Ola Electric's Rs 5,500 cr IPO to bolster its EV market, say experts

Ola Electric’s initial public offering (IPO), of Rs 5,500 crore, is essentially aimed at ensuring the company maintain its top position in the electric two-wheeler segment, with incumbent players TVS and Bajaj Auto giving a fight to the number one player in market share.

Most experts and competitors say the amount being raised is in line with the investment required to expand the electric-vehicle (EV) business.

There are two discernible trends in the competitive electric two-wheeler market.

One is the incumbent players are gaining market share and the gap between Ola and the two together is reducing.

Two, the penetration of electric two-wheelers has decreased marginally and sales are nowhere near industry expectations of hitting 1.2 million by the end of the financial year due to the sudden government decision to slash subsidies on the product.

The new number is around 900,000.

The registration figures based on the VAHAN portal in the quarter of December to date (October-December) show the two incumbent operators collectively have a slightly higher market share of 34.3 per cent over Ola’s 34.1 per cent.

They are going neck and neck.

Contrast this with the quarter of June (April-June), for which Ola has given its revenues and margins in the draft red herring prospectus (DRHP).

The difference was substantial -- 32.7 per cent for Ola as against 25.6 per cent for the two incumbent players.

Competitors point out that with the large distribution already available with TVS and Bajaj Auto, for two-wheelers running on the internal combustion engine (ICE), ramping up volumes is far easier than it is for Ola, which has to continue investing, and build and run its experience centres.

“It can easily build up volumes by 25,000 per month by ensuring availability across the country.

"The real game will be on products and brand salience,” said a senior executive of a rival two-wheeler company.

The second thing is that the ICE is not dead as Ola Electric has projected.

Dependence on subsidies under Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles II clearly came out into the open when the government decided midway this year to slash it by a third.

And that has affected sales as well as the penetration of EV two-wheelers (as a percentage of all two-wheelers).

The DRHP acknowledges that. It says while the penetration of electric two-wheelers in the first half of FY24 went up to 5.1 per cent, it dropped to 4.8 per cent in Q2FY24.

However, it does not offer the financial impact of subsidy reduction on the company’s sales, the bottom line, and margins.

The figures are up to the quarter of June 2023.

The numbers of Ola and others shot up in May because the companies cleared their inventories as they increased prices in June.

Registration increased to more than 100,000 in a month for the first time.

Clearly unlike incumbents, which are sitting on large reserves of cash (like Bajaj Auto, with reserves and surplus of over Rs 25,000 crore or Hero MotoCorp with Rs 16,000 crore) startup Ola Electric does not have the similar luxury.

It raised $380 million in a combination of fresh issuance of equity and debt to fund its expansion in October.

Analysts say the market is tough for raising funds and the IPO the best option.

A large chunk will be deployed for the company’s lithium ion cell business (Rs 1,226 crore), apart from expanding its two-wheeler capacity (currently it is at one million, and the plan is to double it), investing in research and development, and paying its loans.

Founder Bhavish Aggarwal has insisted that making its own cells will give the firm a cost as well as technological advantage.