Ola Electric Mobility Shares Rise 3% as HSBC Reaffirms 'Buy' Rating

Ola Electric Mobility's shares gained more than 3% during the morning trade on September 26, at ₹106, after HSBC reaffirmed its positive outlook with a 'buy' recommendation.

Ola Electric share price have opened 0.9% higher from the last closing at ₹103.91, but they had seen a drop of 34% from the peak they had touched post listing at ₹157.

HSBC has maintained a 'buy' rating with a target price of ₹140, implying upside potential of 35% from the last closing price of ₹103 on the NSE. The stock recently also faced a bit of a challenge as it declined by 12% this week.

The brokerage, however, stated that most of Ola's service centers are incapable of taking the volume of service requests. Apparently, the reports show that the firm receives around 80,000 complaints monthly. This is stressing the service centers, according to several reports.

HSBC noted that there is a severe shortage of skilled staff and testing equipment in most service centres, as well as a general lack of experience in running and maintaining these centres at scale across multiple locations.

On the bright side, Ola Electric has undertaken several steps to mitigate service issues, which HSBC assumes are short-term. Nevertheless, quality service remains the thrust area for Ola before the launch of its electric motorcycles.

As complaints over services rose, the new issuers have established a dedicated team to manage this issue, Mint reported.

"We see the company needs to invest more in the service staff, spare parts, and space," HSBC said in its report. Warranty costs for Ola are currently around 6% of the overall revenues and would remain steep for a few more quarters.

It has improved remarkably in the last one to two months, and Ola Electric is working with service centers on design and developmental issues.

Earlier, HSBC had a positive view on the battery project and had strong confidence that Ola would be able to manufacture batteries at par with import cost. In the ideal case, this brokerage firm is looking forward to a high-quality product at a price of $15-20 per kWh against prevailing ones and therefore there is upside risk in its estimate.

Those positives for the company are set to continue, said HSBC, which retains its recommendation on Ola Electric in light of ongoing regulatory support, potential cost reductions, and hope of success in its battery project. Thus, HSBC puts out a note saying that Ola sold 49% of all electric two wheelers in the June quarter and is working towards producing most of its EV components, including batteries, domestically.

According to brokerage firm Bernstein in its report, on Wednesday, 25th September, Ola Electric has the strongest gross margins among its peers and is moving close to EBITDA-level profitability. This means the company is on a sound growth trajectory.

Despite some concerns over the profit sustainability and issues Ola might face in the EV space, Bernstein sees room for greater optimism. The firm said Ola is actually widening its lead in the electric two-wheeler space as well as on the profitability front. At the same time, Ola is getting closer to positive EBITDA, hence greater growth momentum.

Ola has fared well so far in terms of a move towards profitability, reporting an EBITDA margin of -2%, outperforming peers like TVS (-7.9%), Bajaj (-10.4%), and Ather (-37%). Bernstein credits the competitive advantage to high localization, vertical integration, and a D2C model. The government incentives such as PLI and FAME schemes also have buttressed its financials.

Ola Electric, therefore has a gross margin of 18.4% for Q1 FY25, significantly higher than that of its rivals, 14% at TVS, 12.3% at Bajaj and 7% at Ather. The margin is better for Ola, incorporating after having a very low consumer price for the brand: 10-25% lower than its competition.

In addition to its dominance in the EV market, the technological advancement and strategic investment at the company further justify its positions. The company has so far invested approximately $1 billion dollars into building out an electric vehicle ecosystem, leaving most of its competition still struggling on how to scale their business models.

On August 15th, Ola unveiled Gen 3, the third iteration of its electric vehicle platform set to further boost the gross margins and moves the company closer to sustained profitability.