Ather Energy Ltd has yet to announce the pricing for its upcoming initial public offering (IPO), which will be a mix of fresh issue and offer for sale. However, investors can draw inspiration from Hero MotoCorp Ltd’s strategy. If Ather seems like a risky bet, investors may find comfort in Hero, which holds a 37% pre-IPO stake in Ather. That said, Ather accounts for only about 3% of Hero’s sum-of-the-parts valuation, limiting the downside for Hero if the Ather bet doesn’t pan out.
On the other hand, if the Ather bet succeeds, Hero stands to benefit. It could either replicate Ather’s strategy for its own electric two-wheeler operations under the ‘Vida’ brand or bring the two brands under one entity. Simply put, Hero is treating its holding in Ather as an option value. Notably, ₹750 crore, or 25% of Ather’s fresh issue, is earmarked for research and development (R&D), which is comparable to Hero’s FY24 R&D budget of ₹826 crore, or around 2% of its revenue.
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The other objective of the issue is the capital expenditure of ₹927 crore for setting up a new plant in Maharashtra with initial capacity of 500,000 units. The existing capacity at the Tamil Nadu plant is about 400,000 units, though its capacity utilization is only around 30%. Even if Ather doubles its current monthly sales rate of 10,000 vehicles in the near future, the existing capacity will still be more than adequate.
To be sure, Ather is far behind Ola Electric Mobility Ltd on almost all financial parameters and backward integration. For instance, Ola, which listed on the stock exchanges 9 August, has its own operating battery cell manufacturing plant, whereas Ather only secured a battery cell supply deal with Amara Raja last month. Battery is the most critical component in an electric vehicle (EV), forming nearly a third of the total production cost.
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Moreover, the driving range, a key consumer concern, is dependent on quality and charging life of the battery. Thus, EV battery cells supply and pricing is crucial for EV makers. Interestingly, China’s BYD, which started primarily as a battery cell manufacturing company, has become one of the biggest electric car manufacturers in the world, catching up with Tesla. BYD sold a record 1.6 million battery-only cars in 2023 versus 1.8 million of Tesla.
Ather’s FY24 sales volume of 110,000 vehicles is just about a third of Ola’s. The company barely managed to cover its raw material costs in FY24, whereas Ola’s gross margin stood at ₹10,000 per vehicle. Ola’s market cap-to-sales multiple, based on FY24 figures, stands at 10x. Given the smaller size, miniscule profit at gross margin level, and lack of battery cell manufacturing, Ather deserves lower multiple. A 30% discount to the multiple of Ola would mean a valuation of about ₹12,000 crore for Ather. This would still be at a premium of almost 10% to the valuation of $1.3 billion (approximately ₹11,000 crore) based on the latest funding round in August, when Ather raised $71 million from the National Investment and Infrastructure Fund (NIIF).
Ather does benefit from having a strong interoperable fast-charging network in partnership with Hero MotoCorp, which enhances the economics of its battery charging infrastructure. While this strategic partnership was expected to address the challenges of scaling up production volumes, it has yet to deliver the desired results, with Ola continuing to pull ahead.
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Moreover, Ather needs to strengthen its marketing strategy to compete effectively, especially with Honda Motorcycles and Scooters expected to enter the market by March with an electric version of its popular Activa brand, and Suzuki likely to follow suit.
