Ola Electric listing: What does it indicate about markets sentiment?

Bhavish Aggarwal, CEO of Ola Cabs and founder of Ola Electric and his wife, Rajalakshmi Aggarwal ring the bell during Ola Electric's listing ceremony at the National Stock Exchange (NSE) in Mumbai, India, August 9, 2024. Image: Francis Mascarenhas / Reuters
 
The first challenge a company faces right after its initial public offering (IPO) closes for subscription is its shares listing on the stock exchanges, especially if it comes at a time when market conditions are volatile or under pressure. Despite the hype and publicity, Ola Electric Mobility made a tepid debut on the stock exchanges on Friday, only to later hit 20 percent higher during the day.
 

However, are such gains on a stock mired with financial risks, negative cash flow and no visibility of profitability, worth for those investors chasing lip-smacking listing pops? What does it indicate about the markets sentiment now?
 
Ola Electric Mobility promoter Bhavish Aggarwal’s own share of tryst with luck is widely known. During the time the IPO to raise Rs 6,146 crore was open for subscription, the stock markets crashed over 3 percent on Monday, in one of the biggest single-day loss of Indian equities since June. That hit sentiment, say analysts. 
 
The markets have overall bounced back but are yet to fully recover from the brutal sell-off on Monday as a reaction to global equities collapse. The markets loss had wiped off investors’ notional wealth of Rs 15 lakh crore on a single day.
 
“Despite receiving demand well below street expectation, Ola Electric listed above street expectations can be attributed to market mood. Post listing the short-term view remains the same due to weak financials and risk of negative cash flows in future and allotted investors should understand the risk before holding which could adversely impact its consolidated financial condition post listing,” Prashanth Tapse, analyst, Mehta Equities, says.
 
Shares of Ola Electric Mobility made a stock markets debut at Rs 75.99 a piece on the BSE, almost at par with its issue price of Rs 76. However, as the day progressed the stock moved higher. The fund raising, with a combination of offer-for-sale (OFS) and fresh issue in the price band of Rs 72-76 a piece, was open for subscription from August 2-6.
 
“Despite the company offering its shares at a well discounted price lower than last private placement valuation, IPO investors were not so bullish on the loss-making company and may wait for better lower pricing post listing,” says Tapse.
 
One of the largest IPOs after Zomato and Paytm among the new age companies, Ola Electric received an overall subscription of 4.27 times. Among categories of investors, qualified institutional buyers (QIBs) and retail portion were subscribed 5.31 times and 3.92 times respectively. Non-institutional investors and employees bid for 2.4 times and 11.99 times of the allotted quota in the IPO.
 
This can be considered as a tepid response to fund raising activity by a consumer brand which has been buzzing in the news for its products, controversies and Aggarwal himself. In the past, Nykaa’s owner FSN E-Commerce Ventures’ IPO to raise Rs 5,351.92 in 2021 was  subscribed 81.78 times. However, the IPO of One 97 Communications, the parent entity of digital payments firm Paytm, which raised a whopping Rs 18,300 crore in 2021, was subscribed 1.89 times.
 
Such large new-age technology companies like Nykaa (FSN E-Commerce Ventures), Zomato and Paytm (One97 Communications), which went public in 2021, had performed badly in the secondary markets with severe value erosion for shareholders. Investors in the IPO of One97 Communications lost almost 70 percent of their investment by 1.5 years of the IPO. That made investors conscious of valuations of IPO-bound companies and raise questions on their business prospects.
 
Also read: 'If they have OATS for breakfast, I put ICE cubes in my drink': Ola's Bhavish Aggarwal

Ola Mobility: Where is it headed? 

At the upper price band, Ola Electric company is valued at market cap/sales of 6.6 times with a market cap of Rs 33,522 crore (or Rs 335,220 million) post issue of equity shares. Currently, top global automobile entities are trading between 1-8 times as on market cap/sales.
 
While the stripped down valuations of Ola Electric at the IPO stage was seen as positive by analysts, volatility stemming from government policy shift, dependency of raw materials on foreign countries, and lack of path-to-profitability are some of the major concerns.
 
“Cut in IPO valuation to $4 billion eases the valuation risk at 6.8 times FY24 sales versus global EV peers at 3-8 times of 2023,” says Pramod Amthe, head of equity research (auto), InCred Capital. For perspective, the current valuation is much lower than what Ola Electric commanded two years back. In January 2022, Ola Electric had raised over $200 million from Tekne Private Ventures, Alpine Opportunity Fund, Edelweiss and others at a valuation of $5 billion.
 
The Softbank-backed Ola Electric expects EV2W sales to reach 41-56 percent penetration by FY28 from 4.5 percent in FY24. Despite being a loss making company, it captured a market share of 40 percent in FY24, and aims to maintain market share led by tech and launches.
 
Ola Electric Mobility has incurred a net loss of Rs 1,584.4 crore in FY24 widening from Rs 1,472.1 crore in the year ago period. In FY22, the net loss was at Rs 784.2 crore. However, its revenue from operations was at Rs 5,009.8 crore in FY24, a steep jump from Rs 373.4 crore in FY22. Its revenue from operations was at Rs 2,630.9 crore in FY23. Ola Electric has the highest revenue of all Indian incorporated electric 2Ws original equipment manufacturers from E2W sales in fiscal 2023.
 
The company proposes to utilise a portion from the net proceeds of the IPO towards repayment/prepayment of the Identified Loans, which are working capital loans, letter of credit and overdraft facilities availed by Ola Electric Technologies (OET).
 
Part of the IPO money will be used for capital expenditure to be incurred by its subsidiary, while Rs 1,600 crore will be used for investment into research and product development and Rs 350 crore for expenditure to be incurred for organic growth initiatives.
 
Bhavish Aggarwal, Indus Trust, Alpha Wave Ventures II LP, Alpine Opportunity Fund VI LP, Internet Fund III Pte, MacRitchie Investments Pte, Matrix Partners India Investments III, LLC, SVF II Ostrich (DE) LLC, Tekne Private Ventures XV, and Ashna Advisors LLP are the selling shareholders in the OFS.