Pros and Cons of Investing in Ola Electric Right Now

Ola Electric has been one of the hottest stocks in the market ever since it listed back in August.

You could argue that it was one of the hottest stocks even before listing if all the pre-listing hype and action is to be considered.

The Ola Electric IPO didn't disappoint. After a great listing, the stock soared more than 50% within a few days. It had doubled from the issue price, bringing joy to investors who received allotment.

However, it has not been a pleasant ride since then. In a month and a half, the stock is down about 30% from its life high.

Investors holding the stock from the IPO or just after listing are now worried about the stock turning from an asset to a liability.

Then there are investors who are wondering if this could be a good opportunity to buy the stock.

In this editorial, we will present the pros and cons of investing in the stock.

Read on...

Pros

#1 It's Still a Good Long Term Story

Ola Electric holds about 39% market share in the electric two-wheeler market. It captured over a third of the market quickly. In fact, earlier this year, it held nearly half of the market.

Even though it's facing tough competition from the likes of Bajaj Auto, TVS Motor, and Hero Motors, the company has the potential to hold its own once the competitive intensity stabilises.

Ola's revenue has shown significant growth over the three-year period. From Rs 0.5 billion (bn) in FY22, its revenue crossed Rs 50 bn mark, reaching Rs 52.4 bn in FY24. Ola has a head start over the competition with close to 330,000 deliveries in FY24.

There has been no slowdown in growth so far despite the increasing competition. It reported a 32% jump in revenue for the first quarter of FY25.

Ola Electric is focused on solidifying its position in the market with an aggressive push into the electric motorcycle segment. It has launched the Roadster series, along with the upcoming models like Sportster and Arrowhead, targeting both premium and mass market categories.

#3 Good Growth Plans

Before the IPO, it took steps to address the challenges to profitability. It's restructuring internally to enhance profitability, resulting in the layoff of approximately 600-800 employees.

Ola Electric plans to allocate Rs 12.3 bn of the total net proceeds from its IPO to expand the capacity of its battery cell manufacturing facility, Ola Gigafactory, from 5 gigawatt hours (GWh) to 6.4 GWh. The company aims to achieve this enhanced capacity by the end of April 2025.

Additionally, Ola Electric will use Rs 8 bn of the net proceeds to repay loans taken by its subsidiary, Ola Electric Technologies. The company will also invest Rs 16 bn into research and product development.

The company has also been approved for India's PLI schemes - one relating to the manufacturing of advanced automotive technology products (Automobile PLI Scheme) and another relating to advanced cell chemistry batteries (Cell PLI Scheme).

#3 Expanding Industry

Even though the competitive pressure will increase going forward, the electric two-wheeler market in India is expanding rapidly with plenty of room for growth.

The global EV sector is progressing rapidly, driven by the increasing demand for sustainable transportation and government incentives.

In India, the EV market is also seeing robust growth, with the government encouraging adoption through policies like the FAME scheme.

Additionally, India is at the forefront of electrification of mobility due to the favourable total cost of ownership compared to internal combustion engine vehicles.

India is the second largest two-wheeler market globally (by domestic sales volume). Electric two-wheelers are projected to account for 41-56% of the domestic 2W sales volumes by 2028.

There is sufficient demand for the company's products for the foreseeable future. As long as it can execute its growth plans in a profitable manner, it should do well in the long run.

Cons

#1 A Loss Making Company

Despite the strong growth in revenue, the firm's losses have widened from a net loss of Rs 7.8 bn to a net loss of Rs 15.8 bn in FY24, on the back of an increase in its expenses.

As part of the internal risk disclosure within the IPO prospectus, Ola Electric said that it may continue to incur operating losses in the near term as it is investing in business and focussing on expansion.

Sure enough, its net loss widened by 30% year-on-year (YoY) to Rs 3.5 billion (bn) for the Q1 FY25.

Although the company's consolidated revenue from operations rose 32% to Rs 16.4 bn in Q1FY25, up from Rs 12.4 bn in the previous year, these gains have not been enough to offset concerns.

The cash burn will have to end swifty, if it is to regain confidence of investors.

#2 Uncertainty on How it Will Handle the Competition

Ola Electric's struggles are compounded by the growing success of competitors like TVS and Bajaj, who have gained ground with newer, more affordable models.

The company's share in India's electric two-wheeler market also dipped to 31%, while rivals TVS and Bajaj Auto captured 20% and 19%, respectively.

Despite all the advancements it has made, Ola Electric will have to address the recent downturn in sales and market share. Otherwise, investors will not show any confidence in the management.

The company aims to regain momentum by leveraging its innovative technology and expanding into new segments. The success of these strategies will be crucial for the company to recover from recent setbacks and sustain long-term growth.

For more details, see the Ola Electric Mobility company fact sheet and quarterly results.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...