In a first, Ola gets B3 credit rating from Moody’s

The initial public offering (IPO) bound ride-hailing unicorn ANI Technologies Pvt. Ltd., which operates Ola, has been assigned a first-time B3 corporate family rating (CFR) by New York-headquartered Moody’s Investors Service.

While Ola proposes to use the proceeds from the term loan for general corporate purposes, the loans will be taken by Ola's wholly-owned subsidiaries — Ola Netherlands B.V. and Ola USA Inc.

Where the rating outlook is stable, Moody’s said in the release that Ola has ambitions of expanding its presence in the United Kingdom, Australia, and New Zealand, where it currently has small market shares but competes with incumbents like Uber and Didi, which have much larger scale and stronger balance sheets.

Given these factors, the rating agency views the payoff from such expansion to be uncertain and Ola's intention to fund its evolving business partially with debt as aggressive.

"Ola's B3 CFR 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, a Moody's Assistant Vice President and Lead Analyst for Ola was quoted in the rating release.

According to Moody's, a high level of spending will be required to support Ola's growth plans, such that the company's annual cash burn (cash flow from operations less capital expenditures) will double to $140 million for at least the next two years, from $73 million in the year ending March 31, 2021 (FY 2021).

The releases further added that Ola's cash and cash equivalents of $279 million as of FY 2021 will just cover the company's expected cash burn and scheduled debt maturities through December 2022.

"As a result, the B3 rating is also premised on the successful completion of Ola's term loan transaction as planned, which will provide the required liquidity to sustain its operations beyond the next 12 months, as well as execute its growth plans," Cheong added.

Moody’s also highlighted that the ratings will likely face downward pressure if the proposed transaction is delayed or if the funds raised are lower than the company's target of $500 million, in the absence of any alternative funding that shores up liquidity by year-end.

Also, additional acquisitions or investment plans that further deplete liquidity would also add negative ratings pressure. Moody’s went on to add that Ola is currently in the midst of completing a pre-IPO funding round to raise equity from new and existing investors, and also targets to complete a public listing by the first half of 2022. However, the execution of its plans is subject to market conditions and as such remains uncertain, the rating agency noted.

Moody's however see the silver lining from somewhat offsetting of the risks as Ola's leading share of above 50 percent in India's ride-hailing market and good long-term growth prospects for the technology-driven sector.

“Moreover, the company has generated consistent earnings from its Indian ride-hailing business, which should continue to improve with increased mobility as economies open up, and higher adoption of digital services accelerated by the pandemic,” the release added. “However, operating profits from this segment will only partially fund its various growth plans.”

Among the non-financial risks, Moody's noted that it incorporates high governance risk given the unusually high turnover at Ola's management level over the past few years, which raises concerns around management credibility and its track record.

“Governance risk is also high because of Ola's status as a privately owned company and the company's ownership by a consortium of financial investors, who are likely to employ financial strategies that largely favor shareholders over creditors,” Mooody’s added.

Moody’s also noted that an upgrade on the current B3 rating is unlikely over the next 12-18 months given the company's loss-making operations and aggressive growth strategy.

However, over time, the rating may be upgraded if Ola successfully executes its growth plans, gaining greater scale and business and geographic diversity to better weather economic challenges or competitive threats; and 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.

At the same time, the rating could be downgraded if Ola's proposed term loan transaction is delayed or if the funds raised are lower than the company's target of $500 million, in the absence of any alternative funding that shores up liquidity by year-end.

Further, Moody's could also downgrade the ratings if Ola's cash balance falls toward $200 million; it has insufficient liquidity to fund its operations and investments over at least the next three years; its cash burn increases beyond the rating agency's current expectations; increased competition or changes in regulations, taxation or government policy weaken the company's market position, cost profile or cash flow relative to the rating agency's current expectations.

Co-founded by Bhavish Aggarwal in December 2010, Ola has raised more than $2.6 billion over the years from investors, where its top shareholders include SIMI Pacific Pte Ltd (a Softbank subsidiary), Tiger Global Management and Tencent.