Ola Electric IPO: A Milestone in India's EV Revolution / You should invest or avoid, Detail Analysis

India’s stock market has been abuzz with a flurry of IPOs in 2024. With nearly 40 main board IPOs and 143 SME IPOs this year, the primary market is enjoying its most robust first half in 17 years. The market’s vibrancy is fueled by strong liquidity, favorable valuations, and an upbeat macroeconomic outlook.

This year stands out for the quantum of funds raised, marking the second-best performance ever, trailing only behind 2022. That year, 16 firms collectively raised Rs 403.1 billion, spearheaded by the landmark IPO of Life Insurance Corporation of India (LIC).

In the upcoming week, investors can look forward to an influx of opportunities with nearly eight IPOs lined up for subscription. Among these, the eagerly anticipated Ola Electric IPO is set to make its debut on Dalal Street.

Key Details of the Ola Electric IPO

• Issue Period: August 2, 2024, to August 6, 2024

• Type of Issue: Book Built Issue

• Price Band: Rs 72-76 per share

• Face Value: Rs 10 per equity share

• Lot Size: 195 shares

• Application Limit: Maximum of 13 lots for retail investors, translating to a minimum application amount of Rs 14,820 for one lot (161 shares)

• Tentative IPO Allotment Date: August 7, 2024

• Tentative Listing Date: August 9, 2024

The IPO will comprise a fresh issuance of shares worth Rs 55 billion and an offer-for-sale (OFS) of Rs 6.5 billion. SEBI granted its approval for the IPO last month, making this the first IPO by an EV startup in India and one of the most significant new-age IPOs in 2024.

The book-running lead managers for the IPO are Kotak, Citi, BofA Securities, Goldman Sachs, Axis, I-Sec, SBICAP, and BOBCAPS.

Utilization of Net Proceeds

Ola Electric plans to use Rs 12.3 billion of the net proceeds to expand its battery cell manufacturing facility, Ola Gigafactory, from 5 GWh to 6.4 GWh, aiming to achieve this capacity by the end of April 2025. Additionally, Rs 8 billion will go towards repaying loans taken by its subsidiary, Ola Electric Technologies, and Rs 16 billion will be invested in research and product development.

Business Dynamics

Ola Electric holds a dominant position in India’s electric scooter market, often capturing over a third of the market share. Competing against major players like Ather Energy, Bajaj Auto, and TVS Motors, Ola Electric had a 39% market share in the electric two-wheeler market as of July 27, 2024. This is a decrease from its 46% share in June and a significant drop from 58% in May. As competitors increase their market share, the competition is expected to intensify, especially with Ather Energy’s new model targeting the family scooter segment.

To enhance profitability, Ola Electric is undergoing internal restructuring, which has resulted in the layoff of approximately 600-800 employees.

Financial Overview

Ola Electric’s revenue has seen impressive growth over the past three years. From Rs 0.5 billion in FY22, its revenue soared to Rs 52.4 billion in FY24, driven by a surge in e-scooter sales. Despite the significant revenue growth, the company’s losses have widened, with a net loss increasing from Rs 7.8 billion to Rs 15.8 billion in FY24 due to rising expenses.

For FY24, Ola Electric’s total expenses rose to Rs 62.7 billion from Rs 38.8 billion in FY23, primarily due to increased costs of materials consumed in scooter production and other expenses aligned with sales growth.

Financial Snapshot (2022-24)

Revenues:

• 31-Mar-22: Rs 4.6 billion

• 31-Mar-23: Rs 27.8 billion

• 31-Mar-24: Rs 52.4 billion

Ola Electric has shown significant revenue growth over the past three years. Starting from Rs 4.6 billion in FY22, the company’s revenue soared to Rs 27.8 billion in FY23, and further to Rs 52.4 billion in FY24. This demonstrates a strong upward trajectory, driven largely by a surge in e-scooter sales.

Revenue Growth:

• 31-Mar-22: N/A

• 31-Mar-23: 460%

• 31-Mar-24: 85.7%

The revenue growth percentage reflects the rapid expansion of Ola Electric. From FY22 to FY23, the company experienced a staggering 460% growth. Although the growth rate moderated to 85.7% in FY24, it remains highly impressive.

Net Profit:

• 31-Mar-22: Rs -7.8 billion

• 31-Mar-23: Rs -14.7 billion

• 31-Mar-24: Rs -15.8 billion

Despite the revenue growth, Ola Electric has faced increasing net losses. The net loss widened from Rs 7.8 billion in FY22 to Rs 14.7 billion in FY23, and further to Rs 15.8 billion in FY24. This increase in losses is attributed to rising expenses as the company scales its operations.

Net Worth:

• 31-Mar-22: Rs 36.6 billion

• 31-Mar-23: Rs 23.6 billion

• 31-Mar-24: Rs 20.2 billion

Ola Electric’s net worth has declined over the years, from Rs 36.6 billion in FY22 to Rs 23.6 billion in FY23, and further to Rs 20.2 billion in FY24. The reduction in net worth reflects the cumulative impact of ongoing losses on the company’s financial position.

Ola’s employee costs, including salaries, bonuses, and other related expenses, rose by 3% to Rs 4.4 billion in FY24.

Valuation Adjustment

Ola Electric is expected to launch its public offering at a valuation of around USD 4 billion, a reduction of approximately 25% from its last private funding round. This adjustment is attributed to current market conditions, with a global tech industry slowdown prompting investors to seek profitability from startups.

Despite this lower valuation potentially impacting fundraising capabilities and investor confidence, it presents opportunities for strategic repositioning and a renewed focus on profitability.

Industry Comparison

According to the company’s prospectus, Ola Electric’s industry peers include:

Ola Electric:

• Revenue from Operations for FY23: Rs 26.3 billion

• EPS (Basic): Rs -3.9

TVS Motors:

• Revenue from Operations for FY23: Rs 319.7 billion

• EPS (Basic): Rs 27.9

Eicher Motors:

• Revenue from Operations for FY23: Rs 144.4 billion

• EPS (Basic): Rs 106.4

Bajaj Auto:

• Revenue from Operations for FY23: Rs 364.6 billion

• EPS (Basic): Rs 212.5

Hero MotoCorp:

• Revenue from Operations for FY23: Rs 341.6 billion

• EPS (Basic): Rs 140.5

Most peers are primarily internal combustion engine (ICE) manufacturers. Ola Electric’s EPS is negative at Rs -3.9, highlighting its current challenge in achieving profitability. Despite cash burn, the company has improved its free cash flow loss margin to -31% in FY24 and moved from net cash positive in FY22 to net debt in FY24.

In Conclusion, The Indian electric vehicle (EV) sector is witnessing significant momentum, bolstered by the FAME II scheme and anticipated FAME III rollout. The government has increased the budget allocation for the production-linked incentive (PLI) scheme to Rs 35 billion for FY25 and raised the allocation for advanced chemistry cells (ACC) and battery storage to Rs 2.5 billion for 2024-25.

State governments are also incentivizing the adoption of electric vehicles to reduce pollution and vehicular emissions. With the Indian EV market heating up, electric scooters are leading the charge.

Before making investment decisions, thorough research is crucial to ensure alignment with financial objectives and risk tolerance levels.