Ola IPO: Bumpy road or a smooth ride ahead for investors?

Ola IPO: Ola Electric, the Indian electric vehicle frontrunner, is revving up for its highly anticipated Initial Public Offering (IPO). However, the road ahead for investors isn't entirely clear. While Ola boasts a dominant market position and ambitious growth plans, potential hurdles like financial stability, fierce competition, and evolving government policies cast a shadow on the promising future. The story of Ola's IPO demands a closer look before investors hit the "subscribe" button.

Ola Electric filed its Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) on December 22. The proposed issue includes a fresh equity share release of up to ₹5,500 crore and an offer for sale (OFS) of 95,191,195 equity shares at a face value of ₹10.

Also Read | Ola Electric IPO: Issue details, objectives, risk factors & more; Check 10 key things to know from DRHP

According to the preliminary draft papers submitted to SEBI, Bhavish Aggarwal, the founder of Ola Electric, plans to divest approximately 47.4 million shares in the SoftBank Group-supported electric scooter manufacturer.

Also Read | Ola Electric files DRHP with SEBI to raise ₹5,500 crore via IPO

What risk factors to consider?

• Ola's revenue predominantly comes from a limited range of electric scooters, primarily one or two dominant models. This lack of diversification makes the company susceptible to fluctuations in demand for these specific models or competition within this niche.
• Additionally Ola's dependence on imported resources like lithium for battery production makes Ola vulnerable to global supply chain disruptions and price fluctuations. Any significant disruption could affect production and sales.
• Ola' heavy dependence on Government subsidies significantly contribute to its affordability. Any reduction or elimination of these subsidies could raise the purchase price, potentially dampening demand. Policies like Faster Adoption and Manufacturing of Electric (FAME) subsidy, benefits under the production linked incentive (PLI) scheme, PLI Scheme for National Programme on Advanced Chemistry Cell Battery Storage.
• The Indian EV market is witnessing rapid growth, attracting established players like Hero Electric and Bajaj Auto, as well as global giants like Tesla and Ather Energy. This intense competition creates a challenging landscape for Ola to maintain its market share. Intense competition could lead to price wars, reducing profit margins and profitability for Ola.
• Constant advancements in battery range, charging speeds, and vehicle efficiency could quickly render existing models obsolete. Ola needs to invest heavily in R&D to stay ahead of the curve, according to a report by Mckinsey.
• Any incidents related to safety concerns or technical issues with Ola's scooters could damage the company's brand image and consumer confidence, leading to lost sales and reputational damage. Ola Electric hit headlines last year after a video of the company's electric scooter got viral in which a 2-wheeler caught fire and soon questions were raised over the safety standards on social media.
• However, the company's net loss nearly doubled to ₹1,472 crore in FY23, from ₹784.1 crore in the previous fiscal year, as expenses surged significantly. The IPO-bound electric vehicle company reported an EBITDA loss of ₹1,318 crore as its total expenses jumped to ₹3,383 crore, in comparison to ₹1,240 crore in FY22. The company saw its losses growing nearly 293 per cent to ₹784 crore in FY22.

Also Read | Ola Electric IPO: Founder Bhavish Aggarwal to sell 47.4 million shares

What can make things smooth for Ola IPO ride?

• For the fiscal year 2023, the company's revenue from operations increased more than seven times to ₹2,630.93 crore against ₹373.42 crore a year ago. For the three months ended June 30, 2023, revenue from operations stood at ₹1,242.75 crore. The company topped the charts among Indian incorporated electric 2-wheelers (E2Ws) and original equipment manufacturers (OEMs) in terms of revenue from E2W sales in FY23.
• The Indian electric vehicle market is projected to grow exponentially in the coming years, with estimates suggesting a tenfold increase by 2030. This presents a significant opportunity for Ola to capture a larger share of a rapidly expanding market, according to a Crisil report, “Indian Electric Vehicle Market Outlook – A High-Voltage Opportunity.”
• Ola is vertically integrating its operations, including manufacturing key components like batteries and motors. This could lead to cost reductions, improved product quality, and greater control over the supply chain, as per various media reports.
• The Indian government actively promotes electric vehicle adoption through various subsidies, tax benefits, and policy initiatives. This supportive environment creates a favorable backdrop for Ola's growth and expansion plans.