HSBC, while reducing its target price on Ola Electric Mobility Ltd to Rs 110 from Rs 140 earlier, said the stock remains a high risk-reward stock proposition, where the upside is contingent on the success of EV bikes and in-house batteries. The foreign brokerage said Ola Electric Mobility is undergoing multiple initiatives to improve service quality, saying the long-term product quality has to be the key focus.
HSBC said EV bikes from Ola Electric Mobility are at least 2-3 years ahead of competition and a successful battery venture will provide Ola with a sustainable competitive advantage. As it factors in these points and also the likely impact of higher warranty and service costs, it cut its forecasts and, hence, target price on Ola Electric Mobility. The broking firm kept its 'Buy' rating on the stock in tact.
This is after the foreign brokerage revisited Ola Service stations after a month to do a channel check. HSBC said the service centres were less chaotic and that the vehicle outflow was slightly better than inflow. The backlog was down by 20-30 per cent month-on-month but still 5-7 times higher than it should be.
HSBC said the number of technicians increased in both large and small service stations, but hiring is slower than expected due to shortage of labour with relevant capabilities.
E&Y personnel, it said, were on the ground for the last 3 weeks helping to optimise the service process. Also, the company is expanding its service network and scouting for space for large new service stations.
"We cut estimates and target price to Rs 110 (Rs 140) due to slower than expected e2W penetration and ongoing service issues," it said.
On Friday, Ola Electric shares settled at Rs 77.32 level against the IPO issue price of Rs 76. The scrip hit a 52-week high of Rs 157.53 on August 20, only to see correction on concerns over service-related issues at its service centers.
"Since the IPO while the stock initially went up c100% from the IPO price, there has been a series of negative news. Foremost, the overwhelming quality issues. Ola has struggled with quality issues in the past (Gen1 platform), but we assumed a steep learning curve for the company in our initiation report and assumed a much smoother quality curve. Clearly, we were too optimistic," HSBC siad.
"Admittedly, the company seems to be trying its best to improve, but there is a limit to which the Auto development cycle can be squeezed," it added.
HSBC said the competition has been lot more aggressive in the past 3 months launching a series of low-cost variants – for instance Chetak 2903 and iQube 2.2kWh. A significant share of Bajaj and TVS EV sales are now these low-cost variants. This has impacted OLA’s market share as well, it noted.
"Last but not the least, penetration which seemed to be picking up till September, has stagnated again and continues to hover around 6 per cent. A large share of OLA’s growth forecasts is contingent on continued rise in penetration," it said.