Ola Electric's Five Challenges — Cash Generation, Service, Warranty Costs, Platform And Competition

Ola Electric's earnings report reveals mounting warranty expenses and cash flow challenges, alongside ambitious plans for expanding its service network to 2,000 touchpoints by March 2025.

Ola Electric grapples with market competition from Bajaj Auto and TVS Motor as it accelerates new EV launches and transitions to its third-generation platform. (Photo source: NDTV Profit)

After a turbulent second quarter that saw after-sale service quality issues and competitive intensity, Ola Electric Mobility Ltd. announced earnings that disappointed the street. The earnings call commentary was a best-case effort to calm the nerves. It made a significant announcement in the earnings call to give something to the street to chew up on, after the stock— which had almost doubled post-listing—is trading below the issue price of Rs 76 apiece.

Even after the earnings call, five things are still unclear.

Cost Of Warranty

The EV maker disclosed at the call that it had incurred Rs 64 crore on warranties, during the call. That is close to 5% of the topline. This led to a widening of Ebitda loss in the second quarter to Rs 223 crore. That's a huge cost to incur and raises issues of product testing process and quality. In fiscal 2024, warranties had cost the company 5.5% of sales. There is no guidance on how it plans to bring down this cost of warranties and improve the quality of materials.

Also Read: Ola Electric Q2 Results: Loss Narrows, Revenue Up 39% On Higher Sales

Cash Generation

Ola is far away from cash generation from its operations. In the first half of the financial year, Ola had a negative cash flow from operations of Rs 1,283 crore, which included a rise in inventory at the end of September 2024. This compares to negative cash from operations of Rs 23 crore for the same period last financial year.

Ola needs to provide a glide path for this to the street. What is further required? How much will it spend on the development of a three-wheeler platform? Pre-IPO, it had plans of a four-wheeler, which was shelved at the time of the IPO.

Also Read: Discounts Hit Ola Electric's Q2 Show But Launch Pipeline That Includes Electric Three-Wheeler Lifts Stock

Expansion Of Touchpoints/Service Stations

The company has acknowledged that it is facing capacity constraints at the service centres, but added that it now processes eight out of 10 complaints in a day. Currently, the company has service stations in tier-1 cities. This needs to expand at the same pace as sales. Otherwise, it will lose out on the first mover advantage as the competition is catching up fast.

It plans to expand the touch points to 2,000 by March 2025 from the current 782-owned stores. This is a change in strategy that it hadn't envisaged at the time of the IPO.

The company hasn't elaborated how much it is going to spend on this expansion since, at the time of the IPO, it did not provide for this object. And in the absence of cash flow from operations, it will have to raise funds again or raise debt to expand on this front. The use of proceeds is audited and cannot be used for any purpose other than as stated in the RHP.

A change in us of proceeds will require the company to seek shareholder nods. The company also spoke about partner channels to expand, though, how it plans to undertake this expansion is still unclear. Is it going for a company-owned franchise-operated or a franchise-owned franchise-operated model?

Gen-3 Platform And New Launches

The company has advanced the migration to the third generation platform to January 2025 from August. This, the company says, will reduce the additional 20% cost compared to Generation 2. Will that have an impact on sales in Q3 as customers would rather wait for the advanced version compared to Generation-2?

The quantum of complaints has been higher in Generation 2, and customers could well decide to wait for feedback before jumping on the next generation of scooters. The company has also claimed that it will launch 20 new products in the next two years. While the new product development cost will be incremental, it does impact the operational cashflows.

Also Read: Ola's Valuation Cut To $2 Billion By Vanguard

Competitive Intensity

Bajaj Auto Ltd. and TVS Motor Co. have increased the competitive intensity during the second quarter. Ola resorted to discounts during the quarter to push sales and maintain market share. The company’s Ebitda was impacted by higher discounts and savings from costs were offset by discounts this quarter.

Ola ended October with a market share of 29.9%, while its competitor Bajaj Auto's Chetak has a share of 20.2% and TVS Motor's I-Qube has a 21.5% market share.

There is a lot to explain, and the EV maker has a lot to deliver.

Also Read: TVS Regains No. 2 Position In Electric Two-Wheelers, Ola's Discounts Help Strengthen Leadership

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WRITTEN BY
Sajeet Manghat
Sajeet Kesav Manghat is Executive Editor at NDTV Profit. He is a graduate i... more
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