Should you subscribe to CarTrade Tech IPO?

CarTrade Tech is an asset light tech company operating as market place for automotive sales. The company is diversely held and has no promoter. Its IPO consists entirely of a secondary offer of sale by existing shareholders of around ₹3,000 crore, will value the company at a market cap of around ₹7,400 crore.

The company has a good track record of execution and growth prospects are sanguine given the broader digitisation trends. However, pricing slams the break in what is otherwise a good opportunity.

The IPO values the company at a price to revenue (trailing) of around 30 times and EV/ revenue of around 27 times. However, the revenue considered here includes 100 per cent revenue of a subsidiary (Shriram Automall) in which the company has only 55 per cent economic interest. This subsidiary brings in 57 per cent of the total revenues at the consolidated level. Hence, if one values it adjusting for its economic interest in the subsidiary, the price/revenue and EV/revenue multiple is even steeper at 41 times and 36 respectively. Long term investors can avoid the IPO.

Business and opportunity

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).

According to the prospectus, its online platform CarWale and Bike Wale were ranked number one on relative online search popularity compared to their key competitors over the period from April 2020 to March 2021. Also, its used cars auction platform Shriram Automall is one of the leading used vehicle auctions platform based on the number of vehicles listed for auction in FY20.

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 a offline model. This enables better price discovery for buyer 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 by way of higher advertising revenue as more traffic hits their websites for listings, and also from more such transactions getting executed online.

Factors to consider

However, investors need to factor some important aspects. The company’s business segments have many competitors with no single player dominating strongly. Some of the key competitors are Cars24, CarDheko, Mahindra First Choice, Quickr, Olx and Droom. Usually, the internet business is of the nature of feast or famine, with the top 1 or 2 players capturing most of the market opportunity and thereby, the profits as well. Its revenue for FY20 was around 20 per cent of the combined revenue of CarTrade and that of its 4 key competitors, indicating the fragmentation in this space. Threat of new entrants also remain. While this is not to imply online players cannot make profits even in a fragmented space, this does bring down prospects for earnings growth, which would in turn be required to support the high valuation that the company is demanding. That the company’s platforms have been leading platforms only in a specific year or so as mentioned above is also indicative of high competition.

Financials

In FY21, Car Trade reported operating revenue of ₹249 crore, down 16 per cent vs FY20, reflecting the impact of Covid induced lockdowns. It reported a net profit of ₹101 crore. However, adjusted for deferred tax credit and excluding other income its net profit would have only been around 7 crore.

If we look at FY20, a normal year except for the fag end, its revenue grew by around 22 per cent over FY19. Profits stood at ₹32. 2 crore (including other income of ₹20 crore).. Similarly its EBITDA margin which was at 18.8 per cent for FY20, would have been around 13 per cent if non-operating income is excluded.

Profitability in all the three years remains low, with net profit margins in the 0-5 per cent range (without including other income).

The company has a strong balance sheet with net cash of around ₹650 crore as of March 31, 2021.

Peer comparison

Investors can track CarTrade growth and profitability metrics post listing and wait for a better entry points. An EV/revenue at around 9-10 times would be the levels that may offer scope for decent returns for long-term investors, depending on other factors prevailing at that time. The company has no listed peers in India for comparison.

Cars.com that is listed in the US and has a similar business, trades at EV/revenue of just 2.2 times. To compare further, Cars.com enterprise value is at $1.37 billion while trailing twelve month (ttm) revenue is $606 million. At IPO price CarTrade’s EV will be at around $910 million while ttm revenue is $33 million.

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