Ola Electric IPO 2024: Analysis

Ola Electric is a pure electric vehicle (EV) player in India building vertically integrated technology and manufacturing capabilities for EVs and EV components including cells. They manufacture EVs and certain core EV components like battery packs, motors, and vehicle frames at the Ola Future factory. Their business focuses on capturing the opportunity arising from the electrification of vehicles in India and also seeks to export their EVs to select international markets in the future. The EV sector being a sunrise industry has the potential for exponential growth.

Group

The Company was incorporated as ‘Ola Electric Mobility Private Limited’ at Bengaluru, Karnataka on February 3, 2017. The company was promoted by Bhavish Aggarwal. Currently, the Promoter holds 1,361,875,240 Equity Shares in the company representing 36.94% of the issued.

Market Presence and Products

Market Share in 2W EV: 49%
Total Units Sold: 506,817 (Ola S1, Ola S1 Pro, Ola S1 Air, and Ola S1 X+ from inception through March 31, 2024)
Product Announcements: Seven products since August 2021. Announced a line-up of motorcycles (Diamondhead, Adventure, Roadster, and Cruiser) on August 15, 2023 with deliveries expected in the first half of Fiscal 2026.
Upcoming Launch: Event on August 15, 2024.

Distribution Network

Ola Electric operates a direct-to-customer (D2C) omnichannel distribution network across India comprising:

• Experience Centres: 870
• Service Centres: 431 (429 located within experience centres)

Achievements

Became the best-selling E2W brand in India within 9 months of delivering their first EV scooter in December 2021 based on monthly E2W registrations on the VAHAN Portal of the Ministry of Road Transport and Highways (VAHAN).

R&D and Manufacturing

R&D Locations: India, the United Kingdom (UK), and the United States (US) focused on designing and developing new EV products and core EV components.
EV Hub: In the process of building an EV hub in Krishnagiri and Dharmapuri districts in Tamil Nadu, India which includes the Ola Futurefactory, upcoming Ola Gigafactory, and co-located suppliers.
Battery Innovation Centre (BIC): Located in Bengaluru, India focused on developing cell and battery technology and manufacturing processes for forthcoming cell manufacturing at the Ola Gigafactory.

Fresh Issue of Equity Shares

Aggregate Amount: Up to Rs. 5500 Cr
Purpose: The funds from the fresh issue will primarily be used for capital expansion and research and development initiatives.

Offer for Sale

Equity Shares: Up to 84,941,997 Leads up to ?646 Crore
Purpose: The offer for sale will provide an exit opportunity for existing shareholders and enhance liquidity in the stock market.

Issue Details

Date: August 2 - August 6, 2024
Total Issue Size: Rs. 6112 – 6146 Cr
Price Band: Rs. 72 - 76 per share
Post Issue Implied Market Cap: Rs. 32048 – 33522 Cr

Objects of the Issue

Promoter History

Bhavish Aggarwal

Founder, Chairman, Managing Director, and Promoter: Bhavish Aggarwal is the driving force behind Ola Electric and ANI Technologies Pvt Ltd (Ola Cabs).

Foundation and Growth: Founded Ola Cabs in 2010 at the age of 25. Known for his expertise in rapidly scaling and expanding businesses.

Role: Currently serves as Chairman and Managing Director of Ola Electrical.

Achievements and Challenges

Innovative and Visionary: Bhavish is recognized for his innovative approach and vision across various Tech Businesses
Scaling Businesses: Demonstrated ability to scale businesses quickly as seen with the rapid growth of Ola Cabs and Ola Electric.
Financial Performance and Issues:
Profitability Concerns: Despite his strengths, Bhavish has struggled to convert businesses from loss-making to profitable ventures. This is evident across multiple subsidiaries:

• Ola Money: Revenue of Rs. 85.5 Cr and a loss of Rs. 54.6 Cr in FY23.
• Ola Fleet Technologies: Revenue of Rs. 189.9 Cr and a loss of Rs. 387.6 Cr in FY23.
• Ola Foods: Acquired Foodpanda India at a valuation of Rs. 1200 Cr. The food delivery service under Pisces Eservices Pvt Ltd had a revenue of Rs. 1.28 Cr and a loss of Rs. 106 Cr.
• Ola Store Technologies: Revenue of Rs. 22.4 Cr and losses of around Rs. 81.15 Cr.

Management Style

Diversification and Focus: Bhavish is known for his eagerness to explore new business opportunities. However, this has led to challenges as he often enters new ventures quickly without ensuring existing businesses achieve profitability. This pattern indicates a tendency to become bored too fast leading to a lack of sustained focus on individual ventures.

In conclusion, while Bhavish Aggarwal is a smart and visionary leader with a proven track record of scaling businesses, his ventures have consistently struggled with profitability. His inclination to diversify rapidly may be contributing to these financial challenges.

Rationale For Subscribing to the Following Sector / EV Play

Increase in EV Penetration

Rapid Adoption: The penetration of electric two-wheelers (E2Ws) in India has grown significantly, increasing over 6x between FY 2021 and FY 2022 and over 2x between FY 2022 and FY 2023 reaching a penetration level of ~4.5%
Market Reach: E2Ws are not only popular in metro cities but have also penetrated non-metro areas like Kolhapur (23%) and Surat (15%).

Low Cost of Ownership

Cost Savings: E2Ws offer a 45% lower total cost of ownership (TCO) compared to internal combustion engine (ICE) vehicles mainly due to significantly lower fuel costs (roughly 1/10th of ICE) and reduced maintenance expenses.
Stable Energy Prices: Unlike the fluctuating prices of petrol and diesel, electricity prices in India are stable and generally lower than inflation due to surplus power generation capacity (417 GW compared to peak demand of 221 GW in FY 2023).

Reduction in Battery Pack Costs

Significant Decline: Battery pack prices have decreased by approximately 88% from US$ 1183/kWh in CY 2010 to US$ 139/kWh in CY 2023 driven by cheaper raw materials, innovations in cell chemistry, and increased energy density.
Future Projections: A further 43% reduction in global battery pack prices is expected over the next 7-8 years.

Easing Access to Electric Fuel

Convenience: Unlike ICE vehicles that require refueling at stations, E2Ws can be charged at home reducing energy loss, refueling costs, and offering greater convenience. A single charge provides a range of 70-115 km which is ample for daily use.

Scale Expansion by E2W OEMs

Democratized Market: The E2W market is more open compared to the traditional ICE 2W market with easier product assembly, availability of off-the-shelf components, and regulatory support encouraging new entrants.
Rapid Diversification: E2W OEMs can scale faster and develop new models more easily than traditional ICE OEMs thanks to the modular nature of EV components like batteries and motors.

Serving a Variety of Use-Cases

Broad Appeal: E2Ws are becoming popular across industries for last-mile and hyperlocal deliveries (e.g., food and grocery delivery, couriers, at-home services) and ride-hailing services due to their better economics and lower carbon footprint.
Customized Products: E2W OEMs are designing specific products for B2B use cases featuring greater carrying space and longer range per charge.

Service Network

Low Maintenance: E2Ws have fewer moving parts compared to ICE vehicles resulting in lower servicing needs.
Organized After-Sales Service: Given the technological depth of E2Ws, the after-sale service market is expected to remain largely organized and controlled by OEMs with dedicated servicing fleets being developed.

Software Enablement

Next-Generation Features: Stronger software integration in EVs allows for advanced features like connected vehicles, enhanced safety systems, vehicle-to-user communication, and improved infotainment systems enhancing the overall driving experience.

Low Emissions

Environmental Impact: EVs have zero tailpipe emissions and generally lower greenhouse gas (GHG) emissions over their lifetime compared to ICE vehicles. Even when accounting for the electricity used for charging, EVs have a smaller carbon footprint.
Sustainable Energy: 40% of India's installed electricity capacity comes from non-fossil fuel sources with ongoing efforts to increase sustainability in power generation.

Production-linked Incentive (PLI) Scheme

Government Support: The PLI scheme worth Rs. 1200 billion aims to boost the economy and promote self-reliance in the auto, semiconductor, and advanced chemical battery sectors providing a favourable environment for the growth of EVs.

Competitive Strengths:

Pure EV Player with Market Leadership

Leadership Position: Largest E2W seller in India for Fiscal 2024 with 35% of total E2W registrations.
Focused on EVs: Exclusive focus on EVs leveraging growth in the Indian 2W market.

In-House R&D and Technology Capabilities

R&D Focus: Centered on five key technologies: software, electronics, motor and drivetrain, cells and battery packs, and manufacturing technology.

Manufacturing at Scale and Supply Chain Resilience

High Capacity: Ola Future factory has an installed capacity of 1 million units per year.
Automation: Automated facility with modular flexible assembly lines and in-house paint shop.
Cost Efficiency: Achieves economies of scale through scalable manufacturing processes.

Scalable Platform-Based Design and Development Approach

Platform-Focused Development: Enables leveraging common elements across multiple models.
Efficiency: 86.60% of components in three EV scooter models are common enhancing scalability and cost efficiency.

Direct-to-Customer Omnichannel Distribution Model

Integrated Sales and Service: Digital-driven integrated model provides cost advantages.
Customer Engagement: Direct engagement with customers and feedback integration.
Inventory Management: Low inventory levels at experience centers with central distribution management.

Eligibility for EV-Related Government Incentives

PLI Schemes: Only EV manufacturer in India benefiting from two Government PLI schemes (Automobile PLI and Cell PLI).
Incentives: Qualifies for cash incentives for advanced chemistry cells and EV scooters.
Leading Beneficiary: Awarded the highest capacity (20 GWh) under the Cell PLI Scheme among beneficiaries.

Execution Capabilities

Rapid Construction: Built the Ola Futurefactory in just 8 months.
Expansive Network: Expanded from 1 experience center in September 2022 to 870 centers by March 31, 2024.
Workforce Growth: Increased employee count from 665 in March 2021 to 7369 in March 2024 showcasing significant scaling capabilities.

Threats and Challenges

Regulatory Challenges

Policy Shifts: Potential changes in government policies including taxation, subsidies, foreign direct investment regulations, EV battery disposal, and labor laws could introduce regulatory hurdles.
PLI Scheme Dependence: Discontinuation or inability to claim government incentives under the PLI Schemes may reduce competitiveness due to higher product pricing impacting business profitability and financial performance.

Intensified Competition

Market Dynamics: The EV market is becoming increasingly competitive with substantial investments and rapid technological advancements by new and existing players.

Alternate Fuel Vehicles

Emerging Technologies: The development and adoption of alternate fuel vehicles could pose a threat to the market share of electric vehicles.

Financial Challenges

Losses and Negative Cash Flows: The company has incurred losses and negative cash flows from operations since inception.
Limited Operating History: With a short operating history, there is no assurance of achieving cost-effectiveness and profitability.
Sustainability of Profitability: Despite substantial subsidies in the EV segment, Ola Electric continues to incur significant losses. Questions arise about the company's ability to turn profitable once these subsidies end, raising doubts about its long-term financial viability.

Employee Attrition

High Attrition Rate: The company experienced an employee attrition rate of 44.25% in Fiscal 2024 and 47.48% in Fiscal 2023 indicating potential challenges in retaining talent.

Warranty and Battery Lifecycle

Warranty Uncertainty: Having commenced EV scooter deliveries only in December 2021, the company is yet to complete a full warranty cycle leading to limited data on future warranty-related expenses.
Battery Deterioration: The full lifecycle and deterioration rate of the batteries are yet to be ascertained creating uncertainty in maintenance and replacement costs.

Operational Negligence

Resource Utilization: Rapid expansion has led to suboptimal utilization of experience centres and the gigafactory resulting in resource wastage and inefficiencies.

Fundamentals

Three Key Pillars of the Business Model

Research and development (“R&D”) and technology is at the core of their business model with a focus on in-house product innovation. They undertake R&D activities in India, the United Kingdom (“UK”), and the United States (“US”) focused on designing and developing new EV products and core EV components such as battery packs, motors, and vehicle frames.

Revenue Streams

• Two-Wheeler EV Sales: Primary Revenue: The main revenue stream for Ola Electric comes from the sale of two-wheeler electric vehicles (EVs).
• Installation of Wall Mount Chargers: Service Fees: Generates additional revenue by installing wall mount chargers and charging a service fee for this installation.
• Vehicle Registration Assistance: Third-Party Service Fees: Assists customers with vehicle registrations through a third-party service provider passing through the service fees paid by the customer to the service provider.

Valuation

Ola Electric is currently valued at 6.7x FY24 P/S at the upper price band based on post-issue capital. This valuation is derived from an estimated market capitalization of Rs. 33522 Crore and projected FY24 revenue of Rs. 5398 Crore. Given the company's rapid revenue growth at a CAGR of 266% over FY22-24, the high P/S ratio reflects investor expectations for continued expansion. However, this valuation appears somewhat high considering the associated risk factors including regulatory challenges, intensified competition, and the company’s current lack of profitability. It is important to note that since Ola Electric is not yet profitable at the EBITDA or PAT level, traditional valuation metrics such as P/E and EV/EBITDA multiples cannot be applied effectively.

Comparative Analysis

Conclusion

Ola Electric has positioned itself as a leader in the Indian electric two-wheeler market leveraging its pure EV focus, extensive R&D capabilities, and large-scale manufacturing to capture significant market share. Despite their rapid growth and market dominance, the company faces substantial challenges including regulatory risks, intense competition, financial sustainability, and operational inefficiencies. Their revenue streams and government incentives provide some cushion but the long-term profitability and resilience of Ola Electric will depend on their ability to navigate these challenges, optimize operations, and sustain innovation in the evolving EV landscape.