Unpacking Ather Electric's IPO plan

Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.

You can listen to the podcast on Spotify, Apple Podcasts or wherever you get your podcasts and video on YouTube.

Today on The Daily Brief:

• Ather Energy files for an IPO
• India’s diamond industry is in deep distress
• How big is the front-running problem in the Indian stock market?

Ather Energy files for an IPO

Before Ola Electric came into the picture, Ather Energy was seen as the star of the electric two-wheeler market. We're talking about this now because Ather has filed for an IPO, and there are some interesting insights about both Ather and the Indian electric two-wheeler industry.

Ather is looking to raise about ?3,100 crores through a combination of fresh shares and offers for sale. The exact price range hasn’t been announced yet, so this number is just an estimate.

Before we dive into the industry as a whole, let’s take a quick look at Ather’s numbers.

In the financial year 2024, Ather reported revenues of about ?1,700 crores but faced losses of around ?1,000 crores. The year before, the revenues were similar, but the losses were about ?860 crores. The jump in losses this year was due to an exceptional item related to a reduction in FAME subsidies. If you’re not familiar with these EV subsidies, we covered them in detail in our episode from September 6th, so feel free to check that out.

For comparison, Ola Electric reported revenues of around ?5,200 crores in FY24, with losses of ?1,580 crores. In FY23, Ola’s revenues were about ?2,600 crores, and losses were ?1,470 crores. Clearly, Ola is much bigger than Ather in terms of size.

Looking at market share, Ola holds 35%, TVS has 19%, and Ather comes in at around 12%.

When it comes to sales, in FY24, Ather sold 1.1 lakh scooters, while Ola sold 3.3 lakh scooters. That’s a pretty big difference.

Now, let’s talk about the overall two-wheeler market in India to understand the opportunities and challenges for Ather.

Around 53% of Indian households own a two-wheeler. But this number varies depending on income levels. Among the lowest-income households (earning around ?1.25 lakhs a year), 34% own a two-wheeler. As income increases, so does ownership, with about 75% of wealthier households owning two-wheelers, often luxury bikes.

In terms of vehicle sales, 73% of all vehicles sold in India are two-wheelers.

Here’s an interesting trend: Between FY2019 and FY2024, petrol two-wheeler sales declined by 4%, while electric two-wheeler sales grew by 100%. While this growth is partly due to a low starting point, it’s still impressive. In FY24, around 9.4 lakh electric two-wheelers were sold, compared to just 30,000 in 2019. That’s a huge jump. Electric two-wheelers now account for about 6-7% of the total market.

Financing is also key to boosting sales. Currently, around 50-55% of all two-wheeler sales are financed, up from 40% in 2019. This increase in financing options is crucial for the growth of both petrol and electric vehicles.

As of 2024, there were about 16,300 public charging stations in India, which are important for the widespread adoption of EVs. However, it’s unclear how many of these are for two-wheelers specifically, or if they’re all operational.

The big question for buyers is whether an electric two-wheeler is cheaper to own compared to a petrol one. According to Ather’s draft red herring prospectus (DRHP), if you assume 8,000 kilometers of annual usage, an electric two-wheeler is about 37% cheaper than a petrol bike. With subsidies, it was 52% cheaper. By 2031, they expect electric bikes to be 52% cheaper even without subsidies.

When it comes to the initial purchase price, an electric two-wheeler is about 40% more expensive than a petrol bike. However, Ather predicts this price gap will narrow over time. This makes sense as more people buy electric vehicles, leading to economies of scale and lower costs for manufacturers, which can then be passed on to consumers. Plus, EV battery technology is improving quickly, which is good news for both the planet and buyers.

Both Ola and Ather are heavily investing in production. Ather is putting in over Rs 600 crores to build a new plant in Hosur and ?2,000 crores for another plant in Maharashtra. Ola is also investing big, committing ?6,000-7,000 crores for factories in Tamil Nadu, including Hosur. It’s interesting that Tamil Nadu is becoming a hub for EV manufacturing. Even the Vietnamese EV giant Vinfast is setting up a plant there.

In terms of competition, this segment is still dominated by a few key players. Back in 2019, companies like Hero Electric and Okinawa held more than 80% of the market. But now, new players and legacy brands like TVS and Bajaj have entered the EV space. Today, Bajaj has the same market share in EVs as Ather.

India’s diamond industry is in deep distress

The Indian diamond industry is going through some tough times. Considering we recently talked about natural vs. lab-grown diamonds, this feels like important information to share.

Dinesh Navadiya, the chair of the Indian Diamond Institute, recently told CNBC that the industry is at a "breaking point." But what exactly does that mean, and what’s going on? Let me break it down:

Falling Exports and Prices

Diamond exports have dropped by about 30% compared to last year, and the prices for rough diamonds—the natural, uncut, and unpolished ones—have been falling for 18 months straight. So, what’s causing this crisis? There are a few reasons behind it:

The G7 ban on Russian diamonds

In December 2023, the G7 countries, including the US, UK, and Germany, imposed sanctions on Russian diamonds as part of their economic measures in response to Russia’s invasion of Ukraine. Now, Russia is the largest exporter of rough diamonds, bringing in about $3.5 billion. The EU and its allies want to cut off as many of Russia’s funding sources as possible to weaken its war efforts.

India used to get around 30% of its rough diamonds from Russia, which it would then export to other countries. However, as part of the sanctions, the G7 also banned Russian diamonds that have been processed in other countries, like India. They even demanded a full traceability system for diamond imports, which has added to the stress for Indian diamantaires.

The EU wanted to set up these traceability checks in Belgium, which would have significantly increased costs for Indian exporters. After some pushback, this requirement has been delayed until March 2025, but the pressure on Indian exporters is still intense.

Slumping US demand

The US is a massive market for Indian diamonds, buying more from India than any other country. But demand from the US has fallen sharply since the highs of 2021 and 2022. High interest rates in the US have changed how people spend, even though overall consumer spending remains strong.

Another factor hurting natural diamond sales in the US is the growing popularity of lab-grown diamonds, especially in segments like bridal jewelry. In fact, 50% of engagement rings sold in 2024 were synthetic diamonds, which has taken a bite out of natural diamond sales—bad news for India, which relies heavily on US demand.

Source: De Beers

China’s economic slowdown

China is a major player in the luxury goods market, making up about 25% of global luxury spending. But lately, China’s economy has slowed down, with weak consumer demand and a real estate slump dragging down growth.

China is known for its high savings rate, and after the strict COVID lockdowns, Chinese consumers have become even more cautious. Unlike other countries that offered financial relief during the pandemic, China didn’t. This has led to a mindset of saving more as a safety net, which means people are spending less.

There’s evidence that Chinese consumers are paying off their mortgages and consumer debt instead of splurging on luxury goods, like diamonds. As a result, China’s diamond imports dropped by nearly 30% in FY 2022-23, hitting India hard since China is one of our biggest markets.

The rise of lab-grown diamonds

Lab-grown diamonds have become more popular, especially among younger, budget-conscious consumers who are also focused on sustainability. While lab-grown diamonds still make up a small part of the market, their appeal is growing, and they’re seen as a more affordable, ethical alternative to natural diamonds.

One big shift is the widening price gap between natural and lab-grown diamonds. Although it’s hard to get exact figures, this growing price difference is adding more pressure to the natural diamond industry.

The current situation

The combination of falling demand from China and the US, the Russian diamond sanctions, and high inventories of unsold diamonds have pushed Indian exporters to the brink. Many of these businesses rely on debt, and the interest burden is piling up as sales remain low.

Things have gotten so bad that some industry bodies are calling for a temporary freeze on imports until the inventory clears. Wage cuts of up to 50% have hit workers in the diamond industry, and many factories in Surat—the heart of India’s diamond industry—are now only running two days a week.

One big shift is the widening price gap between natural and lab-grown diamonds. Although it’s hard to get exact figures, this growing price difference is adding more pressure to the natural diamond industry.

The current situation

The combination of falling demand from China and the US, the Russian diamond sanctions, and high inventories of unsold diamonds have pushed Indian exporters to the brink. Many of these businesses rely on debt, and the interest burden is piling up as sales remain low.

Things have gotten so bad that some industry bodies are calling for a temporary freeze on imports until the inventory clears. Wage cuts of up to 50% have hit workers in the diamond industry, and many factories in Surat—the heart of India’s diamond industry—are now only running two days a week.

How big is the front-running problem in the Indian stock market?

Recently, the Enforcement Directorate (ED) registered a case under the Foreign Exchange Management Act (FEMA) against Viresh Joshi, the former dealer at Axis Mutual Fund. The ED is now conducting searches at locations linked to Joshi in connection with a forex violation case. If you recall, Joshi was also caught by SEBI in a front-running investigation involving Axis Mutual Fund.

But first, let's break down what front-running actually means. Front-running is an illegal practice where someone uses insider knowledge of a large upcoming trade to make personal trades for profit. In the case of mutual funds, it often involves a fund manager or dealer buying or selling stocks just before their fund makes a large trade, profiting from the price changes that follow.

The Axis Mutual Fund case is a prime example of how damaging front-running can be. SEBI’s investigation found that Viresh Joshi, along with others, had allegedly been front-running Axis MF’s trades for months. They used a network of accounts to make trades based on non-public information about the fund’s upcoming large orders, reportedly generating over ?30 crores in illicit profits.

But the damage goes beyond just the money. It shakes investor trust in mutual funds, which are supposed to be managed by professionals acting in the best interests of their clients. When fund employees exploit their positions for personal gain, it undermines the entire system.

And this isn’t an isolated incident. Just last week, the Wall Street Journal reported on a whistleblower complaint alleging that Bank of America’s Asia division engaged in similar practices. The report claimed that bankers in BofA’s Mumbai office shared non-public information with investors before the bank sold hundreds of millions of dollars worth of stock. This allegedly allowed some investors to "front-run" these large trades.

The WSJ highlighted two specific transactions where this may have happened. One involved a $200 million stock sale for a subsidiary of Indian conglomerate Aditya Birla and financial firm Sun Life. The other was a roughly $500 million IPO for SoftBank-backed retailer FirstCry. If proven true, these allegations represent a serious breach of market integrity.

Unfortunately, this is part of a growing trend. Over the past few years, several major players in India’s financial markets have faced front-running allegations. In 2022, the Life Insurance Corporation of India (LIC) came under scrutiny when SEBI issued an order against five entities involved in a front-running scheme related to LIC’s trades. SEBI found that these entities had made ?2.44 crore in profits through their activities.

More recently, Quant Mutual Fund has also come under investigation, with SEBI conducting search and seizure operations at its offices in Mumbai and Hyderabad. SEBI’s own data confirms the growing scale of the problem. According to SEBI's latest annual report, insider trading investigations more than doubled from 85 in 2022-23 to 175 in 2023-24. Even more alarming, front-running cases shot up from 24 to 83 in the same period—a staggering 245% increase.

The growing number of cases has pushed SEBI to take action. The regulator has proposed expanding the list of "connected persons" in its insider trading regulations, broadening the scope of who can be held accountable for violations.

In a consultation paper released in July, SEBI proposed widening the net of individuals considered "connected persons." The proposed changes would include more family members, business associates, and individuals with close financial ties to those already classified as connected persons. This is aimed at capturing people who might have access to insider information through their relationships, even if they don’t have a direct connection to the company.

SEBI’s proposal also seeks to align the definition of "relative" with the broader one used in the Income Tax Act, potentially bringing more family members under scrutiny. The goal is to close loopholes and make it harder for insider information to be misused.

However, this proposal hasn’t come without criticism. Sandeep Parekh, a well-known securities lawyer, has expressed concerns that the expanded definition could criminalize innocent people. In an article, Parekh warned that these changes might result in "100% false positives and 100% false negatives"—meaning innocent individuals could be implicated while actual wrongdoers might still slip through the cracks.

Parekh’s concerns highlight the tricky balance regulators need to strike. On one hand, it’s crucial to crack down on front-running and other forms of market abuse. But on the other hand, overly broad regulations could have unintended consequences and stifle legitimate market activity.

As these cases unfold, they serve as a reminder of the challenges facing India’s financial markets as they continue to expand. In response to these issues, the Association of Mutual Funds in India (AMFI) has recently introduced new standards to prevent front-running and market abuse at asset management companies.

AMFI’s new framework includes stricter surveillance measures, improved alert systems, and tighter controls on the personal transactions of key employees. These standards will be rolled out in phases, starting with large equity funds in November 2024, and gradually covering all types of funds by August 2025.

The goal of these measures is to build a more robust system for detecting and preventing market abuse, ultimately protecting investors and maintaining the integrity of the market. While these steps are encouraging, their success will depend on how well fund houses implement them and the ongoing oversight from regulators.

Thank you for reading. Do share this with your friends and make them as smart as you are ??If you have any feedback, do let us know in the comments.

This post was first published on Substack.