Copyright © HT Digital Streams Limited All rights reserved. How Ola Electric’s unallocated cost of 12% helped it post an Ebitda profit in its auto business Ola Electric’s unallocated expenses, absent from its peers’ books, failed to impress investors. (Reuters) Summary Ola Electric booked 12% of costs as unallocated expenses in the September quarter, double from a year ago. Context: none of its peers had unallocated costs on their books. While this is a valid accounting practice, experts suggest that such expenses typically should not exceed the 5% level. New Delhi/Bengaluru: Ola Electric Mobility Ltd’s accounting approach of clubbing around 12% of total costs as unallocated expenses in the July-September quarter – about twice the year-ago level – helped it report operating profitability in its scooter and bicycle business. Unallocated expenses were a fourth of the company’s net loss in the September quarter, compared with a fifth in the year-ago period. Such expenses are a valid accounting practice, to be sure, and are reflected in a company’s consolidated accounts. In Ola Electric’s case, unallocated expenses refer to expenses that, according to management, could not be allocated to one of its businesses – two-wheelers and cells (electric vehicle batteries). In the second quarter, it stood at ₹106 crore, against total expenditure of ₹893 crore. This compares with ₹ 99 crore – or about 6% of ₹ 1,593 crore – allocated to unallocated expenditure in the second quarter of FY25. Ola Electric’s unallocated expenses, absent from its peers’ books, failed to impress investors. Since the results were announced on November 6, the company’s stock has fallen 19% on the NSE till Wednesday, compared with a 4% rise in the Nifty Auto index in the same period. Abhishek Banerjee, founder at LotusDew Wealth, an investment advisory firm that focuses on corporate governance, said that typically unallocated expenses should not exceed 5% of total expenses and anything above that “will definitely raise eyebrows”. “I think it’s a combination of non-assignable Esop, group-level IT infra and CXO compensation. That said, it’s very high.” he said, adding that there are no guidelines on how high these expenses can be and that the company has no obligation to disclose the breakdown of these expenses. Ebitda positive auto segment Last month, Ola Electric’s founder and chairman Bhavish Aggarwal announced that the two-wheeler business has become operationally profitable, making it the country’s first. “Our auto segment delivered its first positive Ebitda margin at 0.3%,” Aggarwal wrote in his shareholder letter dated November 6 when the company announced its earnings. Ebitda, a measure of operating profitability of a business, refers to earnings before interest, taxes, depreciation and amortization. The company’s revenue fell 43.2% year-on-year to ₹690 crore in the second quarter. Of this, the bulk – ₹688 crore – came from the two-wheeler business, and another ₹4 crore from the cell business. ₹2 crore has been deducted as in inter-segment eliminations. The total cost of manufacturing two-wheelers and cells totaled ₹477 crore, while operating expenses, including research and development and other costs, were ₹416 crore, bringing its total expenditure to ₹893 crore. Even though Ola Electric reported an Ebitda loss of ₹137 crore, it did not club the ₹106 crore undistributed loss at either of its two businesses. So, Ola Electric reported an Ebitda profit of ₹2 crore in its two-wheeler business and an operating loss of ₹27 crore in its cell business. Standard practice Ola Electric’s spokesperson said the unallocated expenses relate to shared resources, general corporate activities and occasional one-off items such as events, Esops or consultancy projects. “This reporting practice is standard for multi-segment firms,” the spokesperson said. “We further clarify that the increase in unallocated expenses as a percentage of revenue is primarily driven by lower revenue, not by a material increase in these costs themselves.” The spokesman said it was factually incorrect to say that higher unallocated expenses masked segment-level costs, as consolidated operating expenses actually fell. To be sure, Ola Electric’s net loss narrowed from ₹495 crore at the end of the September quarter last year to ₹418 crore in the latest quarter. “The (unallocated) expenses fluctuate over time, include both fixed overheads and periodic one-off expenses, and do not scale directly with sales,” the spokesperson said. None of Ola Electric’s competitors – including Ather Energy, TVS Motor Company or Hero MotoCorp – have any unallocated expenses. Ola Electric stock ended Wednesday at ₹38.02, the lowest since the company went public in August 2024. Unusual, experts say. Indian accounting standards allow companies to classify expenses as unallocated. In fact, these expenses can support technology and brand development, an expert said. “Under segment reporting norms, unallocated expenses should generally capture expenses such as actual corporate level costs such as strategic management, central R&D or group-wide functions etc.,” says Paras Savla, partner at KPB & Associates. “While a higher indivisible ratio can sometimes make segment profitability appear stronger, it more often reflects a rapidly growing company that is centralizing investments in future technology, brand building and organization-wide capabilities.” “As long as the allocation framework matures over time, with scale, such centralized spending can support long-term efficiency, transparency and sustainable growth,” he added. According to one former CFO of a Bengaluru-based company and another board member, the practice of unallocated expenses can help companies manage small expenses. “A conglomerate with diversified businesses or, say, an automobile company, may have an overseas business that it has acquired along with a domestic business and a financing business,” said a Bengaluru-based board member on condition of anonymity. “In each case, the conglomerate or a company may consider allocating the compensation of the Group CEO or managing director across these businesses as an unallocated expense line item.” The councilor found it unusual that Ola Electric was “unable to spell out the nature of these charges”. The former CFO also expressed surprise that “Ola Electric spells out the money earned by the two businesses from its IPO proceeds, but … would not detail the nature of these (unallocated) expenses.” For now, Ola Electric is separating the interest earned from IPO proceeds for the two-wheeler and diesel businesses. The company’s two-wheeler business earned ₹49 crore in interest, while the cell business got ₹23 crore. At the end of the September quarter, Ola Electric used ₹2,301 crore from the IPO, after spending ₹2,974 crore of the ₹5,275 crore it raised in August last year. Get all the corporate news and updates on Live Mint. Download the Mint News app to get daily market updates and live business news. more topics #Auto #Electric Vehicle Read next story
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