Company Name – Cartrade Tech Limited (CarTrade) Current Share Price – INR 835 (January 3, 2022) Market Cap – INR 3,886 cr |
1. What is interesting about the stock?
A car is not just your partner on the roads but is your companion on journeys undertaken and the memories made therein. Remember the “Rampyari” car driven by Amitji in a movie in 1991. Buying a car in the Indian context becomes even more stressful as it usually entails emotional value also. So, along with tending to the practical issues of price range, fuel economy and performance, resale value, etc., we must give due consideration to our and our family’s aspirations.
India's automotive retailing is digitizing at a fast pace with influx of capital and the emergence of new online business models (esp. for EV players like Ola) shift more of the automotive purchase journey online. We all have tried to purchase a second-hand car and realized that the buying experience is inefficient and cumbersome. So, digitization has found rapid traction in this space.
CarTrade is a multi-channel auto platform with presence across the value chain. CarTrade.com was established in 2010 by Vinay Sanghi and Rajan Mehra. The company offers a variety of solutions across the automotive value chain for marketing, buying/selling, financing new and used cars, 2Ws, and pre-owned CVs and farm and construction equipment. The Company operates an asset light model with no inventory risk.
It has also taken the inorganic route to build the key businesses:
In November 2015, CarTrade acquired CarWale, an online classifieds portal
In May 2017, CarTrade acquired vehicle inspection and valuation venture Adroit Inspection
In January 2018, CarTrade acquired a 51% stake in Shriram Automall from Shriram Group, which was subsequently increased to 55%
Key brands and products of the Company are:
Carwale and CarTrade: Consumer platform for users to research cars online (similar to classifieds sites). Users can consume automotive content on the platform and use tools like car reviews, price guide, used car inventory, and car finance offers. The platform also provides functionality to connect users to dealers (both new & used car dealers)
Bikewale: Platform for bikes similar to Carwale/CarTrade
Shriram Automall: Market leader for vehicle auctions, in terms of number of vehicles listed for auctions. Shriram Automall listed more than 800k vehicles in FY21. Auctions are conducted online & offline at 114 (3 owned; rest leased) automalls across India
CarTrade Exchange: Online auctions platform and used vehicles ERP tool
Adroit Auto: Offers vehicle inspection and valuation services used by insurance companies, banks, and other financial institutions
AutoBiz: Provides new car dealers a CRM solution to manage their customers
Company generates 56% of revenue (Q2 FY22) from Shriram Automall which is a vehicle auction business and remaining from the classifieds business like Carwale/CarTrade/Bikewale with most of it coming from new vehicles listing.
Based on the IPO RHP document filed, Company operates in the segments with total revenue pool (also known as Target Addressable Market or TAM) of USD 14 billion. Industry (volume) is expected to grow at 10%. With increase in digitization, we can expect the Company to grow at 15-20% for next 4-5 years.
Key strengths of the Company are:
Market leader in vehicle auction business
High consumer traffic at their classifieds business with c. 85% organic traffic – shows a strong brand name and relevance for customers
Profitable (like Nykaa) and asset light business model – acts as a marketplace with commission model. Business is run by old fashioned folks like us who haven’t got impacted by the Venture Capital model. Cash generating business will always have higher probability to survive.
Key risks for the Company are:
Large TAM and higher level of digitization possibility has attracted lot of competition – specialized vertical players like CarDekho, Cars24, Droom or classified players like Olx apart from car/bike manufacturers like Maruti, Tata Motors. Many of these players are sitting on lot of Venture Capital funding
Increase in market share of EV players (both 2Ws or cars) – as these players will prefer their own digital platform to control consumer’s buying experience. Example – Ola 2Ws
Company needs to continuously invest in technology - new and complementary products and services as well as improve/upgrade existing products and services to remain competitive and retain customers
On an overall basis, Company has good asset light business model but there is significant competitive pressure which can eat away margins.
2. Key Historical Financials
Company revenue fell by 16% in FY21 due to COVID 19, but has rebounded in Q2FY22
Q2FY22 EBITDA went into loss due to exceptional and non-recurring expenses (ESOP issuance). Adjusted EBITDA in Q2FY22 was INR 24 cr
Shriram Automall EBITDA is around INR 13 cr where the Company has 55% stake. Adjusting for the minority stake (as the Company should receive proportionate value for their shareholding in Shriram Automall and not the full value), the "further" adjusted EBITDA in Q2FY22 was INR 18 cr
3. What is my view on company valuation?
The stock price of the Company has almost halved since the IPO in August 2021 – beating Paytm which is down around 40%. Major underperformance in the market which is flushed with liquidity. Possible reasons could be:
IPO was 100% offer for sale with no capital raised for growth of the business
Increasing competitive pressure in the industry – in my view this was known at the time of IPO, so should have been factored in the price. Alas! IPOs are thought as easy money route by us (retail investors).
Company trades at Price to Adjusted EBITDA (annualized Q2 FY22) ratio of 50x in comparison to global players like Autohome (China), Auto Trader Group (UK), Cargurus (US) or Copart Inc (US) that trade between 10-15x.
Company trades at Price to Revenue (annualized Q2 FY22) ratio of 11x in comparison to:
VCs have invested in the Company’s competitors like CarDekho and Droom at an equity valuation of around 12-18x revenue. We should keep in mind that VCs invest in a company with lot of downside protection – with clauses like liquidation preference (if the company is sold then the money is distributed based on waterfall where last investor get 1-2x of the investment first before any previous investor receives any money). So, we should apply a discount to any VC investment valuation as a public investor does not get the same downside protection
On an overall basis, business is good with significant competitive pressures and highly overvalued (4x of global competitors) at the current levels. Do let me know your thoughts in the comments section below. Will you invest?
4. What are the risks to the investment analysis?
Risks to the analysis are:
Acquisition by an international player like Auto Trader group or Copart
Lack of profitable alternatives in start-up space (other than Nykaa) can keep retail investors interested in the short/medium term
About the Author
I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.