Case 022Stock pitchCore
Keep a long pitch ready: Ravestra Motors, a two-wheeler maker with revenue of Rs 9,000 crore, where electric models are 8% of volumes rising to 20% and carry a gross margin 10 points below petrol. Pitch it and show what the mix shift does to margins.
1The situation
Ravestra Motors makes scooters and motorcycles. Revenue is Rs 9,000 crore. Electric models are 8% of volumes and sell for 1.5 times the price of a petrol model, but their gross margin is 20% against 30% for petrol, because batteries are expensive and volumes are still small. Management expects electric to reach 20% of volumes in four years and 26% in six.
Battery cell prices have been falling, and Ravestra's next electric platform, due in year 3, uses a cheaper cell chemistry and shares more parts with petrol models. Assume the electric margin gap narrows from 10 points to 9, 7, 4, 2 and finally zero by year 6. The market has watched the blended margin slip and values Ravestra below its petrol-only peers.
2Your task
Give the long pitch in one line, show year by year what the electric mix does to gross margin, and name what would break the thesis.
Quick check
Electric grows from 8% to 14% of volumes by year 2 while its margin gap narrows only a little. What happens to the blended gross margin?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The long pitch is that the market is pricing today's margin dilution as permanent, when the electric cost gap is closing. Blended gross margin dips from 28.8% to about 28.2% in year 2 as electric grows at a lower margin, then climbs to 30.0% by year 6 as the gap closes. The thesis breaks if the gap stays at 10 points: the margin then falls to 26.5%. The catalyst is the year 3 platform.
Step 1What is the pitch in one line?
Lead with the disagreement, not the company history. A long pitch needs a view the market does not share, a reason to believe it, and an event that will prove it. Here: the market sees a falling margin and assumes electric scooters will always earn less; you think the gap closes as battery costs fall and the new platform arrives, so the dilution is temporary. The rest of the pitch is the evidence and the numbers.
Step 2What does the mix shift do to the margin, year by year?
A tea stall that adds a lower-margin sandwich counter sees its average margin fall while the counter is small and inefficient, then rise once it gets bulk bread prices. Blended margin is a weighted average, so it falls whenever the low-margin item grows faster than its gap closes. Weight by revenue, not volume: electric models sell for 1.5 times the price, so 8% of volume is 11.5% of revenue and 20% of volume is 27.3%. In the first two years electric's share rises fast while its gap barely narrows, so the blend dips to 28.2%.
| Year | Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 |
|---|---|---|---|---|---|---|---|
| Electric share of volume | 8% | 11% | 14% | 17% | 20% | 23% | 26% |
| Electric share of revenue | 11.5% | 15.6% | 19.6% | 23.5% | 27.3% | 30.9% | 34.5% |
| Electric margin gap, points | 10 | 10 | 9 | 7 | 4 | 2 | 0 |
| Blended gross margin, base | 28.85% | 28.44% | 28.23% | 28.35% | 28.91% | 29.38% | 30.00% |
| Blended gross margin, gap stuck at 10 | 28.85% | 28.44% | 28.04% | 27.65% | 27.27% | 26.91% | 26.55% |
Step 3What would break the thesis?
The size of the dip is modest, about Rs 64 crore of gross profit in year 2 on revenue of about Rs 10,404 crore. The risk is not the dip but the gap staying open: if electric scooters remain 10 points less profitable, every year of growth pulls the margin lower, to 26.5% by year 6. That would happen if rivals and new entrants price aggressively, if incentives for electric vehicles are withdrawn and the saving has to be passed on, or if the new cells disappoint. Watch the electric gross margin disclosed each quarter, not the blended one: it is the leading indicator.
Close the pitch with the catalyst and the exit. The year 3 platform launch is the event that tests the view; if the electric margin gap has not narrowed to about 7 points by then, the thesis is wrong and the position should be cut.
Where candidates lose it
Candidates pitch electric growth as good news for margins because it is the growth engine. Growth in a lower-margin product dilutes the average until its margin catches up, and an interviewer will ask for the blended number.
The second miss is weighting the mix by volume. Electric models sell at a higher price, so their weight in revenue, and in the margin, is larger than their share of units.
What the interviewer asks next
- What electric margin gap would keep the blended margin flat as electric reaches 20%?
- How would a withdrawal of electric vehicle incentives change your pitch?
- Would you rather own Ravestra or a pure electric maker, and why?
- What is priced in at today's multiple?
Asked at Franklin Templeton, Equity Research, San Mateo, 2024 (Wall Street Oasis): know current events along with broader economic implications. Also, keep a stock pitch ready, ideally long.
Company names and figures are illustrative.