IPO Size: Rs. 602 cr 

• 58% is offer for sale (OFS) by PE Banyan Tree (30% stake to drop to 10%), clocking 34% IRR in 8 years on partial exit
• Rs. 250 cr fresh issue to repay Rs. 192 cr of Rs. 729 cr net debt

Price band: Rs. 280-295 per share

Mcap: Rs. 2,100 cr, implying 29% dilution

IPO Date: Tue 12^th Mar to Thu 14^th Mar 2024, Listing Tue 19^th Mar 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

South Indian Automobile Dealer

Popular Vehicles retailer in Kerala, Karnataka, Tamil Nadu and Maharashtra through a wide network of 432 touch-points (61 showrooms, 133 booking offices, 32 pre-owned vehicle outlets, 139 service centres). Company’s revenue is split as:

• 60% from passenger vehicles (PVs): dealership of Maruti, Honda, Jaguar Land Rover
• 35% from commercial vehicles (CVs): Tata Motors and BharatBenz dealership
• 5% from electric two-wheeler (2W) and three wheeler (3W): Ather and Piaggio

Service business accounts for 15% of revenue and 55% of EBITDA, as company’s service market share is higher than sales market share (ranks #1 in service for Maruti and Honda, against rank 7 and 6 respectively in sales)

High Debt to Continue

Post Rs.192 cr repayment from fresh issue proceeds, debt will reduce only by 25%, as business requires high inventory, of over 1 month. Thus, net debt, rated BBB+, will continue to remain high, at Rs. 537 cr, or debt equity ratio of 0.85:1, on expanded equity of Rs. 625 cr.

Margin Expansion

As sale of spares, pre-owned vehicle and service income (finance + insurance) together rose from 21% of company’s revenue in FY19 to 27% of revenue in H1FY24, EBITDA margin strengthened from 3.6% to 4.1% respectively.

FY23 proforma revenue (including full year financials for acquisition) stood at Rs. 5,134 cr with EBITDA of Rs. 249 cr (4.8% margin) and PAT of Rs. 67 cr (1.3% net margin). In H1FY24, revenue was at Rs. 2,834 cr, with Rs. 146 cr EBITDA (5.1% margin) and Rs. 40 cr PAT (1.4% net margin). EPS for FY23 and H1FY24 stood at Rs. 10.8 and Rs. 6.4 respectively.

Priced Lower than Peer

Since H2 is generally stronger than H1 for auto sales, FY24E EPS is estimated at an over Rs. 14, implying a PE multiple of 21x and a revenue multiple of 0.4x, on current year basis. On H1FY24 PAT of Rs. 40 cr, Popular is seeking Rs. 2,100 cr market cap and Rs. 2,640 cr enterprise value (EV). This is much lower than sole listed automobile distributor Landmark, which clocked Rs.27 cr PAT in H1FY24, has similar RoE of 18% and yet ruling at market cap of Rs. 3,000 cr, implying PE multiple of 43x and a revenue multiple of 0.9x. Popular not only has a bigger topline and bottomline than Landmark, but was also profitable for all years pre-covid (FY19 and FY20) too, unlike Landmark.

In Feb 2024, promoters did a secondary purchase at Rs. 57 per share from the PE investor, to share the upside made by the latter. Hence, this price cannot represent ‘fair’ value.