How Ola Electric’s 12% unallocated costs helped it show an Ebitda profit in its auto business

Unallocated expenses accounted for a quarter of the company’s net loss in the September quarter, down from a fifth compared to the same period last year.

Such expenses are of course valid accounting practice and are reflected in a company’s consolidated accounts.

In Ola Electric’s case, unallocated expenses refer to expenses that management has said cannot be allocated to any of its two-wheelers and batteries (electric vehicle batteries) businesses.

This figure is in the second quarter ₹106 crore against total expenses ₹893 crore. This is compared ₹99 crore – or about 6% ₹1,593 crore — allocated to unallocated expenses in Q2 FY25.

Ola Electric’s unallocated expenses, which were not included in the books of its peers, failed to impress investors. The company’s shares have fallen 19% since the results were announced on November 6. on NSE till Wednesday compared to a 4% rise in the Nifty Auto index in the same period.

Abhishek Banerjee, founder of LotusDew Wealth, an investment consultancy focusing on corporate governance, said generally unallocated expenses should not exceed 5% of total expenses and anything above that “will certainly raise suspicion”.

“I think it’s a combination of unallocated Esop, group-level IT infrastructure and CXO fee. That suggests it’s quite high.” He added that there is no guidance on how high these expenses might be and that the company has no obligation to disclose the breakdown of these expenses.

EBITDA positive auto segment

Last month, Ola Electric founder and chairman Bhavish Aggarwal announced that its two-wheeler business has become operationally profitable, a first in the country.

“Our auto segment achieved its first positive EBITDA margin of 0.3%,” Aggarwal wrote in his Nov. 6 shareholder letter in which the company announced its earnings. EBITDA, a measure of a business’s operational profitability, refers to earnings before interest, taxes, depreciation and amortization.

The company’s revenue fell 43.2% year-over-year in the second quarter. ₹690 crore. A big part of this — ₹688 crore – came from two-wheeler business and another ₹4 crore from cell business. ₹2 crore was deducted as was the case for inter-divisional qualifiers.

Total cost of production two-wheelers and cells assembled ₹Operating expenses, including research and development and other costs, stood at ₹477 crore. ₹416 crore, total expenses ₹893 crore.

Even though Ola Electric reported an EBITDA loss ₹137 crore, didn’t stick ₹106 crore undistributed loss in one of its two businesses.

Ola Electric reports EBITDA profit ₹2 crore and operating loss in two-wheeler business ₹27 crore in mobile phone business.

Standard application

Unallocated expenses relate to shared resources, general corporate activities and occasional one-time items such as events, Esops or consultancy projects, Ola Electric’s spokesperson said.

“This reporting practice is standard for multi-segment companies,” the spokesperson said. “We also clarify that the increase in unallocated expenses as a percentage of revenue is primarily due to lower revenue and not a material increase in these costs.”

The spokesperson said it is factually incorrect to say that higher unallocated expenses mask segment-level costs because consolidated operating expenses actually decreased.

Of course, Ola Electric’s net loss narrowed ₹495 crore at the end of the September quarter last year. ₹418 crore in the last quarter.

“(Unallocated) expenses fluctuate over time, include both steady-state overhead and periodic one-time expenses, and do not scale with direct sales,” the spokesperson said.

None of Ola Electric’s rivals, including Ather Energy, TVS Motor Company or Hero MotoCorp, have unallocated expenses.

Shares of Ola Electric on Wednesday expired at: ₹38.02, the lowest level since the company went public in August 2024.

Experts say unusual

Of course, Indian accounting standards allow companies to classify expenses as unallocated.

One expert said these expenses could actually support technology and brand development. “Under segment reporting norms, unallocated expenses are generally required to include expenses such as strategic management, central R&D or true corporate-level costs such as group-wide functions,” said Paras Savla, partner at KPB & Associates. “While a higher retained ratio can sometimes indicate stronger segment profitability, it more often reflects a fast-growing company centralizing its investments in future technology, brand building and organization-wide capabilities.”

“As long as the allocation framework matures with time and scale, such central spending can support long-term efficiency, transparency and sustainable growth,” he added.

According to a former chief financial officer and another board member of a Bengaluru-based company, the practice of unallocated expenses can help companies manage small expenses.

“A conglomerate with different businesses, or an automobile company for example, may acquire a domestic business and a financing business as well as an overseas business,” said a Bengaluru-based board member on condition of anonymity. “In any case, the holding company or a company may consider allocating the remuneration of the Group CEO or MD to these business lines as an item of unallocated expense.”

The board member found it unusual that Ola Electric “failed to disclose the nature of these costs”.

The former CFO also expressed surprise over the fact that “Ola Electric disclosed the money earned by the two businesses from IPO proceeds but… did not disclose the nature of these (unallocated) expenses.”

For now, Ola Electric is earmarking interest earned from IPO proceeds for its two-wheeler and mobile phone businesses. The company’s two-wheeler business ₹While 49 crores were earned from interest, mobile phone business ₹23 crore. At the end of the September quarter, Ola Electric ₹2,301 crore spent from IPO ₹2,974 crore ₹5,275 crore was collected in August last year.