Ola Electric share price has surged: engulfing points to a dive

Ola Electric share price is thriving as investors cheer its recent financial results and its strong revenue growth. After listing at around ₹76 earlier this month, the stock soared to a record high of ₹157.43 on Tuesday and then pulled back to ₹137. 

Strong growth but risks remain

Ola Electric is a leading company in the electric mobility industry that manufactures electric motorbikes and bicycles. 

It is backed by the likes of Tiger Global Management, Matrix India, Temasek, and Tiger Global, who handed it over $800 million. It then raised $734 million in an IPO in July

The company’s growth has been spectacular in the past few years. Data on its website shows that the company delivered 20,948 units in 2022, a figure that grew to 156,251 in 2023 and 329,618.

A key benefit is that Ola Electric is initially targeting the Indian market, which is one of the biggest markets for motorbikes and bicycles globally. In 2023, data shows that Indians bought over 18 million bikes and scooters in 2023, and the industry is growing by over 10% annually. 

India’s motorcycle industry is dominated by companies like Hero MotorCorp, Bajaj Auto, TVS, and Royal Enfield. 

While most of these sales were traditional internal combustion engines (ICE), the electric segment is seeing more growth, a trend that will continue. Customers prefer these bikes because they are cheap to maintain.

Ola Electric also hopes to expand its business in other countries, especially in Asian countries, including Indonesia, Pakistan, Bangladesh, and the Philippines. Historically, these have been some of the biggest markets for motorcycles. 

However, the company faces major challenges ahead, with competition being the biggest issue. In India, most of this competition is coming from the dominant names like Hero and Bajaj and other venture-funded firms like Ather Energy, Revolt Motors, Ampere Vehicles, and Pure EV.

For example, Hero sells electric bikes like the Optima CX 2.0, Hero Electric Photon, and Hero Electric Altria. As we have seen in the electric vehicle industry, this competition can lead to substantial margin compression. 

Ola Electric valuation concerns

The other big issue is that Ola Electric seems like it is highly overvalued. Ola Electric has a market cap of over $7.14 billion, while Hero MotoCorp is valued at over $12.9 billion while Baja Auto is valued at 2.74 trillion or $33.4 billion. 

Hero Motorcorp sold over 5.3 million two-wheeler vehicles in 2023 and generated over $4.20 billion in annual sales and over $486 million in EBITDA. 

As such, it is clear that the company is overvalued since its annual revenues in 2023 stood at over $339 million in annual revenues.

The view, therefore, is that Ola Electric’s strong revenue growth will continue in the coming years and that its margins will continue rising. This is difficult, especially in a highly competitive market, as we have seen with Tesla, whose stock has fallen by over 50% from its highest point this year. 

Ola Electric growth is continuing

The Ola Electric stock price continued rising after the company published strong quarterly results. 

Its total income rose by 34.32% YoY in the first quarter to ₹1,722 crore while its vehicle deliveries jumped by 77% to 125,198.

The results showed that the company had a 48.6% market share while its gross margins rose to 21.94%. Gross margins increased even after the government removed its subsidy program. It was helped by factors like more premium sales, better cost control, and supplier negotiations.

This growth was helped by the company’s vast distribution network, which is made up of 750 experience centers in the country. 

However, like other companies in the industry, Ola Electric is still losing money. Its loss after tax rose from ₹267 crore in Q1’24 to ₹347 crore. Still, the loss dropped from ₹416 crore in the previous quarter. 

Outlook for the Ola Electric share price

Ola Electric is a fast-growing company that has room to disrupt the mobility business in India and other countries in the Asian region. It is building a good ecosystem of motorcycles and scooters that many Indians are finding cheap to maintain. 

The company is also investing in its battery technology, with its cell production expected to happen in FY 26. It hopes that the new batteries will be more powerful and provide longer range to customers. 

The stock faces three key risks. First, it has gone up too quickly and could be ripe for a pullback if this momentum fades. 

Second, the stock has formed a bearish engulfing pattern, which is characterised by a big bearish candle happens after a bullish candlestick during an uptrend. It is one of the most popular reversal patterns in the market, meaning that it could retreat.

Third, the company could see thinner margins in the next few years as competition in the industry heats up. Therefore, I suspect that the stock may drop to the support at ₹120 in the coming weeks.