Decoding OLA Electric's IPO plans
Happy New Year, everyone! The final months of 2023 witnessed a whirlwind of IPOs storming the Dalal Street.
Joining the IPO lineup is the rising star, OLA Electric. With a whopping plan to raise Rs. 5500 crore through fresh equity shares, they've recently filed their DHRP with SEBI. And, naturally, we couldn't resist delving into the details.
Why the excitement??
Ola’s IPO stands out for multiple reasons. Firstly, it's astonishing to see a startup dipping its toes into the public waters just four years after its inception, a feat that typically takes companies a decade or more.?
Secondly, it's the first purely Electric Vehicle (EV) company to take the plunge into the public domain.
The intriguing part lies in witnessing how investors respond to this IPO from a cutting-edge company in the red-hot EV sector. It's a show we're eagerly waiting to watch. But for now, let's unpack its DRHP.
Ola Electric - The new age, new company
Founded in 2019, Ola Electric took its first steps, rolled out its maiden electric scooter in December 2021, and began raking in revenue from sales by the financial year ending March 2022. While it's claimed a significant chunk of India’s electric two-wheeler market, there's a catch – its operational history is relatively short.?
In 2023, the company managed to sell a modest total of just 2.65 lakh scooters.
Starting with two models in 2021, the company now boasts a portfolio of five scooter models.
Ola sells its scooters through its own cab hailing app and experience center.
Their distribution network spans across 935 experience centers, inclusive of 414 service centers, as of October 2023.
Now, lets talk a bit about the IPO. The public offering comprises a fresh issue worth INR 5,500 Cr, with reports hinting at an offer-for-sale (OFS) component of INR 1,750 Cr for 9.5 Cr shares.
As per the DRHP, the raised capital will be divvied up for various purposes:
Let's dive into what makes this IPO from Ola Electric such a standout!
First off, let's talk sales. In November 2023, Ola Electric hit a record with 30,000 units sold, grabbing a big 35% slice of the market. Since starting in December 2021, they've sold over 300,000 electric vehicles. December 2023 alone saw 9,841 e-scooters zooming off the shelves, making their FY24 total sales impressive at over 1.8 lakh vehicles. This surge made them the top dogs among Indian electric 2-wheeler makers and original equipment manufacturers (OEMs) for revenue from E2W sales in FY23.
Ola Electric's market share has not just grown; it's multiplied by five in just two years showcasing its strength? in? India's EV two-wheeler arena.
In FY23, their revenue from operations surged to an eye-popping ?2,630.93 crore from a modest ?373.42 crore the year before. Even in the quarter ending June 30, 2023, they zoomed ahead with revenue from operations reaching ?1,242.75 crore. Talk about impressive digits!
But I have two questions here: Is the EV industry still in its infancy? Absolutely!?
Can the frontrunner status change with the influx of new and seasoned automobile companies? You bet.?
Now, let's get into OLAs core strategy: Vertical Integration.
Ola Electric has repeatedly mentioned in its DRHP about building a vertically integrated EV company, which means they're taking the reins across the entire production.
Vertical integration is like handling everything from start to finish in a production chain. For instance, imagine you're in the ice cream business. Vertical integration means you're not just selling ice cream; you're also taking care of making the raw material (like milk), doing the entire ice cream-making process, and handling the selling and distribution of the ice cream yourself. It's like controlling the whole journey of your product, from its basic ingredients to reaching the customers.
Most automotive companies in India, outsource different process in the value chain like most companies in India import cells and other raw material from China, however Ola's business operations cover the full spectrum, from R&D and raw material procurement to cell manufacturing, battery pack assembly, automotive development, sales, distribution and after-sales services. This integrated approach sets them apart, especially as they gear up to build their Ola gigafactory dedicated to cell manufacturing.
They mentioned,
We are a pure EV player in India building vertically integrated technology and manufacturing capabilities for EVs and EV components. We manufacture EVs and certain core EV components at the Ola Futurefactory.?
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There are multiple advantages of Vertical Integration, first is you can enhance the quality of your product since you are also making the raw materials, second you can control the costs by producing the raw materials rather than procuring, third you are immune to supply chain disruptions.
In the world of cell manufacturing, big names like LG, Panasonic, CATL, Samsung, and others are the rulers. Reaching the level of expertise and technology they have requires intense research and development. For newcomers like Ola, surpassing these giants in innovations or quality improvements might seem really challenging, especially in areas like energy efficiency or density of cells.
Ola's entry into this arena may not aim to instantly outshine these established players. Instead, they seem to be looking at benefits like the PLI scheme (Production-Linked Incentive) and creating a safety net against disruptions in the supply chain, especially after the global battery shortages experienced during events like the COVID-19 pandemic. They're likely focusing on these advantages rather than trying to beat the big players right away.
Also, cell manufacturing may not be as lucrative as it sounds.?
Ather's CEO, Tarun Mehta, in podcast characterised cell manufacturing more as a commodity business than a technology-driven endeavor. Setting up such manufacturing units in India faces challenges due to low local demand and the hefty investments needed.?
Even substantial investments may not address the absence of significant demand. Ola is required to achieve 1GWh capacity in the first year in Fiscal 2024, 5GWh capacity in the second year, 10GWh capacity in the third year and 20GWh capacity by the fourth year. Just to give you some context, BYD, one of largest cell manufactures in world had the largest plant with a capacity of 24Gwh.?
The demand is going to be a challenge as the production estimates of Ola simply don’t add up.
Presently, Ola can churn out 1 million scooters annually, having sold around 2.5 lakh scooters in 2023. Their ambitious plan is to skyrocket production to two million by FY2024 and eventually to ten million. However, India's current EV penetration stands at 4.8%. Even with an optimistic assumption of 50% penetration by 2028, Ola's ambitious production numbers might seem slightly detached from India's market reality, where approximately just 6 million scooters are consumed annually.
He even mentioned that behemots such as LG Chem and Panasonic, even in their best days have struggled to achieve PAT in double digits and it typically hovers around 4-6% for them. Despite commanding high prices, this sector is high-tech complexities with narrow profit margins, making it a strategically significant yet financially intricate pursuit.
Estimations and Exaggerations
Redseer, commissioned by Ola for market assessment, paints an optimistic picture, projecting EV 2-wheeler penetration to hit 41-56% by FY28 from a base of 5.1% in the first half of FY24 (up from 4.5% in FY23). This projection for the next five years appears bullish. While optimism exists about EVs becoming mainstream technology, a 50% penetration within the next 5 years might seem overly ambitious.
Because, you see, the adoption of new technologies, like electric vehicles (EVs), usually takes time. Even though EVs have been around in India since 2008, Ather introducing their first model in 2018 was a noteworthy moment. But, even after about five years, the use of EVs in two-wheelers remains at only 4.8%. This shows that there's still ongoing work needed in educating consumers, developing charging infrastructure, and changing consumer habits from refueling to charging.
Expecting a 50% penetration within ten years of the EV's launch seems optimistic, considering the complexities involved in making these changes happen. It's a journey that involves educating people, building infrastructure, and shifting ingrained behaviors, which all take time to evolve.
The sales of EV two-wheelers are also dependent a lot on government subsidies, if you observe the image the sales of EV two wheelers notably dipped after the discontinuation of the FAME II subsidy by the government in June 2023. This abrupt halt significantly impacted the market dynamics, signaling the weight of government policies on the EV sector.
Quality Quandaries:
Quality concerns indeed pose a major consideration for Ola. They've faced more public reports of battery issues compared to other manufacturers. For instance, in January 2023, there were complaints about the front suspension of Ola S1 Pro, leading to a free "upgrade" offer for S1 and S1 Pro customers. Additionally, Ola identified around 1441 vehicles with potential battery faults, prompting customers to visit service centers for battery health checks.
Surprisingly, despite these issues, the market hasn't seemed to penalize Ola significantly for these quality concerns. Some media outlets have also highlighted after-sales problems with long service periods for Ola scooters.
It seems that consumers are still learning to evaluate quality in EVs, and it might take about 7 to 9 years after purchase before they truly understand how quality impacts the lifespan of these vehicles. Eventually, this understanding of quality could significantly affect future sales and brand value for Ola in the long term.
Financial Fortunes:
They faced a steep loss of INR 1,472 Cr in FY23, nearly doubling from the previous fiscal year. On the flip side, their EV sales revenue skyrocketed over sevenfold, reaching INR 2,630 Cr in FY23 from a mere INR 373.4 Cr in FY22. They nearly hit half of FY23's revenue in just the first quarter of FY24, but here's the kicker—they're drenched in over $1 billion of negative cash flow.?
The company is low of cash and hence the IPO. However, investors could be wary of the IPO since the company is burning money left right and center and has negative cash position.
Expense Expedition:
Comparing Q1 ‘24 with FY23, Ola showed some good news: better gross margins (13% from 5%), less R&D spend (down to 7% from 18%), and a trim in other expenses (21% from 29%). Even the EBITDA increased from -43% to -14%. However, reducing R&D spend might not cut it in the long run. New products on the horizon and that whole cell production gig might demand a bigger R&D investment than they're showing. And despite their fantastic belt-tightening in advertising and marketing, splashing more cash might be on the cards to keep their market mojo strong.?
Also, as per some reports, Ola Electric is eyeing a $7-$8 billion valuation post its IPO. Now, the thing is, Hero, the largest player in India's two-wheeler scene, has a whopping $9.65 billion valuation, having sold over 5 million vehicles in 2023. That's a considerable difference!
Before dismissing the comparison, here's the catch: Hero isn't primarily an electric vehicle company but holds a stake in Ather, another EV two wheeler giant in India. Ola's sold 2.5 lakh vehicles in 2023, Hero's at 5 million, 20X vehicles than Ola. However the valuation gap between them is not much. Absurd, isn’t it?