Analysis of Ola Electric’s DRHP

I am extremely excited to see an IPO filing by an EV company; not in the least because I have a small part of my net worth dependent on the success of such IPOs. Moreover, thanks to the sky-high prices of travel and vacation during this holiday season, I figured spending my time going through a ~500-page prospectus and analyzing it would be far more interesting. And cheaper.

As of writing this article, Ola hasn’t yet announced the offer price of its shares, so the final valuation is still unknown. Different media outlets have quoted the likely valuation to be somewhere between ~$6.5-8B. The last fundraise for Ola Electric was at ~$5B. But the exact number doesn’t matter. Early in my career, I had my fair share of participation in the circus called ‘coming up with a valuation’ and since then, I get panic attacks whenever I hear the word DCF. The intent behind this article is not to comment on the valuation, or worse, give investment advice. Rather, I share my opinions on the prospectus’ assumptions on the market and the business.

With the disclaimers out of the way, let’s get started. Ola Electric is seeking ~$700M. It reported a revenue of Rs. 2,630 Cr in FY23 and Rs. 1,243 Cr in the first quarter of FY24. It had a net loss of Rs. 1,472 Cr in FY23 and of Rs. 267 Cr in the first quarter of FY24.

Market size and potential

The first thing that caught my eye was the market projection. As per Redseer’s projection (who was commissioned by Ola for market assessment), the EV 2-wheeler penetration is expected to be 41-56% by FY28, from the 5.1% penetration in the first half of FY24 (and up from 4.5% in FY23). I think this is a very bullish projection for the next 5 years. While I am long on EVs becoming mainstream and dominant tech, I think 50% penetration in the next 5 years is too aggressive. New technology takes time for reaching this level of adoption. Even though EVs have existed in India since 2008, I would consider the launch of Ather’s first model- 450- in late 2018 as the moment when an EV model was launched which had PMF. It has been ~5 years since then. A technology like this, which has a lot of consumer education yet to be done, ecosystem (charging solutions, etc) yet to be evolved and demands some behavior change from the consumers (charging instead of re-fueling), achieving 50% penetration within 10 years of launch is very bullish. While the y-o-y numbers at this early stage tend to mask more than they reveal, a m-o-m trend signals a slower adoption curve. Instead, I would bet on a penetration of ~25-30% by 2028.

Here is the monthly penetration trend from EVreporter.com .

The prospectus makes the following statement:

“As per these estimates, E2Ws (1% in 2022 to ~50% penetration in 2028-2029) are expected to see faster adoption than other disruptive technologies like smartphones (1% to 50% penetration in 11-12 years) and laptops (1% to 50% penetration in 17-18 years).”

My view is that EV’s adoption curve is going to be a tad slower than smartphones primarily because (1) unlike smartphones, EVs require more investment in the education about the segment, (2) there is a bigger behavior change required of users to adopt this technology (I can’t recall any kind of anxiety that was prevalent for shifting from feature phones to smartphones but range anxiety is real), (3) charging infrastructure is still limited (both ability to set up charging at home and public infrastructure) and while growing, it will take time.

Having said that, 25-30% by 2028 is very realistic and still makes a great story for EV growth.

The regulatory question

There is indeed no doubt that the favorable policy and govt incentives played an immense role in accelerating the adoption of EV 2Ws. Till June ‘23, the top selling EV models of Ola, Ather, TVS, etc were able to claim ~Rs. 45-50K per vehicle in subsidies. However, the government doesn’t have infinite money and the subsidies expectedly came down from June ‘23 to ~Rs. 15-20K per vehicle. The slow down on growth since the last 6 months can be attributed to the price increases (of ~Rs. 15-20K) for EVs across the board. While OEMs are getting better with their margins and can survive the post subsidy world, the impact of removing subsidies is not negligible. My view is that FAME subsidy on 2Ws can further reduce or end within the next 12-18 months.

The second significant regulatory incentive is the PLI scheme that offers ~Rs. 15-20K per vehicle to the OEMs. Unlike FAME, I believe PLI will stay longer.

Overall, I believe the government policies will remain favorable to the EV industry though the FAME subsidy may be reduced or eliminated in the near future.

The technology leverage

In an earlier article , I mentioned that Indian public (and to some extent, private) markets haven’t fully reflected or accounted for technology capabilities of OEMs when valuing them. Ola (and Ather) are perhaps the only vertically integrated companies with in-house R&D teams that have built their own battery pack and BMS, powertrain and software stack. Effectively, these companies are tech-led rather than distribution-led. I strongly believe that these capabilities developed in-house give a significant edge to these companies than the OEMs relying on tier-1 suppliers.

For example, a superior battery pack, BMS and powertrain can contribute to better battery efficiency and higher battery life (up to 20% more). The differences in battery quality will start showing in the next few years as more vehicles cross the 5Y/ 60-70K kms mark. Companies that can promise higher battery life will win.

Similarly, I predicted in my previous article that software can unlock ~10-20% additional revenue in the long run and the markets are yet to reflect this.

Overall, I believe the business model of being vertically integrated and having strong in-house R&D capabilities gives a significant premium to these companies and here I would agree with the prospectus that it doesn’t make a lot of sense to directly compare with the existing OEMs that are dominated by ICE sales and a very different business model.

The quality concerns

One major factor that I would consider for Ola is the quality concerns. Ola has had more publicly reported cases of battery issues than any other OEM. As per their prospectus, they had identified a batch of ~1441 vehicles with potentially faulty batteries and asked the customers to visit the service centers to get their battery health checked. While they claim that none were replaced, I am honestly surprised that the market hasn’t punished these quality issues more.

There is also the question of battery life. Given that most of their vehicles are 1-2 years old and even the oldest vehicles are ~3 years old, it is difficult to ascertain at this point how good their battery packs are. A superior BMS can contribute to increased battery life and we don’t have much information yet on how Ola’s vehicles fare in terms of the battery life.

A few media outlets had also covered the after-sales woes of Ola scooters with long service periods. Around a year ago, there were also reports of issues with their front suspension which were redesigned for future batches.

My guess is that the market is yet to get to a point to start discerning quality in EVs and it will take a cycle of 7-9 years (lifetime post purchase) before the consumers start learning nuances and impact of quality on the life of the vehicles. This will eventually impact future sales. In the long term, quality will have a significant impact on the brand value.

The D2C model

Ola probably stands out as the only major EV company with company owned distribution. They also have a unique advantage of being able to leverage the Ola Cabs app and platform to drive traffic to Ola Electric website. Overall, with an effective use of affiliate platforms, company owned distribution and digital marketing, they have been able to get to a lower CAC.

However, it will be interesting to see if they will continue to operate in this model or take the dealership route in future.

The question of Ola Gigafactory

There is significant coverage in the report on Ola’s cell manufacturing plans. On the back of this, they have also become eligible for the Cell PLI scheme. I am a bit skeptical of this given the commitments Ola has given to qualify for the scheme while they have just started building the plant. As per the prospectus, they have only received project costing for setting up the plant and have no definitive contracts with many vendors.

It is unclear how much of the valuation they have attributed to this business, but I would prefer to not place a huge value on it yet.

Globally, cell manufacturing is dominated by the likes of LG, Panasonic, CATL, Samsung, etc. I would believe that it takes years of R&D to get to the level of optimization required for cell manufacturing that these companies have. I would also presume that it is going to be hard to beat these companies in cell chemistry innovation or quality to get superior energy efficiency or density. My guess is that Ola’s benefit for entering this business is less on gaining any superior performance and more along (1) benefit of PLI scheme, (2) reduced supply chain risk (covid and other global shocks had disrupted battery supply chain). Having said that, this is not an area I am familiar with and would love to know views from the experts on this.

The financial performance

On the whole, their financial performance appears to be trending in the right direction along all the key metrics for Q1 ‘24 when compared to FY23:

• Gross margins improved to 13% from 5% in FY23
• R&D expenses came down to 7% from 18%
• Other expenses came down to 21% from 29%
• EBITDA improved to -14% from -43%

Contrary to the popular sentiment against Ola being loss-making, I would fret less over the fact that they are loss making and look deeper into their future plans and cash outlays to see if the valuation is justified. I believe that as long as gross margins are healthy and we can see that they are likely to improve with time, the more interesting part is the next level of detail. 

First is on their R&D spend. While their R&D came down from 18% to 7%, I believe they will need more R&D investments than what they have projected to invest from the IPO proceeds over the next few years to be able to get the growth they expect. This is on account of launching in the motorbike segment (which should be a completely new platform from the S1 series) and the R&D required for the cell production.

They have also brought down advertising and marketing spend from 11% in FY22 to 2% in FY23 to 1% in Q1 FY24. I believe they will have to invest more in marketing for the same reasons they have to invest more in R&D as I mentioned above. Having said that, it is still impressive for the low CAC that they have been able to achieve, yet maintain market share leadership in the EV 2W segment.

I look forward to how this pans out and wish Ola Electric a very successful IPO!