Ola Electric IPO: Bhavish Aggarwal's business has too many risks to ignore

Ola Electric's S1 Air e-scooters at their manufacturing facility in Pochampalli in Tamil Nadu, India. Image: VarunVyas Hebbalalu / Reuters

It’s not just a reputational risk that brand Ola Electric faces, but also the issues or threats to the business and its ambitious growth plans may be much larger. Being the first to possibly go public as a pure electric vehicle (EV) manufacturer of two wheelers in India, Ola Electric’s draft red herring prospectus (DRHP) spotlights a set of challenges that may be too large to ignore.

Last December, Ola Electric filed its DRHP with markets regulator, the Securities Exchange Board of India (Sebi), to launch its initial public offering (IPO) for stock markets listing. The company is yet to receive Sebi approval for the IPO.

Despite mounting losses, in December, Ola Electric (Ola) remained the market leader by volume and gained market share, reaching 40 percent in EV two-wheeler segment. Ola gained the most market share, followed by Bajaj Auto while TVS Motor lost the most.

“Improvement in Ola’s market share was largely driven by the company’s aggressive marketing campaign ‘December to Remember’, under which it offered aggressive discounts to customers and also reduced prices of its products. Penetration improved the most in Delhi to 19.8 percent from 6.9 percent in November, almost entirely driven by Ola. We continue to see OEMs launching lower-priced models and offering aggressive discounts as a positive catalyst for EV adoption. However, discontinuation of FAME (if happens) could pose a near-term headwind,” says Kumar Rakesh, analyst, BNP Paribas Securities India.

The IPO is a mix of fresh issue of shares and offer-for-sale (OFS) by existing shareholders. The company plans to raise Rs5,500 crore by fresh issue of equity shares while existing shareholders will sell 9.52 crore shares in the OFS.

However, what is striking is promoter Bhavish Aggarwal offloading the maximum number of shares in the OFS. He aims to sell 4.73 crore equity shares via the IPO. As the only promoter with the largest shareholding is selling almost 50 percent of the number of shares of the total OFS, it is triggering questions on Aggarwal’s own confidence in the business of Ola Electric. Pre-IPO, Aggarwal holds 36.94 percent in Ola Electric, while ANI Technologies and Indus Trust have 4.35 percent and 3.85 percent respectively.

“Typically, promotors do participate in OFS during an IPO, but in the case of Ola Electric, the promoter selling the most number of shares in the total OFS is unconventional. It raises doubts if the promoter himself has faith and conviction in a business which is at a developing stage,” says an analyst who does not want to be named.

Some of the biggest shareholders reducing stake in Ola Electric post IPO are SVF II Ostrich (21.98 percent), Alpha Wave Ventures II (3.49 percent), Internet Fund III (6.03 percent) and MacRitchie Investments (1.25 percent).

Ola Electric is looking at a pre-IPO placement of Rs1,100 crore and if that goes through, the fresh issue size will be reduced, it says in the DRHP.

Bulk of the funds raised through the IPO will be utilised for research and development (R&D) and a major portion will go for capex needs of its subsidiary business. Out of the total, Rs1,600 crore is aimed to be utilised as investment into research and product development, Rs1,226.42 crore will be kept aside for capital expenditure to be incurred by subsidiary (Ola Gigafactory project), while repayment or pre-payment, in full or part, of debt incurred by subsidiary OET will take up Rs800 crore.

The company is constructing the Ola Gigafactory for cell manufacturing in Krishnagiri district in Tamil Nadu. Phase 1 of the Ola Gigafactory is expected to be operational by March 31, with a production capacity of 1.4 GWh. It expects to expand the production capacity to 5 GWh by October. 

Also read: 'If they have OATS for breakfast, I put ICE cubes in my drink': Ola's Bhavish Aggarwal

Risks… too many to handle!

In a 444-page DRHP, Ola Electric lists 77 risks compartmentalised as internal and external. Such an exhaustive list of risks is not common in DRHPs. But that is not the problem; it indicates transparency of the company.

Understandably being at a developing stage, Ola Electric is a high-cash-burn company with mounting losses. There are other issues at the operational side as well. The company says it may experience defects, quality issues or disruptions in the supply or increase in prices of components used in EVs, thereby increasing material costs and the price of Ola EVs which will impact projected manufacturing and delivery timelines.

“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,” the company says.

Ola manufactures certain EV components, while others are sourced from third-party domestic and foreign suppliers. Batteries for its EV scooters constituted approximately 35 percent of the bill of materials for Ola S1 Pro scooters as of September 30.

Shortage of certain parts of the EV dependent on global supply may increase delivery timeline and hurt revenue. Ola Electric does not have any long-term contracts with cell suppliers, increasing its risks related to availability and pricing of quality cells.

Ola Electric is a pure EV player in India building vertically integrated technology and manufacturing capabilities for EVs and EV components. It manufactures EVs and certain core EV components at the Ola Futurefactory. It has delivered four products and additionally announced six new products. It operates a direct-to-customer omnichannel distribution network across India, with 935 experience centres and 414 service centres, besides the website.  

Conflict of interest

The company is largely driven and highly dependent on the services and reputation of Bhavish Aggarwal, founder, chairman and managing director of Ola Electric. He has a significant influence on Ola Electric, but also as chairman and managing director of ANI Technologies Private Limited. He recently founded a new startup, Krutrim SI Designs Private Limited. “His involvement with ANI Technologies Private Limited and Krutrim SI Designs Private Limited may detract from the time that he is able to dedicate to our company,” Ola Electric says in the DRHP.

Secondly, Aggarwal is a shareholder of Tork Motors Private Limited which is involved in the same line of business as Ola Electric. “Any conflict of interest which may occur as a result could adversely affect our business, prospects, results of operations and financial condition,” the company adds.

The company says it can't assure that Aggarwal will not favour the interests of such other companies over the interests of Ola Electric.

Also, as the largest shareholder, Aggarwal will be able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendment of constitutional documents and approval of significant corporate transactions and any other approvals which require a majority vote of shareholders eligible to vote. This control could have the effect of delaying or preventing a change of control of Ola Electric or changes in management and will make the approval of certain transactions difficult or impossible without the support of controlling shareholder.

Also read: Charged up: Inside Ola's audacious electric gambit

Problem of a new entrant

As a new entrant in the EV industry, Ola Electric has a limited operating history in manufacturing, testing, delivering, and servicing of EVs. While any EV that it delivers must meet the relevant EV standards prescribed by the Automotive Research Association of India and the Automotive Industry Standards as amended, these testing and approval protocols may not succeed in identifying and addressing all latent, potential and other defects.

“We cannot assure you that we will be able to detect and fix any defects in the EVs on a timely basis, or at all. Any defects or any other failure of our EVs to perform or operate as advertised could harm our reputation and result in negative publicity, loss of revenue, delivery delays, product liability claims, harm to the Ola brand,” the company says.

As a new entrant with limited operating history in a relatively nascent segment within the automotives industry, Ola Electric has limited insights into consumer trends, including customers’ inclination to adopt EVs and the competitive landscape that may emerge and affect business.

Ola EVs use lithium-ion cells, and if they catch fire or vent smoke and flames, that may damage the company’s brand image and business as well. For instance, in March 2022, Ola S1 Pro scooters caught fire in Pune, Maharashtra.

Profitability not in sight

Its revenue from operations has increased but so have its expenses, including costs for technology, raw material and advertising. For FY23, revenue from operations increased more than seven times to Rs2,630.93 crore from Rs373.42 crore in the year-ago period. For the three months ended June 2023, revenue from operations was at Rs1,242.75 crore. But the losses also are piling on.

In FY21, its loss was at Rs199.23 crore, escalating to Rs784.15 crore in FY22 and to a massive Rs1,472.07 crore in FY23. Net cash used in operating activities also surged to Rs1,507.27 crore in FY23 from Rs252.02 crore in FY21. The company has given no guidelines on what it aims to do to turn profitable.

“We may continue to incur operating losses in the near term as we invest in our business and expand our product portfolio, build capacity and scale our operations,” it says. It explains that the expansion of product portfolio, including the introduction of Ola S1 Air, the Ola S1 X+, Ola S1 X (2 kWh) and Ola S1 X (3 kWh) and expansion of sales footprint across international automotive markets, could result in an increase in operating costs.

Ola Electric says it cannot assure that it will be able to manage costs effectively to sell products at favourable margins or its expansion into international markets will prove to be profitable.

“Failure to become profitable would materially and adversely affect the value of your investment in our company,” it adds.

Meanwhile, its advertising, marketing and sales promotion are also eating into a major portion of the revenue. In FY23, ad and marketing cost was 2.34 percent (Rs61.47 crore) of revenue from operation, down from Rs49.24 crore or 13.23 percent of revenue from operation in FY22.

Even as its spends on technology are increasing, its chunk in the total revenue is reducing as the pie is getting bigger. In FY21, technology spends were Rs9.43 crore taking 1091.55 percent of revenue from operations, which expanded to Rs98.3 crore in FY23 but it is only 3.76 percent of revenue from operations.

Another significant issue in its financial losses is its high attrition rate. Its employee attrition rate was at 42.06 percent and 47.48 percent in the seven-month period ended October 2023 (on an annualised basis) and fiscal 2023, respectively.

EV two-wheeler: Ola at top

The good news is that the EV two-wheeler market segment is expanding. Electric two-wheeler sales volume rose 17 percent year-on-year but declined 17 percent on a monthly basis in December. EV penetration in 2Ws improved month-on-month to 5.2 percent from 4.1 percent in November.

In the E2W space, Ola Electric (Ola) remained the market leader by volume and gained market share, reaching 40 percent. Ola gained the most market share, followed by Bajaj Auto while TVS Motor lost the most.

In December, Ola sold 30,223 units followed by TVS (12,227 units), Bajaj Auto (10,3440) and Ather Energy (6,485).

Ola delivered its first EV model, the Ola S1 Pro, in December 2021. This was followed by Ola S1 in September 2022, the Ola S1 Air in August 2023 and the Ola S1 X+ in December. As of October 31, 2023, the Ola S1 Air offers a lower price point than the Ola S1, which in turn, is priced lower than the Ola S1 Pro. The Ola S1 X+ offers a lower price point than the Ola S1 Air.