What Ola’s Debt Funding Says About Its Business
Ola, which dominates more than half of India’s ride-hailing market, is shoring up cash but may burn it at twice the pace in the next couple of years, according to Moody’s Investors Service.
ANI Technologies Pvt., the parent of the mobility platform backed by SoftBank and Tiger Global, raised $500 million (about Rs 3,806 crore) in term loan B from marquee international institutional investors, according to its Dec. 16 statement. That will constitute majority of its debt. The loan is guaranteed by the parent.
It comes after mopping up $240 million (over Rs 1,800 crore) in equity rounds in November and December, its filings with the Ministry of Corporate Affairs showed. The second round that saw participation by Edelweiss, IIFL and Hero Enterprise valued the company at Rs 50,084.8 crore (about $6.6 billion at current exchange rate).
Expansion, Cash Burn
Ola’s parent said in a statement it would use the funds to aid ride-hailing, vehicle commerce, food delivery, quick commerce and financial services businesses. The cab aggregator is also looking to expand in the U.K., Australia and New Zealand, where it commands a small market share since 2018 launch and competes with Uber Technologies Inc. and Didi, operated Xiaoju Kuaizhi Inc.
According to S&P Global, which has a B- rating on Ola’s debt, the company’s strategy of achieving 20-40% share in the newer markets would require increased levels of marketing, discounts, and incentive spending to boost brand awareness and platform user adoption rate.
For Moody’s, the payoff from such expansion is uncertain and the company’s intention to fund its evolving business partially with debt is aggressive. It expects high level of funding requirement to support growth plans such that the annual cash burn rate will double from $73 million as of March 2021 to $140 million at least in the next two years.
Ola's cash and cash equivalent of $279 million at the end of March, the rating agency said, will just cover its expected cash burn and scheduled debt maturities through December 2022. The term loan will provide required liquidity to sustain its operations beyond the next 12 months.
S&P Global expects the company to have adequate cash balance to support its cash burn over at least the next two years before it turns Ebitda-positive from fiscal 2024, driven by greater economies of scale and disciplined spending. It sees the company’s annual operating losses to be at least Rs 500 crore over the next two years.
“Together with planned investments in its business, the company is likely to report negative annual free operating cash flow of about Rs 1,400 crore over the same period,” S&P said.
Ola's business suffered in FY21 because of the pandemic.
Moody’s Investor Service in November rated ANI Technologies B3 with a stable outlook. That’s the first time the global rating agency has assigned a corporate family rating to the company and its overseas subsidiaries—Ola Netherlands B.V. and Ola USA Inc., the borrowers.
“Ola’s B3 CFR (financials) reflects its loss-making operations and high-execution risks associated with its international expansion plans as well as its venture into India’s competitive and fragmented food delivery and vehicle commerce sectors,” Stephanie Cheong, Moody’s assistant vice president and analyst, was quoted as saying in a statement.
Additional acquisitions or investment plans that further deplete liquidity, according to Moody’s, however, would add negative ratings pressure. ANI Technologies targets to complete a public listing by the first half of 2022. But execution of its plans, Moody’s said, is subject to market conditions and as such remains uncertain. BloombergQuint’s emailed queries to ANI Technologies remained unanswered.
GST Liability, Governance Risk
ANI Technologies has goods and services tax-related contingent liabilities in India amounting to $160 million (Rs 1,237.2 crore ) as of March, which has not been factored in Moody’s rating.
Moody’s also highlighted high governance risk given an unusually high turnover among Ola’s management over the past few years, raising concerns over credibility and track record. The governance risk is high because of Ola’s status as a privately owned company and its ownership by a consortium of financial investors, who are likely to employ financial strategies that largely favour shareholders over creditors. Its large shareholders include SoftBank, Tiger Global Management and Tencent.
Still, Moody's stable outlook reflects expectation that although Ola’s cash burn will remain high, it will have sufficient cash, pro-forma for loan proceeds, to fund operating losses and cash investments for at least the next two-three years.
A rating upgrade, according to Moody’s, is unlikely over the next 12-18 months given the company’s loss-making operations and aggressive growth strategy. But it’s possible if Ola successfully executes its growth plans, materially and sustainably improves profitability, and maintains robust liquidity with sufficient cash or alternative liquidity to cover its short-to-medium-term debt and commitments, it said.
A rating downgrade, Moody’s said, will depend on:
Whether Ola’s cash balance falls toward $200 million.
Has insufficient liquidity to fund its operations and investments over at least the next three years.
Cash burn increases beyond the rating agency’s current expectations.
Increased competition or changes in regulations, taxation or government policy weaken its market position.
Cost profile or cash flow relative to the rating agency’s current expectations.