Verdict: Profitable Start-up with Exorbitant Pricing

Rs. 3,000 cr IPO: Entirely OFS by PEs Warburg, Temasek, J P Morgan, March Cap, trimming 84% combined holding to 46%

IPO Date: Mon 9^th Aug to Wed 11^th Aug 2021

Price band: Rs. 1,585-1,618 per share

Mcap: Rs. 7,400 cr, implying 40% dilution

Listing: 23^rd Aug 2021

Omni-Channel Automobile Marketplace

11 year old start-up founded by former CEO of Mahindra First Choice, company owns CarWale, CarTrade, BikeWale, 55% in Shriram Automall. While revenue doubled YoY in FY19 to Rs. 243 cr, it slowed to 23% at Rs. 300 cr in FY20, before being hit by covid in FY21. Revenue fell 16% YoY in FY21 to Rs. 250 cr, despite 25% rise in online visitor traffic, as vehicles sold dropped 21% to 1.6 lakh. Supported by other income, FY21 PBT rose 21% YoY to Rs. 47 cr, with adjusted PAT close to Rs.35 cr, making company probably the only profitable player in online automobile platform space, in both FY21 and FY20. 

FY22 Profit may remain Muted

Q4FY21 revenue stood at Rs. 82 cr, on 0.6 lakh vehicles sales. Q1FY22 sales halved to 0.3 lakh vehicles QoQ, but jumped 75% YoY. Without disclosing financials, company has cautioned adverse impact on Q1FY22 profitability on both QoQ and YoY basis, despite rise in YoY revenues. Besides, FY22 net profit will be dented on Rs. 53 cr ESOPs charge for April-July 2021 and no brought forward deferred tax credit, implying full tax rate.

Valuation Prices in all Future Positives

How can Rs. 7,400 cr mcap be justified for adjusted FY21 PAT of Rs. 35 cr, when nearly 2/3^rd of this profit is from treasury income? Even Q4FY21 annualised PAT of Rs. 64 cr leads to a three digit PE multiple! If a broad-benchmarking is to be done, B2B marketplace Indiamart’s mcap is Rs. 22,500 cr, on 5% revenue growth in FY21 and Rs. 280 cr PAT, although we don’t find this valuation sustainable either.

Heavy Dilution of 40%

CarTrade’s IPO price is at a 17% premium to the last fund raise in Apr 21 at Rs. 1,377 per share, which is unwarranted, post a weak Q1FY22. Prior to that, in Feb 2017, company issued shares to Temasek at Rs. 674 per share. From FY18-FY20, revenue grew at 55% CAGR, with turnaround in profits, but in Jun 20, shares were issued to the PE investors for part-exiting via the IPO at Rs. 825 per share, i.e. only 22% premium after 3 years, when financials improved drastically. This implies primary fund infusion into the company was undertaken at a lower price, even when financial performance improved, while secondary sale is now envisaged at double the price in 1 year, despite subdued financials. Is this ‘may hay while the sun shines’?

Besides, company will not benefit from the exorbitant pricing, as it is 100% OFS, and only 4 PE funds will gain an exit for half their holding.

Asset Light Business Model

Company’s financials are highly sensitive to the pace of auto recovery. Once scale is achieved, there is high operating leverage. It plans to deploy Rs. 800 cr cash on books for growth or acquisitions. Having demonstrated profitability, company is better off some of the other new-generation companies coming up for listing, and may be kept on radar.

Conclusion

We are unable to justify the exorbitant OFS pricing and hence do not recommend the IPO.

Grey Market Premium (GMP) of CarTrade Tech: Grey Market Premium of Car Trade Tech is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.