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Last Updated : Dec 10, 2019 03:51 PM IST | Source: Moneycontrol.com

Ola IPO | Bhavish Aggarwal likes walking down the Uber path, even to the Street

Ola wants to go public in two years from the time Uber went public. While that may be in keeping with its desire to follow in its footsteps, it may be premature for Ola to tap retail investors.

Uber listed in the US in May 2019. Ola's founder and CEO Bhavish Aggarwal plans to take his company public in 18 to 24 months. At 18 months, it will mark two years after Uber listed its shares on New York Stock Exchange (NYSE). Coincidentally, Ola started its business two years after Uber. Following in Uber's footsteps may have worked initially, but when it comes to listing Ola, it should tread carefully. The harsh lessons Uber learnt while preparing for its IPO should actually make it cautious.

Ola has another thing in common with Uber: sizeable losses. To be sure, India's largest ride-hailing startup has narrowed its losses by about 60 percent in the year to March 2019 to Rs 1,160 crore from Rs 2,676 crore in the year ago. But the number is still substantial. Public market investors may want to see a quicker path to profits as they can be less patient than private equity funds.

The question then is, why is Ola in a hurry to hit the Street? Ola has  investors like SoftBank, Tiger Global and Sequoia, among others, who have also invested in Uber. Perhaps, it is seeking to give them an exit in a time-frame similar to that provided by Uber.

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But, Uber's investors did not get their expected returns . They hoped Uber's valuation would touch $100 billion to $120 billion in the IPO. But the Street finally valued Uber at $82.4 billion while its current market cap is at $45.75 billion. The Uber stock posted the biggest first-day dollar loss in US IPO history, not the milestone you want to set. It is yet to win back investor confidence with lack of clarity on when it will turn profitable.

Based on Uber's experience, it may not be the right time for Ola to think about an IPO. Also, the overall economy in India and other parts of the world are slowing down. In India, the IPO market has not been very good in 2019 with a few exceptions.

One factor that works in Ola's favour is probably the worth of its business and hence its valuation, which is far moderate when compared to Uber. Before it launched its IPO, the American ride-hailing startup had raised around $20 billion (combination of debt and equity). In the pre-IPO round, it was valued at $76 billion.

In comparison, Ola has so far raised around $3.3 billion. In January, it was valued at $5.7 billion. That is moderate considering that Ola is the largest ride-hailing company in the world's second-largest populated country with a much wider presence and a fleet of around 2 million drivers.

Uber's valuation is high because of many reasons. One of them is the US being its primary market where ticket size is very high. Ola has no presence there. Secondly, it had big ambitions in China to raise billions of dollars that multiplied its valuations during 2015 and 2016. At one point, it was spending $1 billion a year in China as it was its priority market. The vision, however, did not turn out according to the company's plans, and Uber sold its China business to Didi Chuxing much before the IPO. Besides, Uber's valuation is linked to how well it sold its vision and growth prospects to its investors, its gross billing which is connected to total number of rides it completes. Its success in India naturally played a big role.

In 2018, Uber completed 10 million trips a week (41.8 million in the US and 17 million in Brazil). But, as its CEO Dara Khosrowshahi said, the company aimed to increase the number of trips by 5-10 times in 10 years in India.

While Ola has managed to narrow its losses, Uber's net loss rose 18 percent in the quarter ended September 2019 to $1.16 billion while revenue increased 33 percent to $3.5 billion. Ola's numbers for the comparable quarter is not available.

Ola has now ventured into markets with higher ticket sizes such as the UK, Australia and New Zealand. Ola's success in these markets could be a key factor determining investor interest. Uber has burnt its hands in London where it lost its commercial licence last month. Just a day after this development, Ola announced its entry into London.

On one hand, London is a big opportunity for Ola. But Ola will need substantial cash to build the business and sustain in a market like London. Similarly, businesses in Australia and New Zealand would not be very different in terms of capex requirement as Ola wants to double scale (from 85,000 drivers across 33 cities at present) in these countries by 2021. The company, however, did not indicate any planned investment in these markets.

Here's another thing. The financials mentioned above are standalone financials of Ola’s parent ANI Technologies. It does not include financials of OLA Fleet Technologies, Ola Financial Services (Ola Money), Ola Electric Mobility and international operations. So, the full picture may be different or even look worse.

Both Uber and Ola have been looking for new avenues as growth in the core ride-sharing business has slowed. Besides its focus on electric mobility, Ola has just launched the self-drive car rental business with Ola Drive that would have a fleet of 20,000 cars by 2020.

Its SoftBank-backed electric mobility venture is already valued at more than $1 billion, and it is investing in cloud kitchens. Electric mobility is a good bet considering Indian government’s plan to transform the country into a 100 percent electric vehicle nation by 2030, and Ola will have to transform at least 40 percent of its fleet to electric by 2026 as per government mandate. Each of these businesses are extension of Ola’s core ride-sharing business, but operated separately. Ola also raises funds for each business separately.

While successful diversification would play a key role in attracting retail investors and making its proposed IPO successful, experts are optimistic about its core ride-sharing business.

According to a study (October 2019) by  consulting firm Frost & Sullivan, ride hailing in India is expected to touch $43.3 billion by 2025, up from $15.3 billion in 2017. Ola being the market leader will be the largest gainer. Fleet size will touch 4.2 million, from 1.4 million now. Its electric mobility venture will also benefit considering the government's ambition of transforming the country into 100 percent electric vehicle nation by 2030.

​Ola's plans have been funded by private equity investors so far. Considering the ticket size required to invest in Ola will be relative low compared to, say Uber, it can potentially raise more money from existing investors. It can think about going public later.

But if Aggarwal remains firm about taking it public, then his first task will be to sharpen Ola's focus and lay out a clear path to attaining profitability. It should also be evident as to how these funds will be used to grow its business or whether they will simply provide investors an exit. Lastly, Ola should keep the valuations it asks for in an IPO moderate and leave money on the table for investors, so that the IPO is a resounding success. A failed IPO leaves a bad taste in the mouth for everyone concerned.

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First Published on Dec 10, 2019 03:05 pm
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