Ola Electric IPO: How To Value India's First Public Issue By A Pure-Play EV Maker

Ola Electric Mobility Ltd.'s initial public offering, the first by a pure-play electric vehicle company in India, is expected to hit the markets in early 2024 after the company filed papers with the regulator.

The IPO comprises a fresh issue of Rs 5,500 crore, including a pre-IPO placement of Rs 1,100 crore, according to its draft red herring prospectus filed with the Securities and Exchange Board of India. Existing investors will sell 9.51 crore shares, half of those by promoter Bhavish Agarwal.

Assuming that the company offers at least 10% equity after accounting for fresh issue, the company will have to sell at least 11.85% of stake, according to NDTV Profit calculations.

At a 10% post issue fully diluted equity offer for IPO, and factoring in a fresh issue of Rs 4,400 crore--after the Rs 1,100-crore pre-IPO placement--and 9.5 crore via OFS shares, the IPO would comprise around 40 crore shares at Rs 144 apiece. That values the issue at close to Rs 7,000 crore, and company at around Rs 58,954 crore (about $7 billion).

The company has so far raised Rs 5,838 crore from various institutions including early private equity investors like Softbank and Matrix Partners in the last few years at around $1-billion valuation.

Based on NDTV Profit's calculation, the promoter group's holding of 45.14% on a fully diluted basis will decline to 39.6% after fresh issue of shares and an offer for sale by Agarwal, Indus Trust and other investors. Public shareholders' stake will rise from 47% to 53%, while Ola Employee Trust will hold 7%.

Electric two-wheelers and cars accounted for 4.5% and 1.2% of total sales in each category in FY23, respectively. That, according to a report by Redseer, is expected to surge to nearly 50% and 11-13% by FY28.

Demand for battery-powered scooters and motorcycles is largely led by tier-2 and 3 cities, according to data available on Vahan portal of Ministry of Road Transport and Highways. Cities like Kohlapur and Surat had penetration of 23% and 15%, respectively, in the first half of ongoing fiscal.

Ola Electric, which began its operations in January 2022, sole 1,56,251 units in FY23, according to its DRHP. It started with 1,107 scooters in January 2022 and scaled up to an average of 22,500 units for the first eight months of the fiscal 2024. Based on that, it's expected to clock around 2.7 lakh units in fiscal 2024, a potential 73% jump over the previous year.

The company Ola Pro, Ola S1 Air, the Ola S1 X+, Ola S1 X (2 kWh) and Ola S1 X (3 kWh) models of battery-powered scooters. It is also looking at launching motorcycles under Diamondhead, Adventure, Roadster and Cruiser names, which will be revealed in 2024 and production is expected to start by the end of FY25 or early FY26.

The company also plans to manufacture battery cells under the production-linked incentive scheme. It is required to operationalise 20 GWh in the next four years, starting with 1GWh in FY25. The company will use Rs 1,200 crore from the IPO proceeds and internal accrual to fund this capex.

The company recognises revenues when it delivers scooter to the customer, unlike other players who record sales as soon as the vehicle is shipped to the dealers. Based on expected volumes in FY24, its revenue is likely to be around Rs 4,800 crore.

The cost of goods consumed by the company accounted for 76% of the total revenue for the first quarter of FY24. It had adjusted gross margin-- revenue minus cost of goods consumed, inventory and stock in trade--of over 13% in quarter ended June. At a conservative gross margin of 10% for the year, Ola Electric could report adjusted gross income of Rs 479 crore in FY24.

The company's operating or Ebitda loss and net loss are set to decline in the ongoing fiscal, according to NDTV Profit's calculations.

The company operates at a significant operating leverage. A reduction the cost of goods consumed and lower cell/battery costs and battery management system after the gigafactory comes onstream will improve the cash flows and profitability. Based on NDTV Profit's calculations, 300,000 unit with a cost of goods consumed below 70% of revenue could lead to operational profitability.

While not strictly comparable, the market cap-to-sales multiple of Ola Electric is expensive when compared with companies making internal combustion engine two-wheelers. Hero MotoCorp Ltd., Bajaj Auto Ltd. and TVS Motor Ltd. are valued two to four times the estimated FY24 revenue, while Ola is at over 12 times.