DEEP DIVE: Can Ola, Ather deliver on IPO investors' expectations?

It is said that there is no single road to success. In Indian cricket, for example, there are an equal number of fans for Rahul Dravid's patient accumulation of runs as for Virender Sehwag's aggressive, swashbuckling style of play. Now, the Sehwag and Dravid of India’s burgeoning EV industry – Ola Electric and Ather Energy – are hitting the stock markets to raise thousands of crores to fuel their ambitions of turning India’s Rs 1.5 lakh crore two-wheeler industry green.

Ola Electric will be the first to hit the primary market, planning by August 9 at a $4 billion valuation. The company plans to raise Rs 6146 crore, including Rs 646 crore for existing shareholders, followed by Ather Energy next year, which reportedly wants to raise about $400 million (Rs 3,300 crore) at a valuation of $1.0-1.5 bln.

However, as these startups seek a seat at the high table, a key question arises – can their business models really scale? Can their start-up strategies, which took shape in an indulgent VC environment, stand the test of public ownership, and deliver not just great products, but also impressive shareholder returns? Or will the pressures of public ownership – combined with the fast-evolving business and regulatory environment – crush their nascent green ambitions?

Regulatory Uncertainty

For any EV player – particularly in the two-wheeler space – the biggest challenge remains frequent changes in the market environment, particularly government policy. Across the world, the EV segment remains highly exposed to policy and regulatory changes, and India is no exception.

A good example of the regulatory risk faced by the EV sector is uncertainty regarding India's e-2wheeler subsidy policy. The government introduced a highly successful, Rs 10,000 crore buyer subsidy scheme known as Faster Adoption and Manufacturing of Hybrid and Electric Vehicle (FAME) II for a period of three years in 2019. As of March 2024, 13.65 lakh two-wheelers had already been subsidised under the scheme.

However, the government slashed the subsidies under the FAME II scheme in May last year and withdrew the scheme completely in March this year, causing much disruption in the e-2wheeler space. Players like Okinawa, Ampere, Hero Electric which relied heavily on incentives saw a sudden dip in volumes as prices went up by around 25% overnight in the absence of lucrative subsidies.

After the scheme was withdrawn, Ola Electric saw a dip from 53,320 units sales to 33,963 in April 2024 while Ather saw a month-on-month drop to 4,062 units from 17,232. 

Since then, the industry has been waiting for the government to unveil the successor to the program, known as FAME III. However, very little has come by way of information so far, either on the  allocation or the date of its likely launch. 

Moreover, it is not just the government whose policies are affecting EV sales. Analysts point  out that even banks are not very liberal when it comes to financing EVs. “From a Total Cost of Ownership (TCO) perspective, EVs are relatively cheaper. But there are still challenges to fund the electric two wheelers as financiers have yet not developed comfort on the resale value as well as technology stability.” Hemal Thakkar, Senior Practice Leader & Director – Consulting, CRISIL Market Intelligence & Analytics said. 

Another challenge faced by these new brands will be when they try to target the wider category of two-wheeler buyers, beyond early adopters. “They may be a little more traditional in their purchasing behaviour,” says Kumar Rakesh, Associate Director, Equity Research, BNP Paribas. “Things like tech features may work for early adopters but not necessarily work for the early mass [category]. They would go by a more traditional buying behaviour where resale price, durability, word of mouth, service network etc. would matter a lot more,” he points out.

In this segment, incumbents like Hero MotoCorp, Bajaj Auto and TVS Motor could enjoy an edge over the new entrants, although the legacy players have so far shown no great hurry in trying to corner market share in the EV market. However, the aggressive strategies of players Ola and Ather have are seen to have played a role in pushing the legacy players to accelerate their EV efforts. 

While TVS is reported to have injected over Rs 1,000 crore into the E2W biz, Bajaj plans to invest over Rs 750 crore. In addition, Bajaj Auto has also launched a CNG motorcycle with half the running cost of a petrol variant, further raising the bar for EV adoption.

In addition to these market-related challenges, there are also some technological roadblocks. For example, most of India’s traditional two-wheeler buyers prefer the motorcycle formfactor, compared to the scooter format. But heavy EV batteries sit ill at ease on the motorcycle.

“It's technologically far more complex in motorcycles, especially within a given budget,” says Kumar Rakesh of BNP Paribas, pointing out that you can’t simply swap out a petrol tank on a motorcycle for a heavy battery. 

“The placement of the battery is complicated as it can raise the centre of gravity, deteriorating the handling of the vehicle. To compensate for this, a lot more work on chassis will be needed, which will increase the cost. Also, the price difference between ICE and EV motorcycles would be higher than what it is in scooters as it will need a bigger battery for higher range and performance. Hence, it may take a little longer to electrify the motorcycle,” he explains.  But at the same time, if India's electric two-wheeler penetration has to cross 30%, electrification of motorcycles is critical for that to achieve, he adds.

Given the recent slowdown in the overall market and uncertainty over FAME subsidy, the adoption rate in the market has slowed down. While some continue to believe that two- and three-wheelers will be the first to be electrified, they have also revisited their projections for EV penetration rates in the country. The government’s nodal agency Niti Aayog had once projected 100% two-wheeler transition to EVs by early 2027, but later revised it down to 40%. 

Despite such challenges, many on Dalal Street see the electric two-wheeler segment continuing to grow with costs coming down and an expansion of charging infrastructure. “India EV sales growth is expected to be robust, as customer acceptance increases on the back of availability, affordability and aspirational value. Improving affordability is a result of better cost of ownership in comparison to ICE models,” says Raghunandhan NL, director at financial services firm Nuvama.

Similarly, a report by McKinsey & Company says that electric two-wheelers might account for 60 to 70% of new sales in India by 2030, while Nomura is more conservative and expects EV penetration to continue and grow from 5% in FY24 to 20% in FY30, implying a 30% CAGR. 

According to a Redseer Report, the Indian E2W industry is expected to grow at a CAGR of 11% from $35 billion (Rs 28.8 trillion) to $45 billion (Rs 36.6 trillion) in FY28 as markets like Africa, LATAM and SE Asia provide a significant export opportunity for Indian OEMs. 

Keeping the existing opportunity in mind, Ola’s current investors are confident that Aggarwal will be able to lead the company successfully through the transition, “Market change will not be brought by Bajaj or Ather as they’re extremely conservative in their approach…Some people may criticise him for overdoing it, but that’s how he is,” one of its investors points out.

Elusive Profits

The second major challenge faced by these companies as public listed entities will be that they can no longer chase market share and burn cash as they used to. As listed companies, they can no longer rely on investors to fund widening operational losses. Their overall strategy will come under increased scrutiny, which can restrict their ability to take the kind of risky bets that they have been used to in the past. Investors may force the companies to look more and more at profits, rather than just at the top line.

“Once listed, they’d be gauged from quarter to quarter,” points out independent stock investor Ambareesh Baliga. “These are the things that the Ola management needs to be prepared for.”

Until now, they have not had to worry too much about the bottom line. In the financial year ending March 2023, Ola Electric reported consolidated revenue of Rs 2,782 crore, up by 510% from Rs 456 crore in FY22, but the company’s loss doubled to Rs 1,472 crore in FY23 from Rs 784.1 crore. 
"For the EV industry dominated by startups, reaching sustainable profitability remains a daunting challenge despite the rise in EV sales year-on-year,” points out Hemal Thakkar, Senior Practice Leader at CRISIL, adding that he expects profitability to improve over time due to increasing volumes and greater support from the government.

To be fair, Ola’s IPO prospectus does warn investors that it may not be able to turn a profit in the near future: “We may continue to incur operating losses in the near term as we invest in our business and expand our product portfolio, build capacity and scale our operations.” Ola has planned motorcycle launches across  different  categories FY26 onwards. 

ICICI Direct points out that increasing revenue is leading to increasing losses for Ola. From FY22 to FY23, Ola’s topline increased 7.5 times, but losses have doubled. 

“At present, the company is operating with several subsidies. Any reduction or elimination of government incentives under the PLI scheme for the Automobile and Auto Component Industry will increase the purchase cost of electric vehicles and could adversely affect customer demand. They are yet to accurately estimate the supply and demand for their electric vehicles, leading to either a shortage or an excess in inventory,” it noted.

However, many analysts are betting on the company’s efforts to bring down per-unit costs through innovation. Nuvama points out that the management is planning to launch the Gen3 platform next year, which should cut costs by 15%, going by past experience. 

“In 2023, Ola launched generation 2 platform of Ola S1 Pro, which offers a 26% improvement in EV performance, a 28% improvement in thermal performance, an 18% reduction in cost, 11% fewer parts, 6% less energy consumption and a 4% reduction in EV weight, compared with the first-generation model,” Raghunandan of Nuvama pointed out.

He noted that the company has also set up a captive motor manufacturing line. “This has led to a significant reduction in costs compared with procurement from SEG. Management reckons profitability for E-2Ws over the medium-term shall be similar to ICE 2Ws for the entire industry, led by scale and localisation of E-2Ws.”

With its own inhouse battery cells coming on stream and volumes picking up, Ola will see a significant improvement in cost. The benefits of the production linked incentive scheme will further aid Ola.  

The road to profitability may be even longer for Ather because of its lower scale compared to Ola. Ather sold 1.09 lakh e-scooters in FY24, up 42% year on year, and had a 12% market share. But this was only one third of Ola’s sales and market share. Moreover, unlike Ola, Ather cannot look forward to any benefits from the PLS scheme as it did not apply under it. 

The company’s losses ballooned to Rs 865 crore in FY23 from Rs 344 crore in the year before, even as revenue more than quadrupled to Rs 1,806 crore from Rs 414 crore.
 
Still, Ather’s plans are no less ambitious. It is targeting a 4x growth in two years to over 4 lakh vehicles by FY26. This will be driven by the new family scooter Rizta, which marks the company’s entry into the mass market, and the upgraded 450X called Apex and other models.

“Ather is eyeing to more than double its market share to around 30% by the end of this fiscal, and Rizta could play a significant role in achieving that target,” notes Motilal Oswal Financial Services. 

However, from an infrastructure point of view, the company is already well geared for expansion. It has a network of over 1,700 fast charging stations nationwide, providing a significant infrastructure advantage. The company aims to expand this network to more than 5,000 stations by the end of this CY.
 
It has two manufacturing plants in Tamil Nadu that have a combined annual capacity of 4.2 lakh scooters and 4.3 lakh batteries. It is planning to set up one more manufacturing plant in Maharashtra to take its capacity up to 1 million scooters annually. Many analysts question the loss-making company’s move to expand plant capacity when the current facility is not yet fully utilised. 

However, Ather continues to enjoy the backing of its early stage investors. Hero Motocorp, for example, increased its exposure to Ather Energy in December 2023 to become the largest investor with a 39.7% stake.
 
Broadly, analysts seem to like Ather’s more prudent approach to finances, but worry about scale, and like Ola’s dominance, but not its wafer thin margins. “My main concern from an Ola Electric investor perspective will be that their gross margin is way too small. For Ather, the question is how they’ll ramp up,” says Subhabrata Sengupta, Partner, Avalon Consulting. 

“But they’ve both built reasonable brand equity. I don’t see why both of them will not continue to grow,” he adds.

Besides paying more attention to the bottom line, a listing will also require the startups and the promoters to be more mindful of the image they project. For example, the public persona of Ola’s high-profile founder Bhavish Aggarwal will also play a role in investor perception around the company as its execution strategy and financial performance. This is particularly so given the high personnel attrition rate of 47.5% (FY23) at the company, which accentuates the need for a steady hand at the top.

Batteries - A Dark Horse?
 
In addition to their focus on the EV market, the companies have also tried to achieve considerable vertical integration with their investments in battery manufacturing. Both Ola and Ather are investing heavily in this domain, but with varying strategies and outcomes.
 
Ather Energy, for example, has invested Rs 320 crore in its second plant in Hosur, which includes a battery manufacturing facility with a capacity of 1.2 lakh battery packs. It plans to invest an additional Rs 650 crore by 2027.

Ola Electric is planning to use Rs 1,226 crore for expanding capacity at the company’s cell manufacturing plant, the Ola Gigafactory in Krishnagiri district in Tamil Nadu, from 5 GWh to 6.4 GWh. This investment is expected to be made in FY25 and FY26. 

Ola has secured an initial investment of Rs 3,200 crore to establish its 100 GWh Gigafactory and has already set up a production capacity of 1.4GWh for 4680 cells. These cells are 5.5x larger than the currently used 21x70mm cell, and promise to deliver greater driving range. They also offer a higher charging rate, improved heat dissipation and lower production costs due to fewer parts, and are likely to be adapted for existing models by the end of FY25.
 
Ola expects to generate peak revenue of $100 mln from the cell manufacturing operations and an EBITDA margin of 25–30% at optimal utilisation levels. 

Moreover, Ola Electric has also qualified for PLI incentives for its 20GWH battery plant. Under the scheme, the company needs to achieve 1GWh capacity in the first year, 5GWh capacity in the second year, 10GWh capacity in the third year and 20GWh capacity by the fourth year. 

“The incentives are expected at 13–18% (sales linked) for five years. The company is also aiming to manufacture LFP and sodium ion cells in 2025, and solid-state pouch cell in 2027,” Raghunandhan NL points out. 

With PLI incentives, Ola’s batteries are likely to turn out cheaper than imports. “Sale of surplus batteries to other automobile and industrial customers will provide another stream of revenue,” he adds.
 
However, not everyone is convinced that battery manufacturing is what these companies should be getting into. 

“Cell manufacturing is not a very high margin business,” said an analyst who did not wish to come on the record. “Outside of China, it's really a very poor business to be in even if you vertically integrate it. It’s highly capital intensive with the technology investment where the form factor, chemistry, solid state tech. etc. are still evolving. It might not be a great place to spend so much money. 

“On paper it may look like a competitive advantage but it becomes a challenge and increases the risk of overall business. On average, they will have to produce and sell 2 million batteries. Where will they deploy these batteries?.”
 
Arun Kejriwal, founder of Kejriwal Research and Investment Services, points out that Ola may need to tie up with other EV players, including incumbents, to fully leverage the PLI scheme, which is available only for a period of five years. On this front, the company is known to be already in advanced talks with other two- and four-wheeler players to deploy its battery cells.
 
However, more competition is very much on the horizon. Tata has committed Rs 13,000 crore to build a Gigafactory in Gujarat, while Log9 Materials has constructed a 25 MWh capacity plant at a cost of Rs 190 crore and plans to build a 25 GWh Gigafactory, estimated to cost Rs 10,000 crore. Players like Amara Raja and Reliance are also looking to enter this space in the future.  

On a positive note, the companies do face a potential upside in the form of faster-than-expected decline in raw material and battery prices, points out Hemal Thakkar, senior practice leader and director at CRISIL. “We expect them to drop by 6-8% CAGR going forward over the next 5-7 years. We think the prices of EVs will gradually come closer to ICE vehicles once [EV] volumes ramp up, current exemption in customs duty on critical minerals is passed through and more choices are available to the customer,” he points out, adding that he expects around 35% of total two-wheelers sold to be electric by 2030. “But right now, there’s a lack of clarity about certain policies propelling EV sales, especially FAME III and EMPS.”
 
To invest or not to invest?

All this raises the question – are these upcoming IPOs a once-in-a-lifetime chance to ride India’s EV revolution, or a risky bet on an unproven business model?
 
Amit Dakshini, President & Sector Leader, Arthur D Little (India & South Asia), is one of the believers. He is not overly concerned about Ola’s poor margins and does not expect a sharp correction in the stock price after listing, as was seen in the case of other startups like PayTM. “At the end of the day they are still operating with the largest market share and they have been able to sustain the volumes. Profitability is definitely going to be an agenda, but [optimisation of] production and distribution costs will eventually help them achieve profits,” he points out.
 
There will be a market for Ather as well, he says. “People who focus more on performance and high quality, would gravitate more towards performance products like Ather 450X. It will have its own niche in the market. The battlefield in e2w space is getting defined by product cost, reliability and maturity of the EV eco-system elements like financing, charging / swapping, and servicing,” he adds.

However, recent bitter experience with start-ups – such as Paytm, Zomato, and PB Fintech – is likely to temper investor enthusiasm – and valuations – this time. Of the 12 companies that have filed their DRHP with the Securities and Exchange Board of India (SEBI), eight – including unicorns like FirstCry, MobiKwik, and Ola Electric – have accumulated combined losses of over Rs 8,000 crore.
 
Dakshini of Arthur D Little, expects some of the market uncertainties to reflect in the valuations that these companies are able to command. “So far, electric two-wheeler companies have operated assuming that there's a large subsidy available. Ability to reduce costs and develop new products profitably without the subsidies will be a challenge,” he saying, adding that capital is getting expensive for EV players. “Ola's valuation is actually 15-20% lower [compared to expectations].”

Subhabrata Sengupta, Partner, Avalon Consulting, also believes that the current market situation is likely to lead to a “more balanced outlook” on EVs. 

For now, Ola’s investors seem resigned to the fact that the IPO valuation is likely to be slightly below the valuation discovered in its last funding round. 

“The valuation coming down was expected because EV industry has faced headwinds not because of its potential, that’s still intact but because it was overhyped,” said one of Ola’s early investors on the condition of anonymity. “We’ve realised that mass electrification will be a slow process in India and growth will not be as predicted and the valuation is a reflection of that.”.
 
As for the IPO, market experts like Ambareesh Baliga don’t expect Ola stock to be heavily oversubscribed, but expects it to sail through without much trouble. “It’s a decently large issue but I don’t see a major challenge for it to get subscribed”. He doesn’t expect the IPO to be heavily oversubscribed like 50X or 100X, but says that subscription levels could hover around 8-10X.

Finally, says VG Ramakrishnan, Managing Partner at Avanteum Advisors LLP, there has been a rationalisation in the way the startups are being assessed, and that is not a bad thing. 

“Earlier electrification was portrayed as a revolution. My optimism for the industry is coming from the fact that now the industry is letting the market forces define the demand. That’s a very positive element.”