8 reasons why Ola Electric IPO does not deserve your money

Startup IPOs in India have an irresistible charm. History shows investors do not hesitate to pile in. Throw in a hot theme like EV or AI, and voila, everyone wants a piece of the deal. The latest noise-maker on Dalal Street is the Ola Electric IPO. Part of the reason for the buzz is, perhaps, the enticing pricing of the issue which, word has it, had to be tempered from the company's prior expectations. And yet, the magnitude of the IPO begs the question: will this be another fool's gold like the rest of the new-age club, especially when you consider young Ola's nascent growth stage and the unprofitable run?

The business model doesn't make it even through a basic eye test. Which is why you may want to rethink riding with Ola Electric. Here are eight reasons why:

Also read: Ola Electric IPO

1. It's a cash-burning machine

Running unprofitable operations in the name of growing their market share is a standard practice among new-age tech companies and Ola Electric is no exception. It is yet to turn profitable at the operating level. But what's more worrying is its rapid cash burn rate. The company recorded a cumulative operating cash outflow of Rs 3,025 crore between FY22 and FY24, which is almost 55 per cent of the money it is raising from the IPO (fresh issue). This casts serious doubts over the business' sustainability.

2. External funds are a necessary evil

Another trait shared by budding startups is their dependence on external sources for capital. These sources are generally the venture capitalists (VCs) that finance the ambitious ideas of young startups at their early stages. However, VCs seal their profits by taking the exit route in the IPO as the business matures, often leaving new investors vulnerable. Ola Electric's VC investors are taking the same route. Moreover, post its debut, the company may struggle to raise funds as easily done in the past from private investors. It has also had to raise debt frequently to finance its working capital requirements. The company's debt-to-equity ratio was 1.3 times as of March 2024. Given the dismal cash position, the company will likely stay dependent on raising capital from outside.

3. EV remains an unproven business

Despite a flurry of new product launches and government subsidies to promote EV adoption, the technology and its market is still fledgling. The industry requires extensive R&D and EV battery packs mean aggressive expenses. The technology is new as alternatives to lithium batteries are still in the works. The charging infrastructure remains severely underdeveloped in an already energy-deprived country like India. Hence, scaling up this business may prove to be an uphill task for a cash-starved company like Ola Electric.

4. All eggs in the EV basket

Ola Electric is a purely EV-focused company that does not manufacture fuel-using internal combustion engine (ICE) vehicles like its competitors. Even the incumbent Indian automakers have not made it profitable in their sidekick EV businesses, simply because the technology and its market are immature and small. There's no question about how a pure EV company can swing to profits then. That said, ICE companies have decades of profitable track records in the Indian auto market. This exposes Ola Electric to severe product diversification risks, as even a small disruption in the EV technology or the market can deal a major blow to its already bleak financials.

5. The government crutch support

Ola Electric is a tiny player in a tiny (by which we mean underdeveloped) EV market. Not just the company, but the entire industry requires great assistance from the government for investments. The government provides financial incentives to the industry on their incremental EV sales (over the stipulated base year) under the automobile PLI scheme. Even customers get up to 15 per cent subsidy on buying electric two-wheelers, along with lower GST rates. Despite the benefits, the industry has barely taken flight and any reduction in government support can further disrupt the fragile market.

6. Dependence on China

In FY24, Ola's imported supplies from China made up 36 per cent of its cost of material consumed. This reliance is a key threat as China controls almost 80 per cent of the world's lithium supply. While last year's 70 per cent crash in lithium prices due to Chinese oversupply benefited the company, the supply concentration makes lithium prices prone to high volatility. This naturally affects Ola's cost structure. Even its plans for its cell-manufacturing gigafactory hugely depend on the supply from China.

7. Underdeveloped distribution

Two-wheeler incumbents tout sprawling distribution networks. Hero MotoCorp has more than 9,000 retail touch points, while TVS Motor has over 4,500. Now, compare this with Ola's small network of just 870 experience centres. That too, operated on the COCO (company owned company operated) model, which necessitates high capital requirements. This is why the company will utilise around Rs 300 crore from the IPO's net proceeds to pay the rentals for the existing centres and to expand its network. To get anywhere close to the large players, Ola would require more heavy investments, which means continued fundraise.

8. Threat from large incumbents

The share of disruptors or car makers that entered the electric two-wheeler market has declined from 93 per cent in FY22 to 67 per cent in FY24. Who ate their pie? The two-wheeler giants. And this was not surprising given the large resources these companies have. Ola's fresh issue of Rs 5,500 crore is nearly as much as the free cash flows generated by the likes of Hero Moto and Bajaj Auto. These companies have a much greater appetite than Ola to keep stomaching their losses in the electric two-wheeler segments without worrying about running out of cash. This strength will challenge Ola's current market leadership going forward.

In sum, Ola Electric is a cash-guzzling new-age firm with an unproven business model. While the IPO may receive a strong reception from investors, its long-term growth prospects are shrouded in uncertainties. Even if you are an investor attempting to ride the EV wave, there are wiser options out there.

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