IPO Size: Rs. 6,146 cr

• Rs. 5,500 cr is Fresh Issue, for (i) Rs. 1,600 cr R&D (ii) Rs. 1,228 cr capex for brownfield capacity expansion (iii) Rs. 800 cr debt repayment, of Rs. 2,390 cr gross debt (iv) Rs. 350 cr organic growth for experience centres and charging network
• Rs. 646 cr is Offer for Sale (OFS): Half by the promoter (45% stake to drop to 37%), 28% by Softbank (22% to reduce to 18%), and balance by investors, including Temasek part-exiting at cost, after 19 months.

Price band: Rs. 72-76 per share

M cap: Rs. 33,522 cr, implying 18% dilution

IPO Date: Fri 2^nd Aug to Tue 6^th Aug 2024, Listing Fri 9^th Aug 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Electric Two-Wheeler (e2W) Maker

Ola Electric enjoys 35% market share in Indian e2W market, which is barley 5% of total 2W industry. Since auto industry will move away from fossil fuel, it is important to view market share on total industry, which stood at 1.8% for FY24.

Technology Superiority yet to be Established

Ola’s electric technology backbone is the May 2020 acquisition of Amsterdam-based Etergo for a reported EUR 3.75 million (or a paltry Rs. 32 cr) after latter was staring at a bankruptcy. Is unsuccessful technology from across the globe powering India’s largest pure play e2W company?

The 4680 Li-Ion cell, developed by Ola in-house, is just a cell format and cannot be blindly compared to Tesla’s. BIS certification does not imply technical superiority or cell reliability, which will be established only post market validation in 2-3 years time. As company has refrained from quantifying cost savings due to this backward integration, which accounts for nearly 1/3^rd of manufacturing cost, it will not be incorrect to infer that monetary benefits may not be material vis-à-vis the current Chinese imports.

While cell manufacturing is critical, it does not automatically lead to higher business valuation. Chinese battery makers, one even commanding 35% global market share, are ruling at PE multiple of 12-13x, even after being profitable with 4-10% net margin. As technology reduces cost, batteries will become more commoditized, hence, inhouse battery production is not a good enough USP. Globally a lot of progress has been made in cell manufacturing and competing with deep-pocketed, large-scale and highly-experience players may not be as easy for Ola.

‘Casual’ Investment Planning?

Rs. 1,228 cr investment is planned from IPO proceeds to expand 1.4 GWh cell manufacturing capacity, under phase 2, at Ola Gigafactory, to be completed by Apr 2025. However, quantum of investments is not adding up. 3.6 GWh capacity under phase 1b is being built with a capex of Rs. 1,023 cr, completion of which has been delayed by 4 months, from Oct 2024 as per DRHP, to Feb 2025 now. If 3.6 GWh brownfield requires Rs.1,023 cr capex, how does 1.4 GWh brownfield expansion at the same plant require Rs. 1,228 cr investment? Funding plan for 13.6 GWh capacity, planned after phase 2 and to be operational by June 2026, has also not been quantified in the RHP, which will be a huge capex.

Company will have to choose between profitability or expansion, as achieving both looks good only on paper.

Also, 1.4 GWh capacity under Phase 1a of Gigafactory was completed on 22^nd March 2024, but not a single cell from the plant been installed in any 2W, of Ola or third-party, even till 29^th June 2024. Is this rush to complete capacity addition only to meet the Government’s Cell PLI conditions, which require commissioning of 1GWh capacity in FY24, 5GWh in FY25 and 20 GWh in FY27E and avoid penalty? 2 other Cell PLI awardees (of total 3) are learnt to have shelved their plans.

Other Red Flags

• Till March 2024, company has spent Rs. 1,100 cr spent on R&D, including development of new cells. From IPO proceeds, Rs. 1,600 cr is earmarked for R&D, including Rs. 600 cr in FY27E, which is too far-fetched and unnecessary, as capex for manufacturing is yet to be tied-up. 
• Company has its own retail network of 870 experience centres or sales outlets. This is a financial burden and no wonder that Rs. 281 cr from IPO proceeds will go towards paying rent for the existing experience centres. After having raised about Rs. 8,200 cr in capital in past 4 years, company still needs support for R&D, manufacturing and now even marketing! This really makes one question the business model.  
• Employee attrition of 44% and 47% in FY24 and FY23 respectively is very high, including key senior level exits like Company Secretary and Chief Marketing Officer within 2 years. 

Poor Financials, yet Exorbitant Pricing  

On sale of 3.3 lakh scooters in FY24, revenue was at Rs. 5,010 cr. But it is heavily loss-making, with Rs. 1,040 cr operating loss and Rs. 1,584 cr net loss for FY24. Based on Rs. 33,400 cr enterprise value, FY24 revenue multiple is at 6.7x, which is extremely expensive for loss making operations as well as on peer comparison.

Bajaj Auto, TVS Motors and Hero Moto are ruling at revenue multiple between 3.0-5.4x. A valuation of Rs. 33,500 cr for 1.8% market share and mounting losses is ridiculous, when Hero Moto, with 30+% market share and Rs. 3,700 cr net profit is trading at about Rs.1 lakh cr valuation.

Ola’s path to profitability is a not established and it lacks any right to win, in the increasingly competitive auto industry.

Investor Exodus Spells Caution

2 investors who invested in Feb 2022, Tekne Private Ventures and Alpine Opportunity, are part-exiting at 32% loss, probably correcting their mistake. Matrix, whose shares are not subject to lock-in post IPO is also participating in the OFS while Alpha Wave is selling in 3 years, at just 7% IRR. This mad rush to exit by the very same investors makes comparison of IPO valuation to previous round futile!

Not learning from others’ mistakes can be the biggest blunder and we are compelled to draw parallels to the 2021 IPOs of Paytm, CarTrade, PB Fintech, all of which raised funds during the 0% interest rate regime in the world.