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Car Trade Tech IPO: Absurd Valuations, Strong Business Model

by tavaga
IPO

After strong demand for IPOs of loss-making companies such as Devyani International and Zomato. Mumbai Based, CarTrade Tech, owner of platforms such as CarTrade, CarWale, AutoBiz, is all set its launch its IPO on 9th August.

Company Overview

CarTrade Tech is a multi-channel automotive platform that supports a variety of car types and value-added services. In terms of internet search popularity, CarWale and BikeWale (their platforms) were placed first. Shriram Automall (their platform) is one of the most well-known sites for used vehicle auctions. Among its competitors, CarTrade is the only profitable automobile digital platform.

CarTrade Services

Car buyers can interact with dealers, OEMs (Original Equipment Manufacturers), and other partners on the CarWale and CarTrade platforms to sell and buy new and used cars. The platforms also assist with financing and offer automotive ancillary products and services.

For new and used two-wheelers shoppers can connect with dealers, OEMs, and other partners on BikeWale to sell and buy new and used two-wheelers offered by them.

Shriram Automall is a platform for the sale of only pre-owned two-wheelers, three-wheelers, cars, commercial vehicles, and farm construction equipment.

CarTrade Exchange is a car Enterprise Resource Planning (ERP) tool. CarTrade Exchange is also used by automotive dealers to manage their inventory management, procurement, and customer relationship management (CRM).

Insurance companies, banks, and other financial institutions use Adroit Auto’s car platform for inspection and valuation services. 

AutoBiz offers new vehicle dealers a CRM solution to help them manage their customers more effectively.

How does CarTrade make money?

How did CarTrade start?

Vinay Sanghi, a veteran of the Indian auto industry with over two decades of experience, projected that the growing Indian middle class will not just buy cars from showrooms, but also from the internet (Almost 80 percent of consumers check online before buying a car). Furthermore, as the car-buying lifecycle shortens, they would look for a platform where they could buy and sell used cars. Vinay Sanghi exactly had the idea when he started CarTrade.

Forbes nominated the start-up to its top 10 list of India’s most focused e-commerce businesses.

Share Holding Pattern

JP Morgan and Warburg Pincus will sell around 40% and 51% of their stakes in the company, and they will receive proceeds as high as 236% and 181% of their investment. The public holding will climb to 40% due to heavy share selling by private investors.

Why is CarTrade Raising Money?

The proceeds of the Offer for Sale will be transferred directly into the bank accounts of the selling shareholders. Car Trade is entirely raising money through Offer for Sale, so nothing will be used for the company operations. It is listing in the markets to enhance visibility and brand image and provide liquidity to the Shareholders.

Financials

Revenue from Operation grew by 23% from FY 19 to FY 20 but later it decreased significantly, we can notice a drop in revenue by 16% from FY 20 to FY 21. Even after accounting for the disruption in the last week of March due to the national lockdown, revenue from operations grew just by 25% in FY20, and it fell in FY21.

EBITDA also hasn’t grown meaningfully. The jump in the Profit After Tax in FY 21 is due to a tax credit the company received.

The company is debt-free with a strong balance sheet and has a history of generating positive free cash flows. 

Key Operating Metrics

Particulars3MFY21FY21FY20FY19
Average Monthly Unique Visitors (in million)27.11 25.66 20.51 19.27 
Average Monthly Unique Organic Visitors (in million)24.85 23.42 14.54 13.04 
Number of Vehicles Listed for Auction212,552 814,316 809,428 709,190 
Number of Vehicles Sold by Auctions30,133 156,689 197,986 199,529 
Source: RHP, Tavaga Research

Organic Sources is without any help from Google Ads or other Ads. The Organic monthly user’s number is pretty good which shows the brand visibility.

Used Car Industry

In comparison to other developed countries, India’s used car market is quite small. The parc turn rate in India is roughly 16% (total number of used cars sold divided by total volume of cars), indicating there is ample amount of future growth for used car sales.

Peer Comparison

There are no listed firms in this space.

When compared to other unlisted firms, CarTrade tech is the only one that is profitable. Cars 24 took 5 years to reach the same revenue as CarTrade, which took roughly 11 years, demonstrating the tremendous scale-up that can be achieved.

ParticularsFY 20 Total Income (In Rs. Million)FY 20 PAT (In Rs. Million)
CarTrade Tech3,184313
Mahindra First Choice3,758-70
Droom1,795-829
Cars2430,652-2850
CarDheko7,547-3265
Source: RHP, Tavaga Research

ParticularsCountryRevenue (In Cr)Price to Sales
Car TradeIndia31823.3
VroomUS97923.8
CarvanaUS401764.8
CopartUS1584015.9
Auto TraderUK2430.826.7
Source: News Sources, Tavaga Research

International Peers are trading at 16-25x P/S but they are also clocking in 30-50x more revenue than CarTrade. So when compared to International peers CarTrade might be slightly overvalued with high valuations. Domestic competition is also heating up. 

Balancing Act

Bottom Line

Key factors such as digitization, changing customer behaviour, and innovative services are predicted to propel India to become the world’s third-largest automotive market in terms of volume by 2025. In comparison to other developed countries, India’s used car market is quite small.

CarTrade is the only profitable company in this space but the domestic competitors are gearing up and catching up with the numbers. With an EPS of Rs. 19.2 and 84x P/E it seems to be overvalued compared to global peers. Revenues have not grown much and declined in FY 21. The management is extremely talented and has the relevant industry experience and it’s a strong and trusted brand.

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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