Ola Electric, the EV two-wheeler upstart founded by Bhavish Aggarwal, filed its draft IPO papers with SEBI on December 22nd, making it the first automaker IPO in India in over 20 years.
While the company has seen tremendous growth and captured imaginations with its vision of electric mobility, its draft red herring prospectus (DRHP) comes with multiple risk factor warnings that bear examination.
Limited Operating History and Mounting Losses
Ola Electric was only founded in 2017 and has a very limited five-year operating history. As a young, high-growth company it has invested heavily in R&D, manufacturing infrastructure, and expansion. This has resulted in spiraling losses and negative cash flows:
- FY22 loss of Rs 1,222 crore on revenues of Rs 202 crore
- FY21 loss of Rs 429 crore on revenues of just Rs 84 lakh
- Negative cash flows from operations in FY22 and FY21
As Ola continues to scale, it warns that losses may continue in the near-term. This is typical of a high-growth startup, but is a key risk factor for investors in the IPO. Can Ola successfully turn profitable even as it invests in new products and manufacturing capacity?
Quality Issues and Defects
Electric vehicles rely on large battery packs and complex electrical and electronic components. Any defects or quality issues in these components can severely impact a vehicle’s performance, safety, and customer experience.
Ola Electric warns that defects or quality issues in the EVs themselves or their components could damage their brand image and require expensive recalls. Recently the company has dealt with recalls, battery fires, and customer complaints – so this risk cannot be ignored.
In-House Cell Manufacturing Unproven
Ola is making a big bet on in-house cell manufacturing at its 500 acre Ola Futurefactory. However, cell manufacturing involves highly complex processes with little margin for error.
As a first-time cell manufacturer, Ola Electric admits execution risks in achieving the precision and automation needed for high quality cells. Import restrictions may also limit raw material availability.
Delays or problems with its flagship cell factory could limit Ola’s self-reliance and margin expansion plans.
Read More: Ola Electric Files for Rs 10,000 Crore IPO, First EV Company in India to Go Public
No Ownership of Ola Brand Name
One of Ola Electric’s biggest assets is the high brand awareness and trust in the “Ola” brand. However, Ola Electric does not actually own the Ola brand name or trademark!
It is licensed from the ANI Technologies group which owns and operates the Ola ride-hailing business. This leaves Ola Electric vulnerable from a brand protection perspective and limits its ability to defend the brand name if needed.
Changes in Regulatory Incentives
Ola Electric stands to benefit strongly from various central and state government incentives for EVs and advanced cell manufacturing. This includes the Center’s FAME and PLI schemes as well as new Tamil Nadu policies.
However, any reductions or changes in these incentive schemes could severely impact Ola’s cost structures and customer demand. Regulatory risk is high for any automaker, but more so for one betting on still-nascent EV adoption.
Estimating Demand and Capacity utilization
Ola Electric is investing Rs 2,400 crore on Phase 1 of its Futurefactory to deliver capacity of 10 million vehicles annually by next year.
However the company itself flags risks of inaccurate demand estimates. Underestimating demand could result in under-capacity, while low demand could under-utilize its mega factory. This balancing act between demand and capacity is crucial for Ola Electric to achieve profitability.
Successful New Model Introduction
While Ola Electric has seen good initial response for its S1 series of e-scooters, simply rolling out more models will not guarantee success.
The company says its business depends on ability to successfully develop, manufacture and deliver compelling new EV models profitably and at scale. This will test Ola’s vehicle design, engineering, supply chain, and manufacturing capabilities to the fullest.
Execution Risks on Mega Factory
Ola Futurefactory is positioned as the world’s largest EV manufacturing facility when fully completed. However the company warns of substantial execution risks in expanding the facility from its current Phase 1 capacity.
The roll-out of advanced cells and electric car manufacturing will require seamlessly integrating cutting-edge technology across vast factory floors and resolving complex logistics. Delays or cost overruns could severely hamper Ola Electric’s ambitions if not executed properly.
Building a Loyal Customer Base
Finally, Ola Electric admits that its business model depends fundamentally on attracting and retaining customers to its EV brand and offerings.
While it has built excitement and waitlists so far, it remains vulnerable to competition and sustaining customers through superior products and service quality. This will be another key factor in justifying its rich IPO valuation.
In Conclusion
Ola Electric’s draft IPO prospectus provides unvarnished insight into the array of risks and challenges it faces, despite the strong growth and promise so far.
It remains to be seen if the young company and its maverick founder Bhavish Aggarwal can successfully mitigate and manage these threats on the road to becoming India’s next iconic EV brand.
The pre-IPO round offers a chance for select institutional investors to partner in this exciting but high-risk journey of realizing large scale electric mobility made in India.