Will lower incentives play spoilsport for Ola Electric’s IPO?

Highlights

• Ola is set to raise Rs 5,500 crore via IPO and Rs 1,750 crore via OFS


• Ola has a 33 percent share of the e2W market


• Competition is far behind in market share, but incumbents are cash rich


• Ola sales rose seven-fold from FY2022 to FY2023


• However, reduction in FAME II subsidies may see e2W sales stutter


• This may dampen earnings expansion impacting IPO sentiment

There is no debating Ola Electric’s prized position in India’s electrification efforts in personal mobility. From being the largest home-grown, purely electric two-wheeler (e2W) maker, start-up entrepreneur Bhavish Aggarwal’s Ola Electric is the first EV maker to file its Draft Red Herring Prospectus (DRHP) for an initial public offering (IPO).

In a mega issue in 2024, the e2W maker will tap equity markets to raise Rs 5,500 crore through the IPO and another Rs 1,750 crore through an offer for sales by existing shareholders.

Indeed, there might be as much hype during the IPO as there was in the run up to the electric scooter’s challenging launch and rather frustrating wait for customers that got Ola Electric considerable flak in the market. But if fiscal FY2023’s sales trajectory is to be considered a measure of success, then Ola has crossed multitude hurdles to be a clear winner now. The DRHP cites a seven-fold jump in Ola Electric’s revenue in FY2023 from FY2022 on the back of 1.52 lakh scooters sold.

Besides, the company now holds the pole position in electric two-wheelers (e2Ws) as it bites off a 33 percent market share in the segment. The gap between Ola and the Number two TVS Motor (21 percent) is still significant, followed by Bajaj Auto and Ather Energy at 13 percent and 10 percent.

The operating loss, alone, is unlikely to deter investors as start-ups are typically known to take calculated risks. The hope is that as the firm clocks more sales volumes, operating leverage will help mitigate the losses. In this context, the growth potential is huge given that the EV penetration is barely 5-7 percent in the two-wheeler market.

The question is how soon would the sales ramp up? To be sure, adjusting for purchasing power parity, the difference in price between EV and traditional vehicles is much lower in two-wheelers compared to four-wheelers. Hence, along with the FAME II (Faster Adoption and Manufacturing of Electric Vehicles) incentives, two-wheelers may see a quicker transition from traditional to EVs or, even hybrids. Increase in government incentives also helped in ramping up e2W sales.

And early entrant in EVs Ola Electric is banking precisely on this. The electrification journey in personal mobility may hit a hard road bump soon, as FAME II incentives have been reduced by the government since June. Per the DRHP, e2Ws have seen an accelerated adoption journey in India over the last two years.

But recent months have not been celebratory for EV sales in general. Registrations were lower in Q2 FY2024 than the previous quarter due to reduction in FAME subsidy, effective from June 2023. With vehicles increasing prices too, sales may stutter further. Further, competition from incumbents may rise in future as most of them have got their act together after crossing initial hurdles.

Besides, incumbents such as TVS, Bajaj, Hero are cash rich too and can invest in market expansion and research and development. These companies have also proved themselves in the traditional technology on product development and even localisation of components, when needed. Their strong brand equity both in India and in some global markets may give newbies such as Ola and Ather a run for their money.

Any drop in sales momentum is likely to impact earnings. Industry analysts hint at downward revision in earnings estimates of Ola for the coming year, which in turn may make investors cautious about participating in the IPO. Analysts says the estimated valuation (based on enterprise value of the business) is higher than what it was a few months earlier when the company had raised equity and debt funding. It is also reckoned to be several notches higher than profitable and listed auto companies.

Write to Vatsala.Kamat@nw18.com with your views on EVs and Ola Electric's aim to list on the bourse.