The Ola Model: Raise money to Burn it!

One of India’s hottest unicorn Ola Cabs is raising yet another $100 million to run its huge cab-aggregator business in India. According to regulatory filings made with the Corporate Affairs Ministry under the Companies Act, the board of the Bengaluru-based ANI Technologies – which operates Ola – said its board has approved raising “up to $100 million (about ₹670 crore) by issue of 495,526 Series ’L1’ preference shares of face value ₹10 each at a price per subscription share equivalent to ₹13,521“. According to media reports, the rights issue was scheduled for March 23 and there is no clarity on how much money was finally raised.

The news of this round of funding is all the more pertinent, as just 4 months back the Ola had raised about $250 million (approx. ₹1675 crores) from its largest shareholder Japan’s SoftBank Group Corp. The last round of funding had also brought down the valuation of the company to about $3 billion from $4.5 billion.

The Bleeding market

Over the past couple of years, Ola has been locked in a death roll with its arch rival Uber in India. The battle has really gone bloody in the past few years, as Uber exited the Chinese market and decided to up the ante in India. According to claims, Ola operates in over 100  cities in India, while Uber is concentrating on 29. In the highly fragmented and unorganised market, the two players have been incurring heavy losses in the bid to win market share. Heavy piles of cash are being burnt not only in heavy discounting to customers but in incentivising drivers on their platform. Thus, for every rupee that these cab aggregators earn, they burn a lot more. Back in 2014-15 fiscal, Ola was burning ₹3 for every ₹1 that it earned. Given the fact that the competition has only gone worse in these intervening years surely the earning to losses ration might have gone only southwards.

The trouble is we really don’t know.

For all the hype and the hoopla that surrounds Ola, being feted as a billion-dollar-unicorn, we are not really sure of how its business is doing. Thanks to all the fillings with the MCA, we do know that it has so far raised around $1.5 Billion (a massive 10,000 crores and counting). But we don’t know how all that money infused has truly aided the business.

And that gets us to an important question, why is Ola not filling its accounts?

The ROC Mandate

You see, according to the provisions of the law, all companies registered in India are mandated to file their accounts with Registrar of Companies (ROC) under Ministry of Corporate Affairs (MCA). As the Indian companies follow April to March financial year, they are allowed to file their accounts latest by 30th October, a good 7 months after the closure of financial year (assuming Company conduct its Annual General Meeting on last permissible date i.e. on 30th September). This gives the companies time to get the financials audited and approved in board meetings and subsequently by shareholders. While all publicly listed companies publish their results in greater depth, it is not the case with privately held companies and the ROC filing is the only way to figure out how a company is doing on top line and bottom-line.

The VC funded internet companies and unicorns are even more guarded in letting the key matrices out. Because of their high profile in media and cult status of their founders, the public at large is also very keen to know how they are performing. Media waits with bated breath for these companies to publish their results with ROC.

A couple of months back Mint had published details of 41 Internet companies which have filed their accounts with ROC. It included all the big names like Flipkart, Snapdeal, Paytm, Zomato, Bigbasket, ibibo, Oyo etc. Even local arms of international companies like Amazon have filed their accounts with ROC. However, one prominent name from the Indian unicorn list is missing and hasn’t filed their account with ROC – the poster boy of Indian start up space: Ola!

If this delay of little over a year seems too high, it is not really the first time. Even for the previous financial year 2014-15, Ola had delayed filing for 15 months and filed only in June ’16.

A Case for Transparency

The presumptive reason, why a company like Ola would delay filing for ROC as late as possible is not all that difficult to guess, when you assess the returns for the previous fiscal, FY 14-15 in Ola’s case. According to that on a consolidated basis Ola had reported a loss of ₹796 crore on a revenue of ₹383 crore. Much of the funding that Ola generated came in FY 15-16. Surely the accelerated growth would have come at a higher proportionate cash burn. Industry estimates peg their losses between ₹2500 to 3500 crores.

With such mammoth losses, companies obviously wish to avoid questions on business model and related negative publicity. Such negative PR also hampers their efforts to get more funding as their valuations sink. The best example of that is Snapdeal in front of us. The e-tailer had more than doubled its losses to ₹2,960 crore (around $436 million) in the financial year ended 31 March 2016. Result, its valuation (and its ability to raise funds) has been declining in the past two years. From a peak valuation of around $6.5-7 billion, when it raised $200 million from Canada-based Ontario Teachers’ Pension Plan and other investors in February 2016, the valuation of Snapdeal has come down to between $3 billion and $4 billion as it hunts for partners in the market.

Is Ola worried about the same? Namely, in case the financials are out, its valuation might suffer and its ability to raise cash nosedives?

Well, whatever be the reasons, Ola is also helped by the way are regulations are framed. So, if a company delays filing their returns beyond 30th October and up to next Jul 30th, there is a fine defined by the MCA. The fine is very nominal at 12 times the Normal Fees (which by the way a mere ₹600), which the companies have to pay when they finally submit their statement. Even if Ola filed the accounts after 16 months of year closing, it would have been fined a mere ₹7,200. For a company that has raised $1.55 billion or over ₹10,000 crores of VC capital till date, would some ₹7200 really wouldn’t matter. Especially, since filling could have a much more serious business implication. Thus a delayed filing is not really undesirable as by the time the accounts are finally published in ROC, they are so stale that everyone loses interest on such old information.

Numbers that don’t tell the story

Meanwhile, Uber proactively shared their financials with Bloomberg in order to spread some good news on revenue numbers and offset the negative news and self-goals they have been scoring off late. As per their own admission in this story, they made a loss of $3.8 billion in 2016 worldwide ($2.8 billion excluding China).

Considering that they made a loss of $1 billion in China within 8 months, the losses in India may not be too different. US market has been profitable or breakeven for Uber and they are not giving cheap rides like 10 Km for a dollar or massive driver incentives anywhere else in the world. India is their second largest market. It is fair to assume that India would have contributed a lion’s share in their $2.8 billion losses.

According to market experts, Uber’s international entity (Uber BV) directly bills Indian consumer and pays incentive to Indian drivers, so Uber’s financial performance does not get published in ROC. What they publish is the accounts of their local arm Uber India Systems Pvt. Ltd, which acts as a captive unit and provides services to Uber abroad. Due to this cost plus structure of a captive operation, it always remains in profit and thus media reports of Uber turning profitable in India are not all that factual.

Ola recently filed the details of its subsidiary, its leasing arm, Ola Fleet Technologies. The subsidiary posted a net loss of ₹13.2 crore for FY16, as compared to a profit of ₹3.2 crore for FY15. The interesting bit is that its revenues has fallen even as the losses have mounted, namely, it fell by 40% to ₹9.1 crore in FY16, from ₹15.2 crore in FY15.

If the results from the subsidiary are any indication, then we should brace for much bigger losses from Ola, if and when it files its returns for FY16.

The macro impact

This utter lack of transparency in the taxi industry is honestly a serious issue and should be tackled at larger government level. Considering how the market is growing and also getting muddled up in various business issues ranging from surge pricing to predatory play, it only makes sense that there should be transparency of their business model. Keeping in mind the fact that these two players account for almost 90% of the organised taxi-market, their business health kind of defines the health of the overall industry (worth some ₹13000 crore annually).

In case of Ola, transparency is almost expected because of the illustrious names it has on its board. Former Vodafone Group CEO Arun Sarin as independent director to Ratan Tata is one of the investors. Ola’s board composition also includes some of the heavyweights of VC community like Avnish Bajaj, Lee Fixel and David Thevenon representing Matrix partners, Tiger Global and Softbank respectively. Surely, these respected gentlemen would also be worried about the health of the company, just like everyone else is.

Thus, filing the returns with ROC is kind of expected from Ola. Till it does so, we can only guestimate as to how the money being raised is being burnt to run business. Let’s just hope that our favourite unicorn is not is not hiding a serious affliction that is financial in nature. It would be a big issue not only for CEO Bhavish Aggarwal but also for the industry as a whole.


Author: Shashwat DC

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