Ola Electric Mobility Ltd’s proposed public issue opens on Friday at a scaled-down valuation. The initial public offering (IPO) pricing values India’s largest electric scooter maker at $4 billion, about 25% discount to the valuation based on the last private funding round in September. In fact, the valuation is also sharply lower from as much as $7 billion that news reports had said the company’s founder was initially aiming at, but had received investor pushback.
“Cut in IPO valuation to $4 billion eases valuation risk at 6.8 times FY24 sales versus global EV peers at 3-8 times CY23,” according to Incred Research Services. This makes Ola’s valuation closer to the higher end of global peer range.
That said, investors need to evaluate the drop in valuation in the context of continuing policy uncertainties in the sector and the relative valuation gap with Hero MotoCorp Ltd.
For Ola, policy uncertainty is a key worry. Currently, there is a subsidy of up to Rs10,000 for electric two-wheeler scooter as per EMPS 2024 till September. If the subsidy is not extended, we might again see a sudden drop in sales as was witnessed twice in the past, once in June 2023 and then April onwards.
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Recall that in May 2023, adjustments were made to the incentives provided under the FAME II programme, reducing them to ₹10,000 per kilowatt-hour (kwh) and capping them at 15% of an electric two-wheeler’s ex-factory price (earlier it was: ₹15,000 per kwh with the cap at 40% of ex-showroom price).
Ola’s retail sales volume, as per Vahan, in May 2023 were 28,742 vehicles and it took six months to regain this level after sales dropped sharply in June 2023. Ola’s sales peaked in March at 53,320 units as FAME II expired and was replaced by EMPS in April. Even after four months, sales are still at 38,887 units for July, much lower than March 2024.
Valuation gap
Ola’s post-issue valuation works out to a market capitalization (mcap) of ₹33,500 crore at the upper end of the price band of ₹72-76. The company is the undisputed leader in electric two-wheeler sales in India with market share of 49% based on the retail sales data of Q1FY25. Ather Energy, the next pure-play EV competitor is far behind at 7%.
Hero MotoCorp can be viewed as a proxy play on Ather, given its 40% stake in the latter. Agreed, Hero is the traditional motorcycle company, but still, the valuation premium is wide. Ola’s mcap works out to 7x FY24 sales from scooters, excluding trading sales, service revenue, and government incentives. The same figure for Hero, excluding spare part, is 3.5x.
Ola’s average selling price for FY24 was ₹1.4 lakh, but gross margin per vehicle was only ₹10,000 even after adjusting the material cost for the sale of traded goods. The corresponding numbers for Hero are ₹56,000 and ₹20,000, respectively. Ola is making net losses as it is still a new company.
Sure, some of the huge gaps in valuation can be owing to Ola’s own battery cell manufacturing capacity. Indeed, a part of Tesla’s success is attributed to it having its own battery cell manufacturing. Ola’s prospectus reveals that almost one-third of the production cost of EV is in the form of battery. Ola is the first company to commence operations of cell manufacturing in India on a large scale with 1.4 GWH already completed and expected to reach 5 GWH capacity by February.
Notwithstanding this benefit of lower battery cost, investors have to consider that any reduction in policy support could further delay the path to profitability. That would be a tough choice to make.
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