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BL Research Bureau
CarTrade Tech shares saw a weak debut, listing at ₹1,600, a 1 per cent discount to its IPO price of ₹1,618. The stock was trading down 1.7 per cent at ₹1,590 apiece on the BSE at 12:30 pm with about 4 lakh shares having changed hands.
We had recommended an avoid on the IPO because of its expensive pricing and maintain our stance. The company is trading at price to revenue (trailing) of around 30 times and EV/revenue of around 27 times. This is an extremely steep price to pay for a company with very low core profitability.
Excluding other income, its net profit margin in the last 3 years up to FY21 would have been in the 0-5 per cent range. Another thing to note is that its Price/revenue and EV/revenue multiples would be even more expensive if one considers only its economic interests in subsidiaries which have been fully consolidated in its financials.
The business space is also fragmented with many players in the fray. Given these factors caution is warranted. For long term investors value may emerge if the EV/revenue multiple comes in the range of 9-10 times. Of course, this will also depend on other factors prevailing at that time, which will have to be considered.
While there is no listed peer in India, US listed Cars.com trades at EV/revenue of just around 2 times.
Business
CarTrade is an online marketplace for automotive sales and allied products such as financing and insurance. Through its multiple platforms and subsidiaries, the company enables buyers and sellers of different category of used vehicles to connect online/offline and transact. Its websites also serve as a place for ratings & review (new vehicles), and listing (old vehicles) of automobiles.
The company derives revenues from three main segments. One, the Shriram Automall platform where it makes commission and fees for sale of used cars in its platform (57 per cent of FY21 revenue). Through this platform, it facilitates both online and offline bidding/ auctioning of different category of vehicles and takes a commission/fees from the transacting parties on the winning bid value. Two, online advertising and lead generation solutions on its branded online platforms such as CarWale, BikeWale, Cartrade etc where dealers, OEMs and consumers connect to research and review vehicles, list their vehicles for sales and where interested buyers check for listings (36 per cent). The key here is to provide content and useful features that will drive traffic to its websites. Three, inspection and valuation services for banks and other financial institutions, insurance companies and OEMs (7 per cent).
The online ecosystem in this sector helps address the inefficiencies in market place by expanding the reach to include more buyers and sellers, significantly beyond what would be possible in an offline model. This enables better price discovery for buyers and sellers. According to the prospectus, over the next 5 years, the used car market in India is expected to grow at a CAGR of atleast 11 per cent, two wheelers at 8 per cent, and commercial vehicles at 7 per cent. Online portals facilitating this are expected to capitalize on this trend both through higher advertising revenue as more traffic hits their websites for listings, and also from more such transactions getting executed online.
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