Ola Electric Mobility Limited (OLAELEC.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ola Electric Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Before we begin, a few quick announcements for the attendees. Anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement may involve risks and uncertainties. Such statements or comments are not guarantees of future performance, and actual results may differ from those statements. To. Begin with, I would like to request Bhavish Aggarwal, Chairman and Managing Director of Ola Electric; and Harish Abichandani, CFO of the company, to take you through the results.

Thank you, Abhishek, and good to meet everybody again after 3 months. Again, I'm going to largely keep time for Q&A. My comments are going to be very, very brief. We published the shareholder letter in good time this time, and I'm assuming most of you have gone through it. A couple of highlights. It's been an important quarter for us. Our auto business has continued its progress towards strong profitability. Specifically, I want to highlight our gross margin, 30.7% gross margin, much better than many ICE companies also. And this has been consistent with our strategic focus over the last 2, 3 quarters. Auto business also turned cash generative with underlying cash flow from operations of INR 15 crores. This quarter also commissioned our giga-factory 2.5 gigawatt hour capacity. And by March, we will be scaling up to 5.9 gigawatt hour. In October, we launched expanded into the energy segment with [ Ola Circuit ]. It's India's first residential BESS product, and this built with our own in-house 4680 cells. This should drive new revenue streams and grow the giga-factory utilization. So I'm going to pause here. I'm going to open up for questions and through questions, answer many of your queries.

[Operator Instructions] We take the first question from Mr. Chandramouli from Goldman Sachs.

First question is just on the BESS business. So I just wanted to understand what the building blocks of the assumptions are on your guidance for FY '27 full year revenues then?

Chandru, firstly, important point to highlight in the BESS business is that a lot of the manufacturing and R&D is all shared between our automotive and BESS business. It's the same battery pack that goes into our roadster. The same 4680 cells go into our BESS -- the [indiscernible] product as go into our automotive. Now if you look at the opportunity, and we launched it in October, we've gotten a very good response, a lot of reservations. The product goes into the market in around mid-January and goes into market across all our 2,500, 3,000 stores, right? So in that sense, we have a very strong distribution also. The current market that it addresses, it's a first of its kind product, which is built in India, but the market it addresses is the current inverter market, which is largely lead acid or even the diesel generator used in homes, used in small SME or small commercial establishments. And it also complements the rooftop solar market growth because rooftop solar as it's growing with the government push behind it. Most of those installations will have some version of home battery storage installed with it. So those are the market assumptions that -- market directional inputs that important for all of us to understand. In terms of numbers, the average selling price for this product is at the upper end, INR 2 lakh product, at the lower end, 50,000 products. So an average selling price of about [ Saha ] average blended selling price is coupled up. So then if you just add that next quarter, we have said Q4, which is when it launches, we should do about INR 100 crore revenue, which means about 7,000, 8,000 products sold through the quarter, which we feel fairly confident in doing. And through FY '27, INR 1,000 crore number to us seems to be a median guidance on what we can achieve. That's about INR 250 crores, INR 300 crores a quarter. So the demand for this is fairly high. And our distribution, our pricing all is industry-leading here. And also despite the pricing that we've in this category also started with a competitive pricing, despite that, our gross margins are going to be fairly healthy. Just like in our auto business, as you've seen, our gross margins have continued to improve. Even here, our gross margins will start off in a very healthy way.

Got it. That's helpful. Second bit is just around the ASP reported this quarter. So it looks like the 2-wheeler business ASP has increased from 121,000 to 131,000. Is most of that because of slightly better PLI realization? Or is there any other insight you can share with us on the mix of products, maybe what the quarterly average on motorcycle mix was? Any additional color you can share?

PLI in this quarter was also minimal only, and we have a chart -- we have a graph towards the end in the [indiscernible] which shows you gross margin without PLI, gross margin with PLI. So PLI in the 30.7% gross margin was only 2 points. So gross margin on our Gen 3 -- PLI on our Gen 3 came in only towards the end of the quarter. So in Q3, which is this quarter, we will see a further uptick in gross margin due to PLI. Now the ASP is improving because we are able to increase the attachments of our add-ons like [ MoogOS plus ], which is software subscription as well as, to some extent, accessories, et cetera. We've also -- our Gen 3 products give us a broader range of pricing. The 4680 products are priced on the higher end, higher range. Even the [ Pro Plus ] products came into market in Q2. So due to a broader range, our ASP also got a certain benefit due to that. Our motorcycles also have a slightly higher average pricing than the scooter given the higher battery pack sizes on average. So those are the reasons why ASPs went up. Important point to note also is our pricing in the market is still competitive. We are compared to like-to-like to our competitors, still slightly lower on pricing index versus what they are. And despite that, our gross margins are very healthy. Now another point I want to make on this as we are on this topic is the auto 2-wheeler EV industry has been largely flat over the last few months, last 2, 3 quarters especially through this calendar year. And our strategy has been to use this time to consolidate our operations, focus on cost efficiencies, improve our gross margins, get the new product, which is our Gen 3 product into the market, launch the motorcycles in a credible way and also fix some of the front-end operational challenges that we have been focusing on for the last couple of quarters. And this strategy, we believe is setting us up very well for the next phase of growth that will start once the mass sort of more value-conscious customer starts buying into EVs. So in that sense, the company, the products, the gross margin, the product differentiation, the business model, cost structure all is now primed for the next wave of growth coming up.

Got it. That's helpful. And just lastly, if you could just help us with -- I think there's a comment in the shareholders' letter that the exit run rate for motorcycles was about 15% of total volume. But just the quarterly run rate for the entire quarter, if you could just give us some more clarity on what the electric motorcycle mix was for the September quarter?

See, the quarterly run rate would be around 12% to 15% in the Q2 quarter overall volume. So obviously, over Q1, we have increased. And we are seeing increased interest and traction in our motorcycle business. But like we said earlier, we're taking it in a more gradual sense, rolling it out across the country in a more gradual step-by-step way.

We'll take the next question from Mr. Arvind Sharma. We take the next question from Ms. [indiscernible].

So I just need a clarification did you mention that in FY '27, [indiscernible] INR 250 to INR 400 crores per quarter from our BESS unit?

We have set outlook of INR 4,000 crores to INR 1,200 crores for the year. So we have not really given any specific number for a quarterly number. I just divided that by the...

But this is just from BESS unit right?

Yes. This is just from the BESS products.

And the price [indiscernible] would be INR 1.15 lakh to INR 1.5 lakhs, if I heard it correct?

The upper end is INR 2 lakhs and you can find this in our website.

We'll take the next question from Ms. Gunjan Prithyani of Bank of America.

Yes. Hi can you hear me?

Yes. Gunjan, you have to be a little louder or closer.

Okay. A couple of questions from my side. Firstly, a follow-up on the results. Could you also talk about what was the progress on Gen 3 transition? Are we -- what part of the portfolio is already transitioned fully? And any reason for PLI still being lower? I mean, what stage of PLI certification we are for the current portfolio?

Gunjan Q2 was almost all Gen 3. And now since -- since the beginning of festive, we stopped Gen 2 completely. So now all our sales are completely Gen 3. Q2 was almost like high 90 percentage Gen 3. PLI, the Gen 3 for scooter portfolio already has PLI now. That PLI came through towards the early part of September. That's why only a part of our quarterly revenue has PLI. But Q3 onwards, all of our scooters have PLI, bikes PLI will come in January or Feb. That's our expectation.

So this 2% PLI contribution will essentially go up more closer to like 10% on a blended basis by next quarter. Is that correct?

See, if all our revenue gets PLI in gross margin, it will reflect at about 7, 8 points extra because our revenue is not just product revenue, right? There are [indiscernible] also. So like the add-on revenue doesn't get PLI, the service revenue doesn't get PLI, the [indiscernible] doesn't get PLI [indiscernible] revenue. So 7 to 8 points is what will add up in total PLI revenue once all our products have PLI. So -- but if I help you draw a bit of a margin walk -- gross margin walk between 30.7 in this quarter -- so we are actually -- our outlook is on the gross margin higher than what we thought in Q1. We do expect from a full portfolio PLI Q4 onwards, we should be having a gross margin of 36%, 37%, which is that extra 5, 6 points that will come. Some of it will come in Q3, some of it will come in Q4. Then on top of that, there are some further incremental improvements in attachments of our software subscriptions, other accessories, which are going to increase. And then the whole parts business, which we talked about in our the whole parts business so far was only restricted through my own network. And as you know, most OEMs make about 10%, 12% revenue and 50%, 60% gross margin on that from parts. So now that's a revenue -- we just set up a business unit around that to grow our parts revenue. And we have a very large deployed vehicle base, more than 1 million now, still almost 40%, 50% higher than our nearest competitor in EVs. And so we do expect the parts business to scale up significantly. So in a couple of quarters, if it gets to 5%, 6% of revenue, that's another 2, 3 points of gross margin. So that's the rough ladder up to, let's say, high 30s or even up to 40%. Some of this, we might invest back into growth as the industry gets back into a growth phase over the next couple of quarters. Comment on industry growth also. See, our read of the market is that the market grew a lot over the last couple of years. And for the last 1 year, it has stabilized because the early adopters have already adopted EVs. Now it's the mass market customer who needs to get convinced about the EV proposition. The commercial proposition, they're convinced with, but the general reliability of a new technology, charging network, service network, et cetera, still needs some work. And we also still need to do some work in that direction, which is what we are focused on with our HyperService initiative, where we are expanding network beyond company-owned service centers as well as opening up parts for open purchase. So as the next set of customer base comes into the EV purchase industry, we will actually be well poised to scale that up, including having the gross margin to invest into surgical growth opportunities.

Okay. Got it. My second question is on the warranty cost that we -- that was dragging for the last couple of quarters. Now that we've transitioned to Gen 3 more or less for the entire portfolio, can you share a little bit more on where we are on the warranty cost and what are the initial feedback on Gen 3 in terms of how should we think as a sustainable warranty cost? And Bhavish, maybe because you covered industry growth, I mean, it will be good to have your comments on the market share as well because that is clearly something which has been underwhelming. So some thoughts what is the reason for it? How should we think about a more stable market share for Ola?

Our brand proposition to the customer is a great product, competitive product in terms of performance, range, technology, superior value and customer [indiscernible] and the ownership experience. Now 2 out of these 3 has been very good for us. We are working on the ownership experience, which is a service network. It has been slightly more challenging. And some of the challenges, by the way, are not just company linked. Some of the challenges are because we are the largest EV company, the largest deployed vehicles in the market, we actually face the largest challenge of trained technicians also. The industry does have a shortage of EV trained technicians. So it is in some way incumbent upon us to grow the pool of EV trained technicians, which is what the HyperService initiative is looking to do. Now in terms of our market share, Gunjan-ji, fundamentally, our product, our product feedback, especially the Gen 3 product, the quality of that product is much superior to our previous generations and even in our own benchmarks to the market. So customer is loving the product. Bikes [indiscernible] 4680 giga products, the higher range products are also -- customers are quite excited about that. We have an order backlog we need to fulfill on that. So we feel we have all the fundamentals lined up. As of now, we are focused on a lot more of our energy is being spent on just getting operational costs into shape, getting our operational excellence and execution excellence on our front end in shape, our back end and manufacturing supply chain works really. But our front end, which is where a lot of my personal time is also going. A little bit of market share up and down. I know we are also focused on growth. But in this interim period, we don't mind a little bit of market share loss to other guys who are actually buying market share. It's not that their structural business model delivers a higher market share. Whereas our structural -- our business model now, our product leadership is all structural. The gross margin reflects that and our operating margin also now reflects that. Looking ahead, we do expect market share to increase as the Gen 3 product stabilizes. We do expect market share to increase as our service network further improves and scales up, especially as our parts ecosystem becomes more broader, customer confidence on buying our vehicle because there is a very broad-based service ecosystem also improves. So that will remain a focus over the next couple of quarters going ahead. And at some point also, we do feel the competitive dynamic of people kind of playing for the same market share amongst each other will plateau and the industry will have to focus on getting the next set of customers into the industry. And that's where we feel our fundamentals are well positioned to get the next set of customers into the industry. Did I answer all your questions, Gunjan or do you have 1 or 2 -- I think I answered your market share question, but if you have -- if I skipped anything, I'm happy to answer. You can repeat.

This is quite useful. Maybe if I have -- I can just add one more and then I'll join back in the queue. I also wanted to get your thoughts on the captive usage of the battery cells. When do we expect that? Do you think in terms of cost, we are at parity now? What is the yield on the cell business? Some of those metrics which you shared last time in terms of when do we get the parity for captive usage?

Gunjan, the parity on cell cost will be around 3 to 5 gigawatt hour, that target remains the same. On the cell BOM cost, our cell business will actually make a good gross margin from the beginning because the BOM cost is better than our procurement cost from outside, but definitely, there will be some yield improvements we have to go through. Hence, there will be a journey, that's the 3 to 5 gigawatt hour threshold. The rollout of our own cell into our vehicles has started already. The first products were delivered to customers last few days ago. And now we are in the ramp period. If you see our number of cells produced every quarter is also going up. It's still very low, but the factory is in a ramp period. This Q3 quarter, you should -- you see a much more aggressive ramp in the giga-factory. All the cells right now produced will go into our own vehicles or on the [ Shakti ]...

We'll take the next question from Mr. Arvind Sharma of Citibank.

I'll start with the delivery part. You've given guidance for second half. But if we go to FY '27 and next year, it's too early for that. But still what would be your underlying assumptions for the industry as well as Ola's market share beyond this FY '26?

Arvind, the guidance we've given for second half is 100,000 units. We're also learning how to give some kind of outlook and also the industry is still -- there are enough moving parts in the industry. I think what definitely is an important dynamic that we have considered now is the industry growth has slowed down. And this is also a global phenomenon. If you look at global EV industry, except for China, generally, there is a consolidation phase in the global EV industry. And the strategy leading companies which we look up to are following also is largely that in this space, try and consolidate your operations and improve gross margins and improve product quality, bring stability to the product portfolio. That's what we have also focused on Arvind. In FY '27, we do expect the industry to have an uptick on growth. Now whether that will be 20% a year or 30% a year or 15% a year, I think hard for me to pinpoint a specific number. But in that zone, we do expect the industry to grow again. We are also focused on both in the scooter EV segment, consolidating our market share with high gross margins. Our focus has been on margin accretive growth and margin accretive share improvement also. And motorcycle is a completely new domain. And motorcycle domain will take its own time to grow, but we are the leaders there from the [indiscernible]. So hard for me to -- summary is hard for me to hazard a guess on market share, but we are absolutely targeting a market share, which is being the #1 company. If you look right now, everybody's market share has broadly become the same at the top and our market share is moving a little up and down. But as the industry shakes out with more people stabilizing their volumes, having a higher vehicle park, which they then have to manage servicing of, I think market share will eventually be 1 or 2 leading players and a bunch of Tier 2 players. Our expectation is to be in that 1 or 2 leading players with a market share of 25-odd percent as a target.

Got it. On [ DSS ], the commentary on revenue for FY '27, that makes it almost 1/3 of your revenue that you would end up FY '26, which is a very strong number because this is an incremental thing way beyond just the vehicles. Is it the strategy that going just beyond 2-wheelers could we see Ola launching even more non-vehicle products? [ BHS ] is -- it would be a big contributor to revenue if things start to go...

When you take a look at a revenue of INR 100 crores, that is about 6,000, 7,000 units next quarter, which is not hard to do at all, 6,000, 7,000 units is a very minimal number. And in FY '27, INR 1,000 crore revenue means about 60,000, 70,000 units through the year. Again, all these are -- the inverter market is itself much bigger. The diesel generator market, for instance, is much bigger than this. And the solar growth itself is accelerating rooftop -- home rooftop residential rooftop solar growth itself accelerating. By the way, this product is not just for homes, even telecom towers will be using the same capacity of battery storage as the current [ Shakti ] products have, small nursing homes, hospitals, small commercial establishments. So the potential TAM is very high. And we are pretty much by far the first company to bring a fully Indian product. Also, our pricing is very competitive because of our vertical integration. So we are very confident of this product and meeting those volumes, those revenues. And if you remember, even our EV volume and revenue also grew with a similar hockey stick in the beginning. So there is always in any new category, early adopter journey, which we expect in FY '27, our [ Shakti ] product to have. Whether it contributes 1/3 of revenue, half of revenue '25, that's just a mathematical number. But our target as a company is to have INR 1,000 crore revenue minimum next year from our [ Shakti ] product.

And if I may just squeeze in a very quarter-specific question. We see the employee cost has gone down significantly. Is this a sustainable rate? And similarly, on the other expenses side, it's not really gone down versus the volume. I know there would be lots of contributors to it. But if you could throw a quick light on these 2 aspects for the quarter?

See, employee cost [indiscernible]. We are consolidating our -- just a little bit of history reminder for everybody. This is a 4-year-old company. So when we grew like crazy, we did overbuild some organizations because that's the way how to manage crazy growth. You cannot have growth and profitability and consolidation, cost consolidation all at the same time. But we have used the last 6 months to really consolidate our costs, including in people. And this is completely sustainable. In fact, in Q3 and Q4, there will be further cost optimizations, both on people, but more so in the non-people linked operational costs. In Q4 and Q1, we have done a change in our distribution methodology, removed warehouses, removed external registration partners, brought all of that in-house. That has contributed to profitability improvements, not all of which is yet fully baked into Q2. So that will bring some more profitability improvements in Q3 and Q4. And this is just the auto segment. Overall also, we've given an outlook that our overall OpEx, by the way, in Q2 over Q1 has also come down from INR 450 crores to INR 416 crores. And this over the next couple of quarters also will just incrementally keep coming down.

We'll take the next question from Mr. [ Shanik Mehta ] from TPG.

Bhavish, I just thought of asking you a question more about the long-term view of how you look at this company evolving. Say from a perspective of ROE, in how many years do you see that we will get over the threshold of the cost of capital? Many developments are happening, which are really strong and are taking us towards that path. But in your thought process, when do you see this turning around?

[indiscernible] business is gross margin. Most important metric is product differentiation and linked to that gross margin which is where the company is very, very strong. And it's strong across -- horizontally across all products, scooters, motor bikes, even the BESS products. And the foundation of that is our technology, R&D manufacturing scale. And that's where a lot of investment in the past few years has gone. And that's where, again, like we mentioned in our shareholder letter, for the auto business, we don't foresee any major investments in the next couple of quarters. And even beyond that, the only investments will be new products that we bring and limited R&D CapEx that will be needed for new products since the platform is shared. So gross margin on a shared platform, investments already behind us. Next is operating leverage. Operating leverage is a function of volumes. Volumes are a function of both market dynamics as well as our strategy on how much we're going to play in that I have commented on. We do expect market volumes and our volumes to increase in the near future and our focus remains on growing but in a profitable and margin accretive way. Now since for the auto business, capital investments in manufacturing are going to be minimal. We have a capacity of 1 million units a year. And the only capital investments going forward are going to be R&D. As soon as we hit a certain volume scale, we do expect returns to come. And because the fundamentals of this business are linked to vertical integration, technology, et cetera, the returns will be much higher whether it's equity or debt. Now if you look at industry ICE ROEs, we expect EV ROEs -- our ROEs and in general EV industry ROEs for leading EV players, which do vertical integration to be higher than ICE industry ROEs. But maybe in a couple of quarters, you should ask me this again, and I will give you an answer with some performance on ROE.

Yes, that's fair. I know it's a gliding path, but the way you're scaling up and especially the 20 gigawatt factory will also help in the same direction.

We'll take the next question from Mr. Arun Kejriwal of Kejriwal Consultanc.