By Vivek AnanthIt’s tough to be an investor looking to invest in initial public offerings (IPOs) of companies. Especially when IPOs come thick and fast. Take Cartrade Tech’s near Rs 3,000 crore IPO for instance. Unlike some of the ‘tech platform’ companies that went to the primary market over the past few months, the company has made profits for the past three financial years.
Cartrade Tech is a multi-channel digital automotive platform company which runs its business through several platforms like CarTrade, CarWale, BikeWale, CarTrade Exchange, Shriram Automall, Adroit Auto and Auto Biz.
Through its platforms it connects buyers of new and used vehicles (cars and two-wheelers) with dealerships and other sellers. It also connects car and two-wheeler makers and provides a platform to auction vehicles along with pre-owned commercial vehicles, farm and construction equipment.
At the end of the second day of the IPO, Cartrade had received bids for only 99% of its 1.85 crore shares on offer. The company’s founder and investors like Warburg Pincus, Temasek, JP Morgan and March Capital, and other selling investors are selling nearly 40.43% stake in the company through the IPO, which is purely an offer for sale.
Both institutional investors and non-institutional investors didn’t place bids for their full quota of shares, but retail investors racked up bids for 1.5 times their available quota of shares. The fact that there are three other IPOs that opened this week could explain the sluggish institutional investor and non-institutional investor interest.
Another reason could be the really high valuation of 84.3 times its FY21 earnings per share (diluted) that the company is demanding for its shares from investors at the upper end of its price band of Rs 1,585-1,618.
What investors, whether investing in the IPO or otherwise, should concern themselves is whether this ‘tech platform’ business is growing at a pace that justifies the current valuation.
Not a high growth business, but cash flows remain stable
Most technology platform businesses justify their steep valuations by pointing to high growth in revenues. But in the case of Cartrade Tech, its revenues are growing at a steady pace, much more like a traditional business. According to RedSeer, Cartrade Tech is the only profitable company in the automotive digital platform space.
As of FY20, the total addressable market for digital automotive platforms was $14.3 billion, which includes vehicle transactions, after sales, advertising spends (online advertising), auto finance and insurance, auctions and remarketing, and inspections & valuations.
The company posted a three-fold rise in its net profit in FY21, but this was because it recognised a net deferred tax asset of Rs 63.4 crore. As a result the company posted higher profits even though its revenues fell 16.3% YoY to Rs 249.7 crore.
The company mainly earns revenues through website services and fees, and commission & related income. Website services and fees include advertisement revenues, revenues from lead generation and managed solutions. Commission and related income include revenues from facilitation of auction of vehicles and collection and non-refundable parking charges.
The company also auctions vehicles to financiers, fleet operators and other sellers. It also connects financiers with prospective buyers in case they need credit to buy either a new vehicle or used vehicles through dealers or other individual customers.
The company posted decent margins of 27.62%, 22.71% and 24.42%, respectively, in FY21, FY20 and FY19. Return on equity was 5.43%, 1.73% and 1.36% in FY21, FY20 and FY19.
The company’s business is asset light, which allows it generate sufficient cash flows on a yearly basis. Most of its 114 auto malls (offline facilities to conduct vehicle auctions) are leased, which helps limit capital expenditure. The company also managed to curb expenditure over FY21, which boosted its cash flows during the financial year.
One of the most popular platforms in this space
The company’s platforms CarWale and BikeWale were ranked number one in relative search popularity compared to its competitors during FY21…
…while Shriram Automall is one of the leading used vehicle auction platforms based on the number of vehicles listed for auction in FY20, according to RedSeer. But during the second wave of the pandemic, the average number of visitors on its platforms dipped and so did the number of vehicles listed for auction on Shriram Mall and its other auction platforms. This is borne out in the numbers for Q1FY22. The company didn’t share its financials for this period.
One of the risks to Cartrade’s business is that auto original equipment manufacturers (OEMs) will build their own digital platforms to sell their cars. This could include creating a used car portal as well, like Mahindra FirstChoice.
Cartrade Tech allows customers to browse through vehicles, and provides them with the on road price with various financing options. In case the customer is interested in visiting a dealer, he or she can leave their details on the website and for the dealer to get in touch with them. It also provides ERP solutions to dealers to manage their processes. If dealers are forced by auto OEMs to move to their own digital platform, then Cartrade Tech’s business can take a hit.
For investors, it is worth taking a moment and pondering whether the price they might have to pay to own shares of Cartrade Tech is justified. The price suggests that the business will grow by leaps and bounds, but as we can see from the consolidated revenue numbers, growth has been steady but not dramatic over the past three years, including the pandemic-ridden FY21.