with a sell-off in the cleantech sector after a period of significant inflows and pressure on leading green economy stocks like Tesla.

Weakness in the cleantech sector has been met with mounting concerns that it represents an investment “bubble.” While we are not in the business of calling interim tops in the market, nor are we pure momentum investors, we do share the view that there are growing signs of over exuberance in the space. We see this in the form of significant retail participation, numerous newly minted sector focused ETFs, sky-high valuations in leading names and a spate of highly dilutive financings in anything and everything “green.“

That said, given we employ a bottom-up approach when selecting core positions, we view recent weakness in the cleantech space and talk of a bubble as short term noise as it relates to our investment in Electrovaya.

Not all cleantech stocks are created equal and we note that EFL is entering an accelerated growth phase after years of development.  Electrovaya pivoted towards the rapidly growing material handling electric vehicles (MHEV) market where the Company enjoys many competitive advantages. Recent company developments have served to bolster our bullish view as it is clear to us that management continues to deliver on its objectives and we believe the stock will resume its upward trajectory once weakness in the market abates.

Electrovaya is a Standout in the Canadian Small Cap Cleantech Sector

EFL is not a “if you build it, they will come” company – it is growing rapidly after years of development and is focused on near-term profitability. This is a rarity in the cleantech space as most companies are built on promises to be fulfilled many years out or have massive capex plans ahead of them with little-to-no focus on economics.

Figure 1 is a snapshot of Canadian cleantech stocks and recent operating performance.

Figure 1: Canadian Small Cap Cleantech Companies (EV’s between $50M and $1B)

Here are some read-throughs:

1. EFL is growing revenue at 200% YoY where the majority of companies have either no revenue or negative sales growth;
2. This revenue growth is organic with minor shareholder dilution. Well followed names like GPV, PIF, XBC and VMC report positive revenue growth, however, on a diluted per share basis it is negative. Beware of highly dilutive financings and share based acquisitions that mask true performance and eat away at equity interest;
3. Electrovaya is skirting EBITDA profitability as its trailing one-year EBITDA margin is -4.1%. The Company had two quarters of positive EBITDA in fiscal 2020 and management has stated that it aims to continue that trend in the near term;
4. EFL trades at 12.3x TTM EV/Rev, compared to the group median of 16.7x. This despite sector leading revenue growth and superior underlying fundamentals (Figure 1). On a go forward basis, EFL trades at 7.0x EV/2021Revenue.

Figure 2: Canadian Small Cap Cleantech Companies, EV/TTM Sales vs. TTM Sales Growth YoY%

Recent Events Point to Continued Growth for Electrovaya

We do not believe EFL is experiencing a short-term blip in positive performance, but rather, is in an accelerated growth phase and will continue to demonstrate sector leading revenue expansion and EBITDA growth.  Our view is supported by recent company developments, including:

UL Safety Listing.  In Q4 2020, the Company secured a UL listing covering 25 models across its line of 24V and 36V forklift batteries.

This is a key milestone for EFL as a UL safety certification is a highly sought-after industry standard and difficult to obtain. In order to meet the Underwriters Laboratories’ (UL) safety standards, it takes years of engineering and development, testing and significant investment in R&D; serving to widen the Company’s competitive moat.

UL Safety certifications are a must have when companies are looking for a lithium-ion battery supplier, particularly in the US. A battery system that is UL listed can be utilized in a wide range of material handling truck models and confirms the batteries can be safely used in indoor facilities like warehouses with a high standard of safety for the operator.

We believe this new certification will bolster EFL’s competitive position and foster further adoption.  Our view is that the UL Listing is a critical element of the strategic supply agreement with Raymond (Toyota) and is a harbinger for increased revenue and positioning in the US lithium-ion battery market.

Strategic Supply Agreement with Raymond. Electrovaya announced a Strategic Supply Agreement for battery systems within Raymond’s Energy Essentials battery line in December 2020.

Under the Strategic Supply Agreement, Raymond (Toyota) will white label EFL’s batteries and sell directly to their dealer network. The agreement provides Raymond with exclusively distributed Raymond branded lithium-ion batteries that are UL 2580 Listed and compatible with most class I, II and III Raymond lift trucks. Raymond introduced its Energy Essentials line in November 2020 with a press release outlining its competitive advantages in the marketplace. The Raymond website highlights its focus on delivering smart warehouse energy products to its clients and Electrovaya’s strategic importance in that effort.

Raymond is one of the largest forklift manufacturers in the world (Figure 3) and we estimate the TAM within Raymond alone to be north of US$1B. In just under one year, EFL has grown its materials handling footprint to 48 locations from 26 and the strategic partnership with Raymond will support further growth.

Figure 3: Forklift Company Market Share, 2019

First Commercial Battery Delivery in the Electric Bus Market.  In March 2021, Electrovaya announced the commercial launch of its e-bus lithium ion battery system with the delivery of a 700V, 300kWh battery. The e-bus segment is a large and growing market. It is well suited for EFL’s existing battery technology and illustrates that the Company has the ability to enter other verticals like e-trucks.

EFL’s e-bus lithium-ion battery development was supported by Sustainable Development Technology Canada (SDTC). SDTC had signed a C$3.8M R&D contract with Electrovaya to develop safe and long-lasting lithium-ion ceramic batteries for electric buses. This support illustrates the versatility of EFL’s lithium ion batteries and is consistent with the Government of Canada’s aggressive plans to move to zero-emission buses and related infrastructure. The Federal Government has committed C$14.9B towards the effort and has indicated that it will provide additional support to various municipalities and organizations in the cause.

Electric buses and commercial vehicles operate long hours, have limited downtime, require high safety standards and need batteries that can work under fluctuating driving cycles with quick charge cycles.  The long duty cycle and power characteristics of these vehicles have similar performance and safety requirements to the MHEV market, where Electrovaya offers industry-leading lithium-ion battery technology. Furthermore, EFL has the ability to address the e-bus and e-truck markets with only minor modifications to its manufacturing process. MHEV, e-bus and e-truck batteries have the same modular construction, which can be thought of in terms of Lego building blocks. Each of these verticals, and the different sized models within them, are met with a varying number of battery blocks depending upon their energy and power requirements.

The e-bus market, and further out the e-truck segment, represent significant optionality for Electrovaya. Their proven technology in the MHEV market gives them a leg up on the competition.

Figure 4: New Electric Bus Registrations by Country, 2015-19

Figure 5: Global Sales of Medium and Heavy-Duty Electric Trucks, 2010-19

A Nasdaq Listing Should Benefit Electrovaya’s Share Price

EFL submitted an initial application to list its shares on the Nasdaq on February 23, 2021. We believe that EFL is an underfollowed name in the cleantech space and that a Nasdaq listing should enhance its profile and benefit its share price, primarily because:

• The Company should enjoy increased liquidity as cleantech companies are well followed in the US by both retail and institutional investors;
• There are no small cap, pure play lithium ion battery companies of note listed in the US, creating a scarcity value for investors looking for exposure in this area;
• The Company is an attractive candidate for sponsorship by US investment banks that have large and growing cleantech businesses and deep networks;
• EFL will benefit from potential analyst coverage which is lacking in Canada;
• Increased probability of being included in a number of cleantech focused ETFs;
• Electrovaya has potential to realize multiple expansion as it currently trades at a discount to Nasdaq listed cleantech stocks, despite having superior growth dynamics (Figure 6).

Figure 6: Nasdaq Cleantech Cos, EV/TTM Sales vs. TTM Sales/Share Growth YoY%

Summary

Electrovaya remains a core holding within Torrent’s investment portfolio.

The Company is a standout performer in the cleantech space and has a clear value proposition; its lithium-ion batteries offer superior economics in the MHEV segment when compared to combustible engines and lead acid batteries.

EFL has sector leading revenue growth, proven technology, barriers to entry, Fortune 500 clients, is approaching profitability and carries a greatly improved balance sheet. The Company is in the early stages of a period of accelerated growth and as it scales across its existing clients (i.e. Walmart), benefits from its strategic relationship with Raymond (Toyota) and expands into other battery verticals such as e-buses and e-trucks.

Despite these superior fundamentals, the stock trades at a discounted multiple in relation to other cleantech investments. We look for the stock price to trend higher once short-term weakness in the green trade abates, as EFL continues to post sector leading growth and as the Nasdaq listing brings a new set of eyes on the Electrovaya story.