Ambit sees 11.5% downside in Ola Electric Mobility as stock falls 28% from peak, reiterates ‘sell’ call—key reasons why

Shares of Ola Electric Mobility have garnered significant attention on Dalal Street since the company's debut, but recent developments have left the stock struggling. After a flat listing in August, the stock initially turned into a multibagger but has since lost momentum, particularly following the lock-in expiry of anchor investors.

Ola Electric listed on August 9, 2024, at its issue price of ₹76. In the following days, the stock surged over 107 percent to reach a record high of ₹157.53 on August 20. However, since that peak, shares have dropped more than 28 percent, currently trading at ₹113.

Adding to the company's woes, domestic brokerage firm Ambit has initiated coverage of stock with a ‘sell’ rating, setting a target price of ₹100. This represents a potential downside of 11.5 percent from the current levels. 

Despite its impressive growth trajectory, Ambit cited several risks associated with Ola Electric’s business model. The firm pointed out that the electric vehicle (EV) market in India is still in its early stages, and rising competition could pressure Ola Electric’s market share.

What Ambit said

"We expect e-2W (electric two-wheeler) penetration to rise from 5.7 percent in FY25YTD to 23.5 percent by FY29, driven by e-motorcycle launches. The competitive landscape will evolve as existing e-2W players expand their portfolio and reach, with major brands like Honda and Suzuki expected to enter the e-2W market by Q4 FY25. This increased competition will likely reduce Ola's market share from 35 percent in FY24 to 27.5 percent by FY29, and further down to 25 percent by FY31,” Ambit stated.

Despite these concerns, Ambit acknowledged Ola Electric’s unique position as the only e-2W player in India that manufactures key components like motors, battery management systems (BMS), and lithium-ion cells in-house while also owning its sales network. 

The brokerage also pointed out that Ola benefits from significant incentives, including some exclusive to the company. However, the firm emphasised that maintaining this competitive edge will require substantial capital expenditure (capex).

Ambit also predicted that electric two-wheeler (e-2W) original equipment manufacturers (OEMs) would likely prioritise market share over margins in the coming years. The brokerage estimated Ola Electric’s volumes to grow from 3.30 lakh units in FY24 to 1 million units by FY27 and to 1.64 million units by FY29.

Economies of scale and falling battery costs are expected to reduce the bill of materials (BOM) cost, improving the company’s gross margins to 26.1 percent by FY29. Additionally, operating leverage should help Ola Electric achieve EBITDA break-even by FY27.

The stock's recent decline coincides with the end of the anchor lock-in period, which expired on September 6, 2024. This lock-in period had restricted 50 percent of Ola Electric shares, or approximately 18.18 crore shares, from trading. With the lock-in period now over, these shares are free to trade, which has contributed to the downward pressure on the stock.

Ola Electric’s financial performance also adds to the concerns. The company reported a consolidated net loss of ₹347 crore for the quarter ended June 30, 2024, widening nearly 30 percent year-on-year from ₹267 crore in the same period last year. 

However, revenue from operations increased by 32.3 percent year-on-year to ₹1,644 crore for the quarter. The company posted an EBITDA loss of ₹205 crore for the reported quarter.

While Ambit acknowledged that Ola Electric deserves a premium for its extensive coverage of the e-2W value chain, it warned that the company’s market share is expected to decline to 25 percent by FY31. 

"The current valuation implies a compound annual growth rate (CAGR) of 36.3 percent in volumes from FY24 to FY35, slightly higher than our estimate, leaving little margin of safety against the risks," the brokerage added.

The combination of a stock price decline, competitive pressures, and financial losses led to growing concerns among investors. As Ola Electric navigates these challenges, it will be critical for the company to sustain its growth while addressing the risks outlined by Ambit and other market observers.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.