Ola Electric IPO

The Ola Electric IPO will open for subscription on August 2, 2024 and close on August 6, 2024. Here's a breakdown of India's largest e-scooter manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Ola Electric IPO in a nutshell

• Quality : Ola Electric has remained loss-making both at the net and operating level, with consistent cash outflows since its inception in 2017.
  
• Growth : While the company's revenue grew 266 per cent annually between FY22 and FY24 on the back of higher adoption of electric vehicles (EVs), its cumulative loss after tax was Rs 3,841 crore between FY22-24.
  
• Valuation : Post the IPO, the company will trade at a P/B ratio of 4.5 times.
  
• Overview : The government's EV push will benefit the company, given its market-leading position. Consumer preference is also steadily tilting towards EVs given they provide significant fuel cost savings. This will keep the demand upbeat going forward, further benefiting the company. However, its expansion plans necessitate rapid cash spending, which may continue its loss-making streak.

About Ola Electric

Ola Electric Mobility is India's largest electric two-wheeler (E2W) manufacturer by number of registered units, which accounted for nearly 35 per cent of the total registrations in FY24. Ola also manufactures core EV components like battery packs, motors and vehicle frames. It has a portfolio of seven EV scooters and is planning to launch four electric motorcycle models by Q2 FY26.

Ola Electric's strengths

• Market leadership: The company commands leadership in the E2W segment with a 35 per cent market share in FY24, as compared to 6 per cent in FY22.
  
• Focus on backward integration: The company currently sources cells, which are used in battery packs and form a significant part of an EV's cost, from third-party suppliers. To reduce its reliance on external suppliers and have better control over the supply chain and costs, it is focussing on backward integration by building a gigafactory for cell manufacturing.

Ola Electric's weaknesses

• High competition: The company operates in a highly competitive environment. Other auto giants operating in the E2W market like Bajaj Auto , Hero MotoCorp , and TVS Motor pose a significant threat given they have ample capital to commit towards their EV businesses aggressively with an already established distribution network.
  
• Cash generation: The company has high capital requirements to fund its expansion plans and R&D but it has not generated any cash flows since inception.

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Risk report

Ola Electric and its business

• Was the company's earnings before tax more than Rs 50 crore in the last 12 months?
  No. It reported a loss before tax of Rs 1,584 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. The increasing need for affordable personal mobility makes the prospects for two-wheeler growth positive, especially in congested areas like India. Moreover, the initial price difference between ICE (internal combustion engines) and electric 2W vehicles has narrowed down significantly in the last few years owing to a reduction in battery prices.
  This, coupled with increasing awareness towards a safe environment and government subsidies to incentivise buying EVs, will help the company scale up its operations.
  
• Does the company have recognisable brands with client stickiness?
  Yes. The company has a strong brand recall in the E2W market. Ola e-scooters accounted for 35 per cent of India's total E2W registrations in FY24.
  
• Does the company have a credible moat?
  No. It operates in a highly competitive environment.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoters' stake will be 36.8 per cent post the IPO.
  
• Do the top three managers have more than 15 years of combined leadership at Ola Electric?
  No. The company was incorporated in 2017.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Ola Electric free of promoters pledging its shares?
  Yes. It is free of promoters pledging its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. The company has incurred losses at both the net and operating levels in the last three financial years.
  
• Was the company's operating cash flow positive during the last three years?
  No. It reported negative cash flows from operations between FY22 and FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio stood at 0.5 times as of FY24.
  
• Is Ola Electric free from reliance on huge working capital for day-to-day affairs?
  No. It operates in a capital-intensive industry and has a history of raising short-term debt frequently to meet its working capital requirements.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The company has not generated positive cash flows from operations in the last three financial years. About 58 per cent of the IPO proceeds are aimed to be utilised towards capex, R&D, and organic growth initiatives, but it will still likely need to raise more capital to fund its expansion.
  
• Is Ola Electric free from meaningful contingent liabilities?
  Yes. The company doesn't have any contingent liabilities as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The company is loss-making at the operating earnings level.
  
• Is the stock's price-to-earnings ratio less than its peers' median level?
  No. The company has a negative price-to-earnings ratio as it is loss-making. Its peers trade at a median P/E of 34 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a price-to-book ratio of 4.5 times compared to its peers' average level of 10.1 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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