Lithium And Rare Earth Volatility Will Erode Margins

Key Takeaways

• Exposure to raw material supply risks and rapid technology shifts could threaten profitability, asset values, and competitiveness.
  
• Reliance on scaling in-house battery production and government incentives leaves margins and growth vulnerable to operational delays and policy changes.
  
• Strong product innovation, cost efficiencies, and vertical integration position Ola Electric for sustained growth, increased margins, and enhanced operational resilience amid expanding market opportunities.

Catalysts

Develops, manufactures, and sells electric vehicles in India.

• The company's cost structure is exposed to potential shocks from global lithium and rare earth mineral supply disruptions, and while it currently claims progress towards a rare earth-free motor, any sustained volatility or scarcity in these materials will directly pressure margins and could erode profitability as battery and component costs rise.
  
• The heavy reliance on proprietary EV battery technology and in-house vertical integration increases operational risk in the face of rapid technological advancements. If the industry shifts to alternative propulsion like hydrogen or next-generation solid-state batteries, large recent and planned investments in current cell chemistry and gigafactory assets may quickly become obsolete, resulting in asset write-downs and lower earnings.
  
• A significant portion of Ola Electric's current margin improvement is premised on successfully ramping up its own cell gigafactory to 5 GWh capacity and achieving targeted yields above 80 percent. Delays in scaling or persistent below-target yields would undermine anticipated cost advantages over imports, limiting expected gross margin gains and keeping the cell business in a cash-burn position longer than forecast.
  
• Although management asserts gross margins are strong, the business remains acutely vulnerable to a reduction or removal of government incentives and production-linked subsidies, which could sharply reduce vehicle affordability, slow demand, and result in lower revenue and net earnings as the market adjusts.
  
• Ola Electric faces the risk of intensified domestic and international competition, including new entrants with deep resources and rapidly evolving battery platforms. The resulting price wars and technology cycles may compress operating margins across the industry, limit Ola's ability to sustain premium pricing, and threaten market share, all of which could depress both top-line and bottom-line growth.

Ola Electric Mobility Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ola Electric Mobility compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ola Electric Mobility's revenue will grow by 24.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Ola Electric Mobility will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ola Electric Mobility's profit margin will increase from -63.7% to the average IN Auto industry of 9.8% in 3 years.
• If Ola Electric Mobility's profit margin were to converge on the industry average, you could expect earnings to reach ₹7.1 billion (and earnings per share of ₹1.31) by about August 2028, up from ₹-23.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.6x on those 2028 earnings, up from -7.7x today. This future PE is greater than the current PE for the IN Auto industry at 30.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.11%, as per the Simply Wall St company report.

Ola Electric Mobility Future Earnings Per Share Growth

Risks

• Rapid acceleration in electric vehicle adoption globally and continued urbanization in India are expanding the total addressable market for EVs, positioning Ola Electric for sustained revenue growth.
  
• Ongoing technological advances in battery production, vertical integration, and in-house R&D are leading to decreasing costs and improving gross margins, which may drive net margins higher over time.
  
• Successful launch and strong customer reception for new Gen 3 products and electric motorcycles, coupled with an expanding distribution network and growing MoveOS+ subscription rates, could substantially boost both revenue and recurring earnings.
  
• Investments in its own cell Gigafactory and development of rare earth-free motors and in-house ABS systems increase operational resilience and margin control, providing flexibility to adapt to input cost pressures and safeguarding long-term earnings.
  
• The company's strategy of capital efficiency, focus on free cash flow positivity, expansion into new market segments, and ability to leverage government incentives all point to potential long-term growth in both revenue and profitability.

Valuation

• The assumed bearish price target for Ola Electric Mobility is ₹30.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ola Electric Mobility's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹63.0, and the most bearish reporting a price target of just ₹30.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹72.1 billion, earnings will come to ₹7.1 billion, and it would be trading on a PE ratio of 40.6x, assuming you use a discount rate of 21.1%.
• Given the current share price of ₹41.31, the bearish analyst price target of ₹30.0 is 37.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.