Summary:
- I believe the EV penetration projection of 41-56% by 2028 is on the bullish side. My bet is somewhere around 25-30%.
- While the regulatory environment will continue to be favorable, I believe the FAME subsidy (of ~Rs. 15-20K) might get further reduced or eliminated. PLI schemes are likely to stay.
- As a vertically integrated company with in-house development capabilities, there is a premium to this kind of business model compared to incumbent OEMs that rely more on tier 1 suppliers.
- Quality issues are a concern. While the market hasn’t punished the company on these issues yet, if not turned around, the long term impact will be significant.
- The battery life is yet to be ascertained as even the oldest vehicle is ~3 years old. Companies that can claim superior battery life will win.
- They have some moats in GTM. They are able to effectively leverage Ola Cabs’ digital platform and use their execution chops to take the route of company owned distribution models. This shows up in lower CAC.
- Their cell manufacturing business is yet to start operations and at this point, looks like a black box to me. I don’t foresee any technological or quality benefits here but there could be benefits from the PLI scheme and reduced supply risk.
- They have been trending positively on financial performance. With decreasing battery prices, their gross margins are set to further improve. However, I think they will need to spend more on R&D and marketing than what they have spent for Q1 ‘24 as % of revenue.
Financial Note:
Different media outlets have quoted the likely valuation to be somewhere between ~$6.5-8B. The last fundraise for Ola Electric was at ~$5B. Ola Electric is seeking ~$700M. It reported a revenue of Rs. 2,630 Cr in FY23 and Rs. 1,243 Cr in the first quarter of FY24. It had a net loss of Rs. 1,472 Cr in FY23 and of Rs. 267 Cr in the first quarter of FY24.
The regulatory question
There is indeed no doubt that the favorable policy and govt incentives played an immense role in accelerating the adoption of EV 2Ws. Till June ‘23, the top selling EV models of Ola, Ather, TVS, etc were able to claim ~Rs. 45-50K per vehicle in subsidies. However, the government doesn’t have infinite money and the subsidies expectedly came down from June ‘23 to ~Rs. 15-20K per vehicle. The slow down on growth since the last 6 months can be attributed to the price increases (of ~Rs. 15-20K) for EVs across the board. While OEMs are getting better with their margins and can survive the post subsidy world, the impact of removing subsidies is not negligible. My view is that FAME subsidy on 2Ws can further reduce or end within the next 12-18 months.
The second significant regulatory incentive is the PLI scheme that offers ~Rs. 15-20K per vehicle to the OEMs. Unlike FAME, I believe PLI will stay longer.
Overall, I believe the government policies will remain favorable to the EV industry though the FAME subsidy may be reduced or eliminated in the near future.
The technology leverage
Ola is perhaps the only vertically integrated companies with in-house R&D teams that have built their own battery pack and BMS, powertrain and software stack. Effectively, these companies are tech-led rather than distribution-led. I strongly believe that these capabilities developed in-house give a significant edge to these companies than the OEMs relying on tier-1 suppliers.
Fig Source. Ola Electric DHRP
For example, a superior battery pack, BMS and powertrain can contribute to better battery efficiency and higher battery life (up to 20% more). The differences in battery quality will start showing in the next few years as more vehicles cross the 5Y/ 60-70K kms mark. Companies that can promise higher battery life will win.
Overall, I believe the business model of being vertically integrated and having strong in-house R&D capabilities gives a significant premium to these companies and here I would agree with the prospectus that it doesn’t make a lot of sense to directly compare with the existing OEMs that are dominated by ICE sales and a very different business model.
The quality concerns
One major factor that I would consider for Ola is the quality concerns. Ola has had more publicly reported cases of battery issues than any other OEM. As per their prospectus, they had identified a batch of ~1441 vehicles with potentially faulty batteries and asked the customers to visit the service centers to get their battery health checked. While they claim that none were replaced, I am honestly surprised that the market hasn’t punished these quality issues more.
There is also the question of battery life. Given that most of their vehicles are 1-2 years old and even the oldest vehicles are ~3 years old, it is difficult to ascertain at this point how good their battery packs are. A superior BMS can contribute to increased battery life and we don’t have much information yet on how Ola’s vehicles fare in terms of the battery life.
A few media outlets had also covered the after-sales woes of Ola scooters with long service periods. Around a year ago, there were also reports of issues with their front suspension which were redesigned for future batches.
My guess is that the market is yet to get to a point to start discerning quality in EVs and it will take a cycle of 7-9 years (lifetime post purchase) before the consumers start learning nuances and impact of quality on the life of the vehicles. This will eventually impact future sales. In the long term, quality will have a significant impact on the brand value.
The D2C model
Ola probably stands out as the only major EV company with company owned distribution. They also have a unique advantage of being able to leverage the Ola Cabs app and platform to drive traffic to Ola Electric website. Overall, with an effective use of affiliate platforms, company owned distribution and digital marketing, they have been able to get to a lower CAC.
However, it will be interesting to see if they will continue to operate in this model or take the dealership route in future.
The financial performance
On the whole, their financial performance appears to be trending in the right direction along all the key metrics for Q1 ‘24 when compared to FY23:
- Gross margins improved to 13% from 5% in FY23
- R&D expenses came down to 7% from 18%
- Other expenses came down to 21% from 29%
- EBITDA improved to -14% from -43%
Contrary to the popular sentiment against Ola being loss-making, I would fret less over the fact that they are loss making and look deeper into their future plans and cash outlays to see if the valuation is justified. I believe that as long as gross margins are healthy and we can see that they are likely to improve with time, the more interesting part is the next level of detail.
First is on their R&D spend. While their R&D came down from 18% to 7%, I believe they will need more R&D investments than what they have projected to invest from the IPO proceeds over the next few years to be able to get the growth they expect. This is on account of launching in the motorbike segment (which should be a completely new platform from the S1 series) and the R&D required for the cell production.
They have also brought down advertising and marketing spend from 11% in FY22 to 2% in FY23 to 1% in Q1 FY24. I believe they will have to invest more in marketing for the same reasons they have to invest more in R&D as I mentioned above. Having said that, it is still impressive for the low CAC that they have been able to achieve, yet maintain market share leadership in the EV 2W segment.