Ola Electric's Secret Profit Boost? Hidden Expenses Spark Investor Fury, Stock Plummets!

Ola Electric Mobility Ltd. has reported operational profitability in its two-wheeler business, a feat achieved partly by classifying approximately 12% of its total expenses as "unallocated" in the July-September quarter. This accounting practice, however, has drawn criticism from investors and analysts, contributing to a significant drop in the company's stock price.

Unusual Accounting Practice

• In the July-September quarter, Ola Electric classified about 12% of its total expenses as unallocated.
• These unallocated costs amounted to ₹106 crore, against total expenses of ₹893 crore for the period.
• This proportion is nearly double the level seen in the year-ago period, where unallocated expenses represented about 6% of total costs.
• The company states this practice is standard for multi-segment firms and covers spending not attributable to specific business units, such as shared corporate resources or one-off events.

Impact on Profitability and Financials

• By excluding ₹106 crore in unallocated expenses, Ola Electric reported its auto segment achieved a positive EBITDA margin of 0.3%.
• The two-wheeler business recorded an EBITDA profit of ₹2 crore, while the cell business incurred an operating loss of ₹27 crore.
• Despite these segment-level profits, Ola Electric's consolidated EBITDA loss for the quarter was ₹137 crore.
• The company's revenue declined by 43.2% year-on-year to ₹690 crore in the second quarter.
• Ola Electric's net loss narrowed to ₹418 crore from ₹495 crore year-on-year.

Investor Reaction and Stock Performance

• The market reacted negatively to the elevated unallocated expenses, which are not a common practice among Ola Electric's peers in the EV sector.
• Since the results were announced on November 6, Ola Electric's stock price has fallen by 19% on the NSE.
• This underperformance contrasts sharply with the Nifty Auto index, which rose by 4% during the same period.
• The company's stock reached its lowest point since its public listing in August 2024.

Expert Opinions and Concerns

• Abhishek Banerjee, founder at LotusDew Wealth, commented that unallocated expenses should typically not exceed 5% of total expenses, and higher percentages "will definitely raise eyebrows."
• He suggested these costs likely include Employee Stock Option Plans (ESOPs), group-level IT infrastructure, and executive remuneration.
• Other financial experts expressed surprise that Ola Electric was unable to provide a more detailed breakdown of the nature of these unallocated costs.

Company's Defense

• Ola Electric's spokesperson asserted that the increase in the unallocated expense ratio is mainly due to lower revenue, not a material increase in the costs themselves.
• The spokesperson defended the reporting practice as standard for multi-segment firms and stated that consolidated operating expenses have been declining.
• They noted that these expenses fluctuate and include both steady overheads and periodic one-offs.

Peer Comparison

• None of Ola Electric's key competitors, including Ather Energy, TVS Motor Company, and Hero MotoCorp, report significant unallocated expenses in their financial statements.

Impact

• This situation raises concerns about financial transparency and accounting methodologies within India's burgeoning electric vehicle market.
• Investors may scrutinize the financial reporting of other EV companies more closely, potentially affecting capital allocation in the sector.
• Impact Rating: 7/10

Difficult Terms Explained

• Unallocated Expenses: Costs that a company cannot directly attribute to a specific business segment, product, or service.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's operational performance before accounting for financing, tax, and non-cash expenses.
• EBITDA Margin: Calculated by dividing EBITDA by total revenue, it shows how much profit a company makes from its core operations for every dollar of sales.
• IPO: Initial Public Offering, the process by which a private company becomes public by selling shares to investors for the first time.
• Consolidated Accounts: Financial statements that present the financial position and performance of a parent company and its subsidiaries as if they were a single economic entity.
• ESOPs: Employee Stock Option Plans, which give employees the right to buy company stock at a predetermined price.
• NSE: National Stock Exchange of India, a major stock exchange in India.