CarTrade Tech IPO: Analysing Risks And Rewards Of Investing In India's Only Profitable Digital Automobile Platform That Goes Public On Aug 9

CarTrade Tech (CTT), a multi-channel auto platform with a presence across varied vehicle types and value-added services, will launch its initial public offering for subscription on Monday, August 9, 2021.

CTT operates online platforms like CarWale, CarTrade, BikeWale,and auction platforms like Shriram Automall and CarTradeExchange.

CTT serves as an integrated online and offline marketplace for vehicle owners, dealerships, OEMs and others. CTT provides services along the entire value automobile chain such as inspection, buying, selling, marketing, and financing.

As of FY21, CTT had 2.6 crore monthly average unique visitors on its websites/apps (of which 88.4% were organic i.e. from unpaid sources) and featured 8.14 lakh vehicle listings on Shriram Automall.

CTT’s revenues have grown at a compounded annual growth rate of 1.3 per cent over the past three years. As of FY21, 57 per cent of CTT’s revenue was derived from commission and fees for auction, remarketing services of used vehicles.

Online advertising solutions on its portals along with lead generation for OEMs, dealers, etc. and technology-based services combined accounted for 36 per cent of revenues while 7 per cent was obtained via inspection and valuation services. It EBIDTA margins have been increasing each year - from 12 per cent in FY19 to 15 per cent in FY21. The company has generated cash flow from operations, with minimal capital expenditure.

CTT is the only profitable digital automobile platform in India, and the first profitable digital platform to have an IPO in 2021.

Automotive portals like CTT provide a key service of auction and remarketing of vehicles for various customers like individual consumers, fleets, banks and other financial institutions (for repossessed vehicles), insurers (for total loss claims or salvaged vehicles), OEMs, corporates, dealers, etc. As of FY20, auction and remarketing (C2B and B2B) accounted for 41 lakh out of total 85 lakh used car sale transactions in India.

Its platforms CarWale, CarTrade and BikeWale platforms are used by shoppers to research and connect with dealers, OEMs, and individuals to sell and buy cars and two wheelers. Shriram Automall (a subsidiary) is involved in the auctioning of pre-owned vehicles. CarTradeExchange is an online B2B auction platform and a used vehicle ERP tool, also used by dealers to manage their processes like procurement, inventory management and CRM. Adroit Auto offers vehicle inspection and valuation services while AutoBiz provides CRM solutions to new car dealers.

According to the company’s DRHP, it has built a strong brand with strong digital visibility evidenced by the high percentage (88 per cent) of organic visitors.

Google Trends clearly shows that Carwale was the top search on Google followed by Cardekho and the others. Its customer acquisition costs (per monthly unique visitor) have halved from Rs 0.74 in FY19 to Rs 0.37 in FY21.

Unlike its competitors, the company’s buy and sell business is quite new, therefore, the company does not have much used car inventory on hand, which results in a lower working capital requirement.

Key Risks:

Digital Platforms by OEMs:

Auto OEMs and dealers are increasingly looking at online and digital mode not just for customer engagement but also to move away from traditional distribution channels and lower distribution costs. With greater focus on their own online portals, these OEMs could stop selling through third-party portals like CTT.

Changes in Technology & Search Engine Algorithms:

Being an online marketplace, the company is constantly exposed to a rapidly changing technology landscape. It must constantly innovate in service and feature offerings or user experience to keep pace with competition or user expectations, which could entail additional cost.

Search engine optimisation plays an important role in relative popularity of online portals. Changes in algorithms employed by search engines or better efforts by competitors could alter the present strength enjoyed by CTT’s platforms and, thus, lower its competitive edge. Search engines could also begin showing automobile dealer and pricing information directly on the search page which could further create problems for CTT and other digital platforms.

Low Capital Efficiency:

CTT is a cash-rich company with consolidated cash and liquid investments of Rs 650 crore on books as of FY21. It has relied on the inorganic growth. CTT acquired CarWale in FY16, Adroit in FY18 (51 per cent stake) and Shriram Automall in FY19 (55.4 per cent stake). In the process, it has recorded goodwill of Rs 898 crores on its books, which forms around 53 per cent of the company’s FY21 net worth. Bloated capital base on account of large goodwill on the books has led to muted return ratios for CTT - FY21 RoCE, RoE at 1.1 per cent, 5.4 per cent, respectively.

Valuations:

The issue is priced at 81 times the earnings per share and a similarly high Enterprise Value to Operating Profit ratio. Therefore, investors must do their own diligence before investing in a highly priced company.