CarTrade Tech IPO: Here's why brokerages suggest subscribing to the issue

Multi-channel auto platform CarTrade Tech's initial public offer (IPO) launched on Monday, August 9, in a bid to carry out an offer for sale, and to achieve the benefits of listing equity shares on the stock exchanges.  
 

At the upper end of the price band of Rs 1,585-1,618 apiece, the company aims to raise Rs 2,998.51 crore. The offer, which closes on Wednesday, August 11, is entirely an OFS of 18,532,216 equity shares where CMDB II (22.64 lakh equity shares), Highdell Investment Ltd (84.09 lakh shares), Macritchie Investments Pte Ltd (50.76 lakh shares), and Springfield Venture International (17.65 lakh shares) will offload their stake partially.
 

Fifty per cent of the portion is reserved for qualified institutional investors (QIB), 15 per cent for non-institutional investors (NII), and 35 per cent for retail investors. The shares are available in lots of 9 and its multiples thereof. Till 11:43 AM, the issue was subscribed 15 per cent with the retail portion garnering 30 per cent subscription. 
 

About the company

Incorporated in 2000, CarTrade Tech (CTT) is a multi-channel auto which operates under the brand names of CarWale, CarTrade, Shriram Automall, BikeWale, CarTrade Exchange, Adroit Auto and AutoBiz. The company serves as an integrated online and offline marketplace for vehicle owners, dealerships, OEMs and other businesses and its services span the gamut of automotive transaction value chain, i.e. marketing, buying, selling and financing of new and pre-owned cars, two-wheelers, commercial vehicles, and other vehicles. 
 

Financials

For the financial years 2021, 2020 and 2019, the company’s total income was Rs 281.52 crore, Rs 318.44 crore and Rs 266.80 crore, respectively. Restated profits, meanwhile, were Rs 101.07 crore, Rs 31.29 crore, and R 25.91 crore, respectively. Their Adjusted EBITDA margin was 27.62 per cent, 22.71 per cent and 24.42 per cent for FY21, FY20 and FY19, respectively.
 

“Over FY18-21, the company has reported a robust business growth with improvement in the profitability. Mainly on the back of higher commission income, the company reported a 26.4 per cent CAGR rise in total revenue to Rs 249.7 crore in FY21. Total operating expenses increased by 13.4 per cent CAGR (lower than the top-line growth), leading to an EBITDA of Rs 39.4 crore in FY21 as compared to a loss of Rs 20.5 crore in FY18,” noted analysts at Choice Broking.
 

Baring FY18, CarTrade Tech reported a positive operating cash flow with an average cash flow of Rs 29.2 crore. Besides, despite a 20.6 per cent CAGR rise in financial liabilities over FY18-21, the company’s operations were virtually debt free with an average debt-to-equity ratio of 0.1x. Return on invested capital (RoIC) and return on equity (RoE) have been in an increasing trend with an average of 1 per cent and 2.8 per cent, respectively.
 

Brokerages' take
 

ICICI Securities | Subscribe

As of FY20, total addressable market (TAM) for Indian automotive portals was estimated at $14.3 billion (approximately Rs 1.06 trillion), of which CarTrade Tech and key competitors combined covered only less than 5 per cent. With 90 per cent Indian customers estimated to be using online channels for research before buying a new or used car, the space is susceptible to market share gains by organised players (particularly ones with end-to-end presence) at the expense of current unorganised, fragmented industry segments. 
 

In this regard, CarTrade Tech stands to benefit courtesy its suite of strong brands. CarWale and BikeWale were ranked No. 1 in relative online search popularity compared to peers during FY21, while as of FY20, Shriram Automall was a leading used vehicle auction platform based on number of vehicles sold.
 

Anand Rathi | Subscribe for Long-term

Leveraging their leading brands, the company provide services across different vehicle categories, including new and used cars, new and used two-wheelers and used commercial vehicles and farm equipment. Their multi-vehicle approach increases their efficiencies and profitability as the services and technology can be leveraged and applied across vehicle categories. 
 

India was the fifth largest car market in the world in calendar year 2020 and is expected to become the third largest automotive market in the world in terms of volume by 2025. There is substantial headroom for the Indian auto industry to grow. Annual new car sales in India are expected to grow from 2.7 million new cars in financial year 2021 to 4.4 million new cars in financial year 2026, while annual used car sales is expected to grow from 4.4 million used cars in financial year 2020 to 8.3 million used cars in financial year 2026. Annual new two-wheeler sales in India are also expected to grow from 15.1 million new two-wheelers in financial year 2021 to 26.6 million new two-wheelers in financial year 2026.
 

Nirmal Bang | Subscribe

While the brokerage has a ‘Subscribe’ rating on the issue owing to CarTrade's well positioned balance sheet and plans to capture adjacent business opportunities, it cautions many companies have entered the vehicle platform business since 2014 including the bigger competitors like Cars 24 and Droom who, just like CT are backed by multiple marquee global investing firms. 
 

An increase in aggression by competition fueled by large amounts of global appetite to participate in this industry in India, could impact the positioning of CT and its profitability, it says.
 

Choice Broking | Subscribe

CarTrade is an electronic exchange focusing on auto sector and thus there is no peer company having similar business operations. At higher price band of Rs. 1,618, CarTrade is demanding an EV/Sales multiple of 26.6x, which we feel is attractive considering its scalable business model, profitable operations and business growth opportunities in the auto sector value chain. Thus we assign a “SUBSCRIBE” rating for the issue.
 

Hem Securities | Subscribe

Company operate on an asset-light business model, operating only 114 automalls, a large majority of which company lease or rent from third parties. Company have invested significantly in building technology platforms that can manage considerably increases offerings without requiring sizable additional investments, and its growing scale has resulted in a decrease of the share of fixed costs.
 

Together with its strong brands, longstanding relationships with customers, dealers and other stakeholders, and an expanding suite of offerings, company have created a profitable and scalable business model.

Source: Brokerage reports