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

Ola Electric Mobility Ltd.'s second quarter show stuttered when compared to April to June, 2024 period. The reported margins disapponeted due to higher discounts and warranty costs only added to this.

A HSBC research report has maintained its price target for the stock at Rs 110 per share, which is a 47% upside from the current market price of Rs 75.40 a share, as of 1:15 pm on Monday.

It is noteworthy that the company has a launch pipeline of around 20 products over the next two years. Here is an analysis of what led to the quarterly margin contraction, outlook on product launches and what to expect on profitability going forward.  

When compared versus the previous quarter, the company’s automotive margins were down from -2% to -17.9% due to multiple factors. This quarter saw intense competitive intensity across all players like Bajaj Auto Ltd. and TVS Motor Co., with the launch of cheaper electric scooter variants and higher discounts.

The company mentioned that while they had 3% savings of gross margins, 1% of the savings have gone into funding additional discounts given to consumers this quarter. Ola Electric has been running the ‘BOSS’: Biggest Ola Season Sale’, and offering S1 portfolio starting at Rs 49,999 and festive offers worth up to Rs 40,000. This benefitted the company as it gained 260 basis points market share in October, compared to the previous month.

Another cost impact was warranty cost amounting to Rs 64 crore. Warranty cost essentially gives its customers parts and repairs for free under warranty and hence are a cost to the company. For fiscal 2024, warranty costs accounted for 5.5% of total sales. This is quite high and the company has guided for warranty costs to be lower this year, compared to previous year.

One-time costs of Rs 36 crore was the other impact on Ebitda this quarter. These included IPO linked costs, annual launch event Sankalp and annual appraisals.

In its analyst conference call, the company acknowledged it was facing a capacity issue at its service centres. The management mentioned that service capacity growth lagged the company’s sales volume growth over the two-three quarters. What’s encouraging is that the company mentioned that 80% of service requests are being serviced in T+1 days. This essentially means that eight out of 10 scooters are now serviced in one day itself.

Ola Electric is also increasing its distribution network. Ola Electric has 782 company owned stores as of September 2024. They plan on increasing this to 1,000 company owned stores by December. The company has an ambitious target of further increasing presence to 2,000 stores by March 2025.

Apart from company owned stores, Ola Electric also launched the ‘Network Partner Program’ in September. These are multi-brand outlets and help the company increase its presence faster. They are looking to add 1,000 partners by March 2025.

This will also help in increasing its market share further. October was the first month of arresting its market share loss for the company.

While the company already has six models across its electric scooter range, it is looking to launch over 20 products over the next two years. This indicates at least one new product launch every quarter.

Roadster X Electric Motorcycle will be launched in March quarter. Pricing of the same starts from Rs 74,999 to Rs 99,999 across three battery options, between 2.5-4.5 GW/hr. Roadster X will be followed by the launches of Roadster and Roadster Pro leading into fiscal 2026.  

Ola Electric has also confirmed that launch of electric three-wheeler. This will be in the first or second quarter of fiscal 2026.   

Three-wheelers are going electric fast in India and a report suggests that more than 50% of the three-wheelers sold in the first half of the financial year was electric. Currently, Mahindra and Mahindra and Bajaj Auto are the major players.

Costs have been a focal point for electric vehicle makers. While Ola Electric had guided for better gross margins, which would boost Ebitda as well, the same has not transpired due to higher discounts as highlighted earlier.

The next pivot to cost control will be the new platform for its scooters and motorcycles. This has been dubbed as the Gen 3. Gen 2 platform was launched in August 2023 and enabled the company to improve cost by 22.5% over its predecessor. Gen 3 is expected to improve cost structure and save about 20% of costs vs Gen 2. This will be a key positive for the company and its overall margin profile.

Another key update this quarter was that Gen 3 platform has now been rescheduled from August 2025 to January 2025. This essentially means that S1 X models starting January will be manufactured on the Gen 3 platform and lead to additional cost savings.

As updated earlier, Ola Electric has started trial production of cells in March 2024. Trial production reached a milestone in the second quarter of this fiscal, with over 20,000 cells manufactured and the company is on track to use in-house cells in EV products starting from the first quarter of fiscal 2026.

Bank of America reiterated its ‘buy' rating on the stock, but lowered its target price to Rs 120 per share versus Rs 145 earlier. Gross margin was steady at 20% despite mix dilution, lower subsidy and promotional schemes, while service issues were addressed with expanding network reach, the brokerage said.

The company's full portfolio is now PLI certified with 13-15% of revenue but investors might wait for dust to settle, BofA said. The stock is inherently high risk-high reward it said, and lowered its target EV to sales 3.5 times from 4 times earlier.