Pricing the IPO was never going to be an easy exercise for Ola Electric (Ola), the first pure-play electric vehicle (EV) manufacturer attempting to list on the bourses. For one, with bulls continuing to rule the roost, it is a market where one can make hay when the sun shines, especially in themes such as EVs, which have a long runway.

But the fact is that Ola is today a young company heavily in the investment phase, is burning cash and is loss making (EBITDA negative). Important to note that it can continue to be so in the near-to-medium term as it invests in its mammoth Gigafactory and in R&D, as well as in expanding its network of charging stations and experience centers.

For the record, a division of the listed Greaves Cotton - Greaves Electric (Ampere)- which makes electric two- and three-wheelers, is also loss making at the operating level.

It is a very small player though, with about 12 per cent of the revenues of Ola. However, playing tough competition are listed ICE (internal combustion engine) vehicle behemoths - Bajaj Auto and TVS Motors - who are low on debt and high on cash and can with ease, gain further traction in the EV space as the market matures.

While Ola is the market leader today with a 34 per share in e-two-wheeler (e2w) sales, these legacy players are rapidly gaining share in an expanding market.

That said, if Ola Electric’s bet pays off, it could well become a vertically integrated manufacturer of e2w with additional revenue streams ranging from the sale of cells manufactured in its Gigafactory to tie-ups for the use of its charging stations over the long-term.

The valuation reflects the long-term opportunities. At the price brand of ₹72 – 76, Enterprise Value to FY24 Revenue (EV/Revenue) works out to about 5.8 times on a post-issue basis.

This is on par with Bajaj Auto, while being at a premium to TVS Motors (3.7 times). For an international perspective, Tesla’s EV/Revenue stands at 7.2 times. One thing to note here is that while EV/Revenue multiple is comparable, the peers are all profitable while Ola Electric is not.

With the government focusing on EV penetration as a route to reduce emissions, the theme holds promise. But the path to profitability for Ola Electric is not without high risks. Vagaries in EV policies impacting sales, could be one. Inability to meet milestones under PLI schemes, for which it is eligible for incentives, is another.

Of the ₹6145 crore being raised in total, ₹5500 crore is a fresh issue to fund upping capacity at its cell Gigafactory, repay debt, invest in R&D as well as in organic growth initiatives. 

The remaining is an offer for sale from promoter Bhavish Aggarwal, promoter group Indus Trust and other investors. The IPO is not a complete panacea to its long-term capital requirements and the company could continue to require infusion of funds or borrowing over the next few years, to execute its plans.

Being the early stages that the company is in, with a wide range of possible outcomes, investors can wait and watch and need not rush to subscribe to the IPO.

Business

By now it is well established that the total cost of ownership of e2ws is much lower compared to ICE vehicles and thanks to this, the market for e2ws is rapidly expanding in India. Data from JMK research shows that a little over 10 lakh e2ws were registered in India in FY2024, indicating a penetration of 5.6 per cent.

As per the Redseer estimates in in the prospectus, India is at an inflection point in e2w sales and by FY28, the penetration is expected to reach as high as 41-56 per cent.

Starting with premium segment (>₹1 lakh) scooters S1Pro and Air, Ola now has a portfolio of four S1 X / X+ variants in the mass market.  As of FY24, the S1 Pro brings in about 60 per cent of the revenues. While the e2w market is dominated by scooters currently, Ola is also working on bringing out four premium motorcycles in a bid to capture early opportunities in this space.

For sale of its scooters, Ola has been a beneficiary of the FAME II subsidies (until March 31, 2024) and now, the EMPS subsides, available until September 30, 2024. All of Ola’ s vehicles are eligible for EMPS subsidies capped at Rs 10,000 or 15 per cent of the ex- factory price, whichever is lower. Ola has also qualified for both the automotive as well as the advanced chemistry cell (ACC) battery storage PLI schemes.  

Under the automotive PLI, entities are eligible for an incentive of 13-18 per cent of the ‘determined’ sales value for five years beginning FY24, provided they meet investment, sales and domestic value addition (DVA) criteria.

The company has received the DVA PLI eligibility certificate for S1Air as well as the S1 Pro towards the end of FY24, amounting to a subsidy accrual of ₹97.2 crore for the fiscal. Of the 20GWh awarded under the ACC PLI, 1.4GWh has been completed now, with cell manufacturing commencing in March 2024.

Ola is eligible for cash incentives for five years from the date of commissioning 5 GWh capacity, expected to be touched in February 2025. The company plans to achieve a capacity of 6.4 GWh by April 2025, for which it is raising ₹1228 crore through the IPO.

Batteries account for one-third of the cost of the vehicle and the company currently imports lithium-ion cells predominantly from China. In-house manufacturing reduces costs and ensures certainty of supply.

To exclusively focus on cell technology manufacturing, a Battery Innovation Centre has been set up in Bengaluru. Besides, there is also a constant need for innovation in areas such as vehicle design and engineering, software governing the EVs, electronics, battery packs and management systems, etc., making in-house R&D crucial. \

Ola has about 950 employees in R&D across India, the UK and US through wholly owned subsidiaries and has 379 registered/ pending patents in India and globally. About ₹1600 crore from the fresh issue is directed towards furthering R&D expenses till fiscal 2027.  R&D spends constituted 7.7 per cent of revenues in FY24.

What to watch out for

While revenues have scaled from ₹373 crore in FY22 to ₹5010 crore in FY24, losses have widened to ₹1584 crore now. However, gross margins have come into the positive zone and negative EBITDA margins have narrowed to -19.8 per cent. The debt-to-equity ratio is currently at 1.18 times and repayment of ₹800 crore from the IPO proceeds can ease the burden as of now.  

With the government looking to move from a demand-based subsidy to a production-linked incentive regime, there is uncertainty over continuity of subsidy benefits in the form of lower retail prices especially for e2Ws, beyond September when the EMPS ends. ‘

It is not certain if FAME III will include e2Ws. For perspective, when FAME II subsidies for e2Ws were scaled back from 40 per cent of the cost to 15 per cent of ex-factory price beginning June 2023, prices increased by ₹22784 – ₹37106 for Ola’s products and the company saw a sharp fall in orders for some time.

Much for Ola depends on its ability to scale both in EV (capacity utilisation at 49 per cent now) as well as in cell manufacturing at the planned pace. Though it has made an early start, reaping cost benefits from its initiatives and becoming profitable even as it faces tough competition, is key.

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