Forget the fight, focus on the consumer - Street to Ola Electric

The Ola Electric stock continues to test new lows and fell another 5% on Thursday, seemingly incapable of breaking out of the negative spell that befell it when it dropped more than 9% on the first day of trading this week.

This is in stark contrast to the first six days of trading after the company’s listing in August, when investors could not seem to have enough of the company’s stock. Ola Electric shares, which made their stock market debut at Rs 76 each on August 9, nearly doubled in value to Rs 157.53 over the first six trading days.

But the stock has exhibited a persistent downward trend ever since, and is currently flirting with the Rs 90 support level. So, what explains the fall, and more importantly, what does it signal for the company’s future prospects?

Autocar Professional spoke to a cross section of analysts and experts to find out what has changed so radically about the company in such a short period, and why investors seem to have turned bearish on a company they were so enamoured with just weeks ago.

Most analysts agree that nothing has changed as far as the company’s fundamentals are concerned, but, at the same time, they point out that some of the latent concerns about the company and its business model have come to the fore.

These concerns can be grouped into three categories – worries about rising competition and Ola’s declining market dominance, concerns around consumer complaints about the company’s products, and finally the attitude and approach adopted by the company and its promoter towards these complaints and concerns.

Consumer Complaints and Management Reaction

The last few days have seen several high-profile protests and posts highlighting the mounting number of consumer complaints about Ola’s e-scooters. Social media has seen a flurry of posts by angry customers, triggered by everything from manufacturing defects to delays in repairs and services.

An unsightly spat between comedian Kunal Kamra and Ola’s high-profile founder Bhavish Aggarwal over the weekend was only the latest in a spate of negative publicity Ola has had to face online in recent weeks.

The issue raised by Kamra – a rising number of for-repair Ola scooters at service centers – was hardly unknown to investors. However, Aggarwal’s aggressive response to the message – choosing to attack Kamra personally instead of addressing the concern – brought the issue back into the limelight and revived questions about Aggarwal’s style of functioning.

The controversy also attracted the attention of the Central Consumer Protection Authority, a body under Ministry of Consumer Affairs, Government of India, prompting it to issue a show cause notice. The notice cited issues such as delayed and insufficient services, as well as erroneous invoices.

The concerns about quality have also got support from operational and financial numbers. For example, according to an analysis of the company’s IPO documents by Elara Securities, Ola has a warranty expense of Rs 8,898 per vehicle sold, more than double of what a rival like Ather Energy (Rs 3,915) spends. On a company level, Ola’s warranty expenses add up to 5.9% of its sales, while the number is just 2.4% for Ather.

Moreover, Bhavish Aggarwal’s defensiveness in responding to these complaints have only served to make matters worse. Randheer Singh, the former Director of Mobility at NITI Aayog and current Founder & CEO of Foresee Advisors, points out that what sets apart winners from losers is not whether they face adversity, but how they respond to it.

"It is not uncommon for start-ups to encounter operational difficulties, but their response and commitment to improving the customer experience frequently determine how they emerge from such situations,” he said.

He added that the complaints will have only a short-term impact if dealt with properly. “Ola's long-term market position will be determined by how it handles this period and improves service quality and consumer trust,” he noted.

Mrunmayee Jogalekar, Auto Research Analyst at Asit C Mehta Investment Intermediates Ltd, is one of those who are concerned that such controversies around quality and service levels could impact demand for Ola's offerings. She highlighted the notice from the Central Consumer Protection Authority.

“While we await the company's response, this situation may have an impact on consumer demand due to growing concerns about the quality of its products and services…With numerous alternatives available from competitors…Ola's market share may continue to decline. This situation may put downward pressure on the share price in the near to medium term,” she said.

Varun Baxi from Nirmal Bang Securities pointed out that long-term investor interest in electric vehicles remains strong, but there has been a shift in investor interest away from start-ups to more established players. "Ola urgently needs to improve its product offerings, marketing strategies, distribution channels and cash flow," he stated.

An Evolving Market

Beyond issues related to product quality and brand image – which are within the company’s power to fix – Ola Electric also faces external challenges that are beyond its control. The most important among the latter is that many of its well-capitalised rivals from the traditional two-wheeler industry, such as Bajaj Auto, are starting to get their act together in the EV space.

A recent analysis of data from the central government’s Vahan portal by Elara analysts Jay Kale and Nishant Chowhan outlined some of these shifts in the marketplace. It showed that Ola, which previously dominated half of India's e-two-wheeler market, is now facing increased competition, with Hero, Bajaj, TVS and Ather jointly accounting for an unprecedented 60.3% market share in September.

The analysis found that Ola has lost market share in five of the top ten states. Similarly, Elara's investigation into the top ten states, which account for 80% of industry volumes, reveals that Ola Electric's current market share is only 27.4%, the lowest in 16 months.

According to the report, Ola's month-over-month market share in Uttar Pradesh fell by 10.1 percentage points to 33.9% in September. UP had been Ola's largest market in recent months.

Ola also dropped to third place in Maharashtra, the state with the highest EV volume, with a 15.6% market share, from second in August. Rival TVS Motor has significantly outperformed Ola Electric in the state, securing its position as the second-best-selling brand, while in Kerala, it has surpassed Ola to claim third place.

Elara's Kale expects this market share to grow further, particularly as distribution channels expand and more affordable scooters, particularly those from TVS Motor, Ather, Bajaj are introduced.

Besides money and brand, analysts from Nirmal Bang pointed to another key advantage enjoyed by the traditional players – the support of a large ecosystem of partners and dealers.

“In contrast, a company-operated channel does not receive the same level of investment from employees, who do not have the same vested interest as dealers and distributors," they pointed out, adding that established players also have better cash flow and stronger balance sheets for the long game.

Hence, Nirmal Bang has advised its investors to proceed with caution when investing in Ola Electric, stating that the stock appears risky in the short and medium term.

Another analyst who is worried about the rising competition levels is Mrunmayee Jogalekar from Asit C Mehta Financial Services.

“Despite year-over-year growth, Ola's market share has decreased in the last three months due to increased competition. Ola faces significant challenges as major players such as Bajaj Auto and TVS Motors increase their emphasis on electric vehicles,” she said, noting that the company has announced significant discounts for the holiday season.

“Ola's future success will be determined by its ability to navigate market share fluctuations amid fierce competition, effectively address consumer grievances, and meet key profitability targets,” she added.

This is not to say that the company does not have strong backers on Dalal Street.

Barely a month ago, US investment bank Goldman Sachs initiated coverage on the stock with a 'BUY' rating. The analysts put a one-year price target of Rs 160 on the stock. They believe that the planned launch of the Ola S1X (2kWh) at a price of less than Rs 50,000 will again lift the company’s market share and allow it to target the more price-sensitive customers. GS believes that the company will achieve profit breakeven at an operational level in just two years.

However, it warned that this would depend on factors such as “in-house battery cell production, direct-to-consumer (D2C) sales, after-sales service models, and upcoming launches from established competitors”.

Similarly, Kranti Bathini, Director of Equity Strategy at WealthMills Securities, is one of those who are not losing sleep over the recent controversies or its poor margins. However, he agrees that Ola Electric is best suited for high-risk investors.

“Those with a short to medium-term focus on profitability may find this stock less appealing if they are looking for consistent and reliable returns,” he noted. "Ola Electric is a forward-thinking company, and its initial losses should be viewed in the context of the company's long-term growth potential, which could span 8 to 10 years.”