Ola Electric DRHP: Dependence On Govt Subsidies Stands Out Among The Key Risk Factors

After consolidating its position as a key electric two-wheeler manufacturer in India over the last year or so, Bhavish Aggarwal-led electric mobility startup Ola Electric took a step towards public listing by filing its draft red herring prospectus (DRHP) last month. The startup is looking to raise over INR 7,000 Cr through a combination of fresh issue of shares and offer for sale (OFS).

However, a closer look at its DRHP filed with SEBI shows that any significant changes in government policies may deal a major blow to its business. 

Ola Electric is currently heavily dependent on government subsidies received under the FAME-II scheme and the automobile PLI scheme, which incentivises its domestic manufacturing and sales. For instance, the official website of the Ministry of Heavy Industries (MHI) shows that currently all of Ola Electric’s vehicle models are subsidised under the FAME-II scheme, with the incentive amount varying between INR 18,305 and INR 59,550.

The incentives enable a reduction in the cost of customer acquisition to a great extent while boosting the sales of eligible OEMs.

In its DRHP, the startup highlighted the dependence on subsidies as a key risk. 

“Any reduction, elimination, or discriminatory application of government subsidies and economic incentives because of policy changes, or the reduced need for such subsidies and incentives due to the perceived success of the EV or other reasons, may result in the diminished competitiveness of the alternative fuel and EV industry generally or our EVs in particular,” the DRHP said.

It must be noted that a number of speculations are being made around the FAME-II policy. While the demand incentive is expected to end on March 31, 2024, there are expectations that the policy could be extended till FY25. 

On the other hand, there are also speculations that the government may come out with a revamped FAME-III scheme. 

The FAME-II scheme has witnessed a number of controversies over the last couple of years. The MHI also put an embargo on some of the manufacturers from listing their sales on the official National Automotive Board (NAB) portal, following the controversies around the misappropriation of the subsidies. Many original equipment manufacturers have also been penalised by the ministry. 

The MHI also cut incentives under the FAME-II scheme to 15% of the ex-factory price of a two-wheeler EV from 40% earlier and slashed the demand incentive to INR 10,000/kWh from INR 15,000/kWh previously. This led to many two-wheeler OEMs, including Ola Electric, raising their vehicle prices.

As per a Reuters report last month, Ola Electric slashed its sales goals for 2023-2025 by more than half and delayed its target of achieving profits by a year following the government’s decision to reduce incentives that led to a hike in its e-scooter prices.

“If current tax incentives are not available in the future, our business, prospects, financial condition, results of operations, and cash flows could be harmed. Our EV sales are also impacted by any future changes in government policies pertaining to tariffs on imported passenger EVs and cells,” Ola Electric’s DRHP said.

This is despite the fact that early last year, the startup’s founder and CEO Aggarwal told multiple Indian publications that the company was almost ready for a no-incentive, no-subsidy scenario.

On the other hand, Ola Electric will also manufacture cells under the government’s Advanced Chemistry Cell (ACC) PLI scheme.

“Under the Cell PLI Scheme, we are required to manufacture cells as per the committed capacity specified in our bid. Accordingly, we are required to achieve 1 GWh capacity in the first year in Fiscal 2024, 5 GWh capacity in the second year, 10 GWh capacity in the third year and 20 GWh capacity by the fourth year. If we fail to achieve the agreed upon capacity each year, the Government of India has the right to deduct twice the shortfall in the committed capacity from the total subsidy payable to us,” said Ola Electric.

Besides, the startup said in its DRHP that if the EV energy consumption standards become significantly stricter, it might have to incur significant costs to obtain advanced energy technology to upgrade its EVs or design new EVs, which could “materially and adversely” affect its business, financial condition, results of operations and prospects.

Other Risk Factors 

Ola Electric also noted that it might continue to incur operating losses in the near term as it invests in the business and expands its product portfolio, builds capacity, and scales operations. The company reported a net loss of INR 268 Cr in Q1 FY24. It reported a net loss of INR 1,471.6 Cr in FY23, which was an 88% jump year-on-year. The company had negative cash flows to the tune of nearly INR 885 Cr in FY22.

Besides, Ola Electric continues to face complaints from customers about its after-sales service and various safety-related issues on social media platforms.

“As a new entrant in the EV industry, we have a limited operating history in manufacturing, testing, delivering, and servicing our EVs. While any EVs that we deliver must meet the relevant EV standards prescribed by the Automotive Research Association of India (ARAI) and the Automotive Industry Standards as amended from time to time, these testing and approval protocols may not succeed in identifying and addressing all latent, potential and other defects,” Ola Electric said in the DRHP.

It also said that the company cannot assure that it will be able to detect and fix any defects in the EVs on a timely basis, or at all. 

“While we provide our suppliers with the design specifications of certain of our EV components such as the body panels and frames of our scooters and in some instances, necessary tools to manufacture our EV components, we cannot guarantee that the quality of the EV components manufactured by them will be consistent and maintained as per our design specifications and will be consistent across multiple suppliers,” it added. 

Despite the above-mentioned risk factors, some of which have been there for quite some time now and made multiple headlines, Ola Electric continues to rule the electric two-wheeler market in India. 

As per today’s (January 10) data on the Vahan portal, Ola Electric’s total vehicle registration surged 144% year-on-year to 2.67 Lakh units in 2023.