Has Ola set the stage for taxi consolidation?

In the wake of rising competition and growing financial stress, companies are increasingly looking at mergers

Last week, when taxi service provider Ola Cabs bought TaxiForSure for $200 million, or Rs 1,250 crore, in a cash-and-equity deal, the consolidation in one of India's youngest businesses - taxi aggregation - began. Interestingly, Ola was not the first company to realise the need for "consolidation" in the business, but what it did was to rev away before the big players, including American taxi aggregator Uber, could target companies in India's taxi services, a nascent market dominated by unorganised players.

A year after entering India in 2013, Uber had started evaluating TaxiForSure and Meru Cabs, among others, for possible acquisitions. But the payout had not tempted the smaller companies. The co-founders of four-year-old TaxiforSure, Aprameya Radhakrishna and Raghunandan G, both IIM Ahmedabad graduates, rejected the overtures. They probably felt vindicated because a few weeks later, Uber, valued at $40 billion, faced bans across Indian cities after a 27-year-old woman passenger alleged rape by one of its drivers in New Delhi.

Surprisingly, within months of this, Ola, valued at a comparatively small $1 billion in October 2014, was able to convince the founders and investors of Bengaluru-based TaxiForSure to sell. Why did Ola succeed when Uber failed? There are no official details about the deal, but people with knowledge about the sale indicate that it was primarily Ola's blend of cash and equity that trumped Uber, which preferred a cheaper, all-cash transaction. Also, investors would surely have noted opinions about Uber being overvalued, while the Ola stock promised headroom for fast growth.

Last year, when Masayoshi Son, chairman of Japan's SoftBank, announced an investment of $210 million in Ola, there was no indication that the taxi aggregator was looking for tuck-in acquisitions. Son's investment, the largest so far in an Indian company, actually undervalued Ola, given the market potential that had even drawn Uber - backed by investors such as Goldman Sachs, Google Ventures, Menlo, First Round, Lowercase Capital and Benchmark - to India.

But Ola's takeover leaves both the founders and the investors of TaxiForSure happy. Radhakrishna and Raghunandan each held about 8 per cent of the equity, and market watchers say they would have got around Rs 100 crore each. The investors, who had missed putting their money on Ola, a more preferred bet, now get their share of equity. Its investors include Accel Partners, Bessemer Venture partners, Helion Ventures, Factory Ventures, Blume as well as the venture arm of Qualcomm. Of them, Accel, which held about 36 per cent stake in TaxiForSure, has gained the most.

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What Ola gets out of the deal is the inventory and users of TaxiForSure and a city presence. In the context of speculation that the cab aggregator is planning to raise $500 million in an upcoming round, Ola will find itself in a better position to solicit investor trust in the face of muscular challenge from competitors like Uber.

Founded by IIT-Bombay alumni Bhavish Aggarwal. and Ankit Bhatia, Ola finds itself on a better financial footing than most other taxi service providers in India. There are 19 radio taxi operators in the country, including Mega Cabs, Easy Cabs, Meru Cabs, and Tab Cabs, according to the Association of Radio Taxis. These operators run over 25,000 cabs across India.

For 2013-14, ANI Technologies, which runs Ola, reported a 50 per cent jump in net loss at Rs 34.21 crore, against Rs 22.80 crore in 2012-13, according to filings with the Registrar of Companies. Losses have gone up for TaxiForSure too. Serendipity Infolabs, the holding company of TaxiForSure, reported a loss of Rs 17.08 crore for 2013-14, compared with a profit of Rs 3.02 crore the previous year.

Meru Cab Company, which runs Meru Cabs, reported a maiden profit of Rs 3.55 crore in 2013-14 after having logged a loss of Rs 31.11 crore the previous year. As of March-end this year, the company's accumulated loss stood at Rs 215.24 crore. Similarly, Mega Cabs, which owns and operates taxis round the clock in six cities, reported a loss of Rs 2.55 crore on revenues of Rs 36.37 crore for 2013-14. The company, which claims to have the largest radio taxi network in India, had posted net profit of Rs 12.18 lakh in 2012-13.

"Taxi services are a hyper local model where building the supply chain takes a lot of time and investment," points out Vineet Toshniwal, managing director, Equirus Capital. "Investors with very deep pockets and a long-term horizon will be able to sustain and see through the cash burn and create a profitable business. Till such time, consolidation will keep taking place."

Meru Cabs, with plans to raise $100-150 million, is also eyeing regional companies in smaller cities in the wake of rising competition in the business. "In the long run, two or three major players will survive, and the first merger in this space, Ola and TaxiForSure, is a step in that direction," says Siddhartha Pahwa, CEO of Meru Cabs. "In this industry, supply and cost are two very big restraints and a merger of two companies helps in rationalising these."

India's taxi market, despite being under financial stress, has lately received increased attention from global investors, mainly because the radio taxi model has emerged as the fastest-growing form of public transport for the world's second-largest population. There are an estimated 600,000 taxis in India, generating combined annual revenues of Rs 11,000 crore.