Ola on Full Charge for Its IPO Ride

The electric two-wheeler manufacturer is betting big on its proposed IPO, with nearly half the shares on offer for sale coming from founder Bhavish Aggarwal’s account. While its position as a market leader is a huge confidence booster, Aggarwal’s past failures, unfavourable reports around regulation violations and battery mishaps might dent its prospects 

In July 2021, Bhavish Aggarwal, co-founder of Ola ride-hailing services, unveiled the first Ola Electric two-wheeler. The excitement was palpable, with over one lakh pre-launch orders within 24 hours of opening bookings. But that was not it. Naysayers were already pointing to the series of failed experiments stacked up against Aggarwal’s name, while raising doubts over the prospects of his latest venture.

Cut to December 2023. Ola Electric filed the draft red herring prospectus (DRHP) for its initial public offering (IPO) with the Securities and Exchange Board of India (SEBI). If all goes well, and SEBI approves, this year the company will become the first EV manufacturer and first auto maker in 20 years to issue an IPO. 

It is no mean feat for a company to become a market leader and issue an IPO in such a short time since inception. Ola Electric has had the advantage of an early mover. It is currently the market leader in the segment. But that might not be enough to ensure success at the bourses.  

Changing Gears Swiftly 

Aggarwal is known as a maverick who loves experimenting, some of which fail quickly. For instance, Ola Cafe, the company’s food delivery business, closed a year after its 2014 launch. The company acquired online food delivery start-up Foodpanda in 2017 but closed it in 2019. In June 2022, it announced its decision to close its ecommerce platform Ola Dash and “reorient” its used cars business Ola Cars “to focus on” Ola Electric. While this reflects his resilience, willingness to adapt to dynamic market conditions and eagerness to bet on the future, it can also deter cautious investors.  

In an interview to Forbes, Aggarwal explained that he had many interests and “every interest must be explored”. Ola Electric was nothing short of an audacious move. Aggarwal proved naysayers wrong. He has numbers to show. The company was at the top of electric two-wheeler (E2W) sales in CY22, having sold more than 1.09 lakh scooters. In December 2023, it became the first manufacturer in this segment to cross the sales mark of 2.5 lakh units in a single year. Aggarwal now has his eyes set on manufacturing electric cars this year. With his IPO plans, he hopes to turbo-charge his ambitions. The Rs 7,250 crore IPO will include a fresh issue worth Rs 5,500 crore along with an offer for sale of up to 95.19 million equity shares. These include about 47.3 million shares held by Aggarwal, and the rest by other shareholders, including Softbank Vision Fund, AlphaWave, Alpine, DIG Investment, Matrix, MacRitchie Investments Pte and Internet Fund III Pte.  

Industry observers are unsurprised that Ola Electric has decided to go the public listing route because this will help it raise the capital required to entrench itself more strongly in the sector. With venture capital firms becoming more wary about signing cheques, the IPO is the next available route for fundraising. 

According to the DRHP, the company plans to use Rs 1,600 crore from the IPO funds for research and development (R&D) over the next three years, with Rs 450 crore earmarked for deployment in FY25. It will use Rs 800 crore to pay certain debts of its subsidiary Ola Electric Technologies (OET). It also plans to utilise Rs 1,226 crore for the capital expenditure of its subsidiary, Ola Cell Technologies, on expansion of the cell manufacturing capacity of Ola Gigafactory. “While market pundits can debate about how Ola Electric’s IPO will fare once the SEBI gives its nod, this underpins the fact that the company will definitely benefit from the conjunctive marketing, courtesy its ride-hailing platform,” says Treelife co-founder Garima Mitra.

Propelled by Tailwinds

The timing of Ola Electric’s IPO seems opportune when seen against the backdrop of India aggressively pursuing ways to achieve its net-zero emission target by 2070. Moreover, there has been a growing interest in E2W. By 2030, it could well account for 60% to 70% of new sales in the country, according to McKinsey & Company. Compared to the gradual uptake of EV four-wheelers, the consumer interest in E2W is driven primarily because of the potential cost savings, especially for gig workers and short-haul riders. A RedSeer report claims that the savings could range from 20% to 70% compared to petrol-powered two-wheelers.

Abhinav Kalia, CEO and co-founder of B2B EV platform ARC Electric, states that in 2021, the market witnessed 44,803 E2W sales, skyrocketing by over 500% in the subsequent year to reach 252,641 units. “The momentum continued in 2023, reflecting robust market demand, culminating in 728,054 unit sales. While the percentage growth may seem modest in the context of the overall electric vehicle market, the past few years have showcased a substantial surge in E2W adoption, signalling a shift in consumer preferences,” he says. Anticipating this momentum, it is expected that the E2W market will capture 20% to 30% share of the overall market by 2026, Kalia adds. Ola is currently the market leader. In FY23, its market share was the highest at 21%, according to the transport ministry’s Vahan data.  

The Brighter Side 

While most experts are looking at Ola Electric’s public listing with a degree of optimism, they do strike a cautionary stance based on the DRHP filing regarding the allocation of the IPO money. V.L.A. Ambala, a SEBI registered research analyst and co-founder of Stock Market Today, explains that in the past three fiscal years, the company entered into working capital financing agreements totalling Rs 1,405 crore with Bank of Baroda, Axis Bank and YES Bank. As of October 31, 2023, the outstanding payables from these agreements were approximately Rs 860 crore, with interest rates between 8.7% and 9.4%.  

By settling OET’s outstanding debts, Ola Electric can reduce the interest expenses associated with these loans. While repaying the debts involves not only clearing the principal amount but also settling any associated fees and charges, utilising Rs 800 crore from fresh proceeds represents a cash outflow for Ola Electric. From a broader perspective, the debt repayment reflects a strategic decision to enhance the company’s health and potentially improve its creditworthiness. Optimising its capital will put the start-up in a more sustainable financial position in the longer term, which can pave the way for fundraising at better valuations in the future.  

A section of experts believes that the company’s emphasis on continuous innovation positions it for a competitive advantage. “Adaptive strategies, responding to market feedback and technological advancements underscore its flexibility in navigating the uncertainties associated with R&D investments,” Kalia notes. “The strategic approach, product diversification, market anticipation, competitive advantage, long-term vision and adaptive strategies collectively contribute to a balanced investment against the risk of uncertain returns,” he adds. 

Answering Criticism 

As someone dubbed as unpredictable, Aggarwal attracts a lot of cynicism. This follows his IPO plans as well. Analysts find his decision to sell the maximum number of shares from his own holding unconventional. But then, his moves have always been audacious.  

There were media reports that Ola Electric sold around 8,200 scooters to its parent company ANI Technologies till December 2023. The missing mention of this related-party transaction in the DRHP has been raised by observers. An industry expert says anonymously that while this oversight or omission does not reflect well on the company when it comes to being transparent, it did not come as a surprise either. ANI Technologies has indicated its eagerness to launch and expand its electric bike taxi service pan-India after testing waters in Bengaluru, Delhi and Hyderabad. “If the company has a ready sales pipeline in-house where it can provide E2Ws almost at cost prices, it makes sense that it will use its own E2Ws to scale up its bike taxi fleet,” he points out.  

Ola Electric’s employee attrition rate currently stands at a whopping 47.48%, as per the DRHP. This has worried experts. The high attrition rate could indicate various factors within the company, “including the challenges of operating in a highly dynamic and competitive sector like EVs,” Ambala observes.  

Kalia feels that this figure could indicate ongoing employee churn within the company’s ecosystem as it undergoes rapid growth and diversifies into new fields. “Such expansion can create a scenario where the interests of the company and some employees might diverge, contributing to a higher attrition rate,” he explains. This explanation lends to comments about Aggarwal being a tough taskmaster who wants his team to match him in his appetite for growth.  

The instances of Ola Electric two-wheelers catching fire have raised concerns about the safety of its products. These instances have been attributed to the unsuitability of imported batteries to India’s temperatures. Optimists feel that the company’s investment in expanding the cell manufacturing capacity is an indication that it wants to tailor batteries for local conditions.  

Tackling Challenges 

Ola needs to address concerns about vehicle safety, streamline its delivery mechanism by optimising the supply chain and logistics and enhance customer communication. Prioritising rigorous quality control measures, collaborating with certification authorities and enabling efficient recall procedures can enhance its operations. Exploring opportunities for vertical integration and investing in R&D, which they have already started to do, is expected to contribute to overall improvements in its vehicles’ quality, safety, and delivery efficiency. 

Phase 2 of the Faster Adoption and Manufacturing of Heavy Vehicles (FAME), under which the Ministry of Heavy Industries (MHV) provides subsidy support to EV manufacturers, will end on March 31, 2024. Under FAME II, E2W manufacturers were eligible for subsidies covering up to 15% of their production cost. However, last year, the administration penalised and debarred a few E2W companies—including AMO Mobility, Benling Auto, Greaves Electric Mobility, Hero Electric, Lohia Auto, Okinawa Autotech and Revolt Motors—after a probe found that they had wrongly claimed subsidies under the policy’s localisation clause.  

Companies like Ola Electric, Ather Energy, Hero MotoCorp and TVS Motor reportedly billed buyers separately for chargers so that they could be eligible for the FAME scheme that offered subsidies only for E2Ws that cost less than Rs 1.5 lakh (ex-showroom cost). After getting slapped on the wrist in May 2023, Ola Electric decided to refund approximately Rs 130 crore to buyers who bought these chargers for their Ola S1 Pro E2W separately between 2019 and 2023. 

While there have been talks about the launch of FAME III, and extension of FAME II until the next plan is in place, should this go sideways, the resultant subsidy cut could impact unit sales of E2Ws as it could lead to an increase in E2W prices. This will consequently lead to a decline in consumer demand as the cost advantage of EVs over traditional vehicles narrows. For Ola Electric, which has positioned cost-effectiveness as a major selling point, this shift in government policy could present a substantial challenge to its aggressive growth trajectory. Some opine that the company may need to devise alternative strategies to sustain its market position and ensure that its vehicles remain appealing to consumers despite the increased prices resulting from subsidy reduction.

However, Vivek Kumar, principal research analyst at Powertrain Forecasting Group and S&P Global Mobility, feels that the lack of subsidies is unlikely to dent sales of Ola Electric’s vehicles. According to him, most OEMs, including Ola Electric, are aware that high levels of subsidies will not be provided again. Thus, they are laser-focused on value engineering initiatives to develop more affordable products, which can aid EV adoption over the medium term. 

“To offset the vehicle cost hike owing to reduction in subsidy, E2W OEMs including Ola Electric, Ather Energy and Tork Motor recently introduced de-spec versions of their existing electric scooters in the market. As advanced features involve more costs, this aims to ensure vehicle sales while keeping the cost in check,” he adds.  

It appears that Ola Electric’s IPO is not just a financial move; it is a pulse check on the future of EVs in India. As it buckles up for its public listing, the success of the company’s public venture could steer other E2W manufacturers into the fast lane of confidence in India’s electric potential. Asked whether she will advise her clients to buy the company’s shares, Treelife’s Mitra admits that it is a tough ask. “However, it is undeniable that if this IPO succeeds, it bodes well for all players in the EV industry as well as other companies waiting in aisles to go public this year,” she adds.  

If the creator’s passion is a parameter, Aggarwal wins hands down. Last month, less than two months after its launch, his artificial intelligence-based start-up Krutrim became India’s first AI unicorn after raising $50 million at a valuation of $1 billion. If anything, this news shows investor confidence in Aggarwal’s plans. Will Ola Electric enjoy similar confidence and make an electrifying debut at the bourses? Will the increasing interest in the electric vehicle revolution in India work in its favour? Or will ghosts from its parent company’s past come to haunt it? Only time will tell.