Ola Electric’s Billion-Dollar EV Ride: Is Sales Boom Enough To Ease IPO Pricing, Valuation Fears

With Ola Cabs still moving slowly towards profitability, all the focus of founder and CEO Bhavish Aggarwal has been on Ola Electric. And now the stage is also set for a landmark event for the relatively new player in India’s automobile industry — the first initial public offering (IPO) by an Indian pure-play electric vehicle (EV) company, and the first auto stock debut in two decades 

Ola Electric accelerated its ambitions by filing its Draft Red Herring Prospectus (DRHP) with plans to raise a staggering $1 Bn through its upcoming pre-IPO placements and IPO in 2024. 

But the road ahead is far from smooth. Having sold over 3.5 Lakh electric two-wheelers (according to Vahan) and boasting an omnichannel network, Ola Electric also faces many questions about its overdependence on government subsidies, rich valuation, and uncertainty around future product launches, including its ambitious foray into car manufacturing.

Will the public markets be swayed by Ola’s dazzling growth story and aggressive infrastructure rollout, or will this IPO sputter, leaving investors stranded at the charging station?

In this article, Inc42 navigates the electrifying twists and turns of Ola Electric’s IPO, talking to analysts who dissect the company’s potential, valuation hurdles, and market sentiment. 

Buckle up, as analysts claim, it’s going to be a bumpy ride ahead for Ola Electric. 

Ola Electric’s $1 Bn IPO Dreams

In many ways, Ola Electric’s IPO can be viewed as a validation of the potential of India’s EV market and a catalyst for further growth, investment and transformation within the sector.

Speaking with Inc42, Tushar Kansal, founder of Kansaltancy Ventures said that the company has the opportunity to set the pace in the EV game. “By going public and attracting significant funding, the company has the opportunity to accelerate its expansion, product development, and market penetration, while also setting benchmarks, standards, and expectations for industry stakeholders, competitors, and market participants,” Kansal added.

Ola Electric plans to raise funds through its upcoming IPO by issuing fresh shares valued at INR 5,500 Cr. Additionally, it will offer up to 95 Mn existing equity shares for sale (OFS). The company aims to generate an additional INR 1,100 Cr through pre-IPO placement offers.

According to reports, the targeted amount from the OFS is INR 1,750 Cr, bringing the total IPO size to INR 7,250 Cr. When considering the pre-IPO placement offers of INR 1,100 Cr, the overall amount reaches INR 8,350 Cr, equivalent to $1 Bn.

Out of the total outstanding shares before IPO are 1.95 Bn + 1.73 Bn (CCCS Conversion) i.e. 3.68 Bn. Out of this, 95 Mn equity shares will be offered for sale. 

Founder and promoter Aggarwal will divest up to 47 Mn shares, half of the entire OFS, but this still represents a modest 3.4% of his full holdings.  

Other investors diluting their shares will see even smaller percentages, ranging from 2.3% to 2.94%.

The Price Will Be The Key

According to their DRHP, Ola Electric’s business model is founded on three key scalable platforms  

• R&D and technology platform with in-house design and development across EV technologies and components 
• Adaptable manufacturing and supply chain platform 
• D2C omnichannel distribution platform

To maintain its dominant position and further penetrate the market, Ola Electric has outlined ambitious plans:

• Constructing the largest ‘future factory’ with an annual production capacity of 1 Mn cars and 10 Mn two-wheelers
• Establishing the largest battery cell manufacturing facility with a capacity of 100 Gigawatt hours (GWh)
• An R&D Innovation Centre in Bengaluru
• Teasing scooters, motorcycles, and cars with impressive on-paper specifications — a range of 500 Km per charge, the ability to charge up to 80% in 1 hour, or acceleration from 0-100 Kmph in 5 seconds
• Expanding its network of retail experience centres across the country, aiming to reach 1,000 by August 2023

This would put Ola Electric far ahead of any other Indian automobile or EV OEM and hence, the company claims to have an edge over others despite being a late entrant in the game.

However, as most of these plans are still largely on paper, the question is at what price band will Ola take for its public issue. This will be critical in attracting high subscriptions from retail investors. 

Ola Electric was valued at $5.4 Bn in October 2023 when the company raised $385 Mn in debt and equities from SBI and Temasek. The company has so far raised over $1.5 Bn from a slew of marquee investors.

On the valuation side, though, analysts differ from investors. While three analysts estimated the value to hit $7 Bn – $7.5 Bn after the IPO, two of the analysts suggested it would be around $6 Bn – $7 Bn. The scenario will become clearer once the company goes for pre-IPO placements.

However, the analysts we spoke with predicted the IPO to be favourably subscribed if launched timely. 

Umesh Chandra Paliwal, cofounder of UnlistedZone, said that the Ola Electric IPO is expected to see a valuation of around $6 Bn-$7 Bn. Given the favourable market conditions for IPOs in 2024, fundraising at such valuations seems feasible. He expects the company’s bankers to price the IPO at around INR 130-INR 150 to attract large subscription bids.  

But Is The Price Right?

Having said this, many analysts contend that even at $7 Bn, Ola would still be overvalued. 

Ola Electric’s financials show sales of approximately INR 2,600 Cr in FY23. At a valuation of $6 Bn to $7 Bn, the company is heading towards an IPO with a market cap:revenue ratio of 18x to 21x. 

“In contrast, industry peers like Bajaj and TVS are trading at ratios of 5x and 3x, respectively. A comparison with Ather, even if valued at about $1.3 Bn (around INR 10,000 crore) with sales of INR 1,800 Cr in FY23, shows Ather at a 5x Mcap/Sales ratio,” Paliwal added. 

Sales data from SIAM for electric vehicles for FY22 and FY23 indicate that Ola Electric’s sales volume is growing, but competitors like TVS, Bajaj, and Ather are also closing the gap every month. 

For instance, TVS Motors sold 82,109 electric two-wheelers in FY23 compared to Ola Electric’s 1.52 Lakh. In FY24 so far TVS has sold over 1.26 Lakh electric two-wheelers, capturing 20% of the market as opposed to 11% last year. Similarly, Bajaj, which is set to launch a revamped EV Chetak, has seen its market share grow from 5% in FY23 to 10% in FY24. Hero MotorCorp’s VIDA is expected to gain more market share in the upcoming years.

In short, Ola Electric is no longer competing with E2W startups but with established players like TVS, Bajaj and Hero Motor Corp.  Unlike Ola Electric, TVS, Bajaj and Hero MotorCorp have not only a deeper supply chain network but have many more service centres as well. For instance TVS Motor has over 4500+ authorised service centres across 3800 cities in India. Similarly, Bajaj has over 2700 service centres across the country while Ola currently has only 400+ service centres in India.

Additionally, there has been a notable number of service and quality-related complaints about Ola electric scooters on social media platforms. Considering these factors and the stagnant growth in the EV market amid reduced FAME II incentive in the first nine months of FY24, Ola Electric’s valuation may seem overstretched, Paliwal added.

In its DRHP, Ola has presented other automobile makers like Bajaj, TVS, and Hero for financial comparisons. Some analysts believe that being a native EV company is a significant advantage for Ola Electric.

Hero MotoCorp, an established player in the two-wheeler market since January 1984, holds a valuation of $10 Bn. In terms of sales volume, Hero significantly outperformed Ola Electric, selling 34 times more bikes (across categories) in FY23. 

However, making a direct comparison between these two companies might not be entirely accurate given the distinct nature and growth potential of the electric vehicle sector.

Kansal also drew a parallel with the global scenario, Tesla’s valuation surpasses that of major automakers like Toyota, Ford, and Volkswagen, despite producing fewer vehicles. This underscores the significance of considering long-term growth prospects, innovation, and market potential in assessing valuation.

Tesla’s valuation range of $700 Bn – $1.2 Tn as compared to Toyota, which is the second largest automaker at $293 Bn shows how much premium can be attached to EVs. 

The jury is out on whether Tesla throws up a precedent for Ola Electric to hold an outsized premium as compared to Bajaj and Hero. But India is different from the US with regards to the USD vs INR liquidity as well as the risk-taking capacity of investors. Will investors have the patience needed for Ola Electric to break even and enter the black? 

“Considering its relatively young age, Ola Electric’s valuation reflects its leadership position and growth potential within the EV market, it appears overpriced when compared to other OEMs like Ather Energy and seems a little early given the sales number,” said Kansal.

Ola Electric Vs Ather Energy

 Hero’s investment in Ather Energy indicates the interest of legacy players in the electric vehicle segment and its growth potential. 

Ather Energy’s financial performance reveals significant revenue growth, albeit with widening losses. Ola Electric also reported an operating loss in FY23, despite leading the market with a substantial sales volume in August.

Ola Electric is currently selling 2.7X more E2Ws than Ather Energy. Also, unlike Ola, which has been working on multiple fundamentals of EVs, including cell technology, Gigafactory and so on, Ather simply does not have the bandwidth to work on these fronts. 

Ather also does not have the capital that Ola raised in 2023 and the omnichannel sales approach. However, Ather could be the closest to Ola Electric in terms of the native EV DNA and as such is the nearest threat. 

And now Ola Electric is going for an IPO at close to a $7 Bn valuation, while Ather Energy is reported to be privately valued at $800 Mn. 

Considering that both companies operate in the same category and have comparable sales figures, is it justified to value Ola Electric at 9.5 times that of Ather? That’s the question many are asking. 

On the flip side, Ather’s inability to raise multiple rounds of short-term funds is a big disadvantage, according to analysts and as a result, it has lost market share to other players like TVS and Bajaj

No Traction In The Grey Market Yet

The grey market has not shown any traction for Ola Electric since the DRHP was filed. Abhishek Ginodia of Altius Invest said, “No trades have taken place in the grey market – Some blocks were available a couple of months back between $4.5 and $5.”

UnlistedZone’s Paliwal added that Ola Electric shares have seen limited activity in the unlisted market. The shares were primarily held by AIFs of Edelweiss, and not a single share of Ola Electric has been traded through the UnlistedZone platform, he revealed.

Given the EV industry’s dependence on government incentives and subsidies, and the lack of profitability for Ola Electric in particular, people are not keen to buy its shares yet. They want to see if the valuation sobers down after listing. 

Ola Electric is in the process of constructing a GigaFactory for battery production with a projected capacity of 20GWh. And government policies will play a big role in this effort. 

“Ola has enrolled in the PLI (Production Linked Incentive) scheme to secure subsidies. The company faces ambitious production targets: 1GWh in the first year of Fiscal 2024, escalating to 5GWh in the second year, 10GWh in the third year, and reaching the full 20GWh capacity by the fourth year. Failing to meet these milestones could adversely impact the company. Market experts caution that scaling up battery manufacturing to such levels within this timeframe poses a significant challenge and is a substantial risk for Ola Electric,” Paliwal added.

Charting The Uncharted

Ola Electric’s imminent IPO marks a pivotal moment in India’s EV evolution, positioning the company as the first pure-play electric OEM to venture into the stock market. But the company may have bitten off more than it can chew in terms of the valuation, which is yet to be confirmed. 

Kansal says that despite being in losses, Ola Electric has witnessed impressive financial growth such as revenue from operations surging by over sevenfold, escalating from INR 373.42 C in FY22 to an impressive INR 2,630.93 Cr in FY23 and INR 1,242 Cr in Q1 FY24. Besides, unit economics are improving, reflecting a more sustainable financial outlook and strategic investments in technology and infrastructure.

However, challenges loom large, centring around valuation debates and the viability of aggressive expansion plans. 

While the company’s unique features such as an extensive omnichannel network and impressive EV specifications set it apart, questions persist about its valuation against financial performance and market dynamics. Competition is not about to ease up either when it comes to EVs. 

Bhavish Aggarwal’s tall claims in the past year will face many litmus tests — intricate processes, supply chain complexities, dependence on critical raw materials and components and more. 

It is pertinent to note here that Ola Electric itself slashed its revenue guidance for 2023-25 by more than 50%, bringing into doubt the projections vs actual execution on the ground. 

“The absence of a transparent sourcing plan for these essential battery materials exacerbates supply chain vulnerabilities and operational risks. Furthermore, the IPO’s allocation of funds for this critical facility appears disproportionately modest, casting doubts on the adequacy of resources to support Ola Electric’s ambitious expansion plans and future growth trajectory,” said Kansal.

The IPO journey is nuanced, drawing comparisons with global counterparts and industry peers, notably Tesla and Ather Energy. But that could also turn foolhardy, especially as the electric vehicle sector matures in India. Tesla itself could become a competition for Ola soon. Will investor confidence in its growth narrative drive a triumphant market debut or prompt a reevaluation of the valuation and market standing? 

As stakeholders brace for this electrifying ride, Ola Electric’s IPO feels like an uncertain path riddled with hurdles and turns, even as this testing road leads to a great opportunity ahead.