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Equity Markets

The IPO market is cruising along in top gear nowadays. Insatiable demand for new issuances is pushing valuations and margins of safety to opposite poles. But it would be imprudent to paint the entire town with the same brush. You might appreciate that Indian investors are getting a chance to invest in truly sunrise sectors these days, perhaps for the first time in the last 20 years. CarTrade Tech which is launching its IPO on August 9, 2021, is offering you such an opportunity.

CarTrade Tech is a key player in the online automotive ecosystem. It offers a range of solutions across the automotive transaction value chain—buying, selling and financing. It helps automobile customers, vehicle dealerships and OEMs buy and sell new and pre-used cars and two-wheelers effectively.

What makes CarTrade Tech an interesting offering?

Traditionally, the automobile market in India is underpenetrated, fragmented and in a way extremely inefficient. Multi-channel auto platforms, such as CarTrade Tech, are expected to reduce inefficiencies and also open up new markets. 

CarTrade Tech’s business has an addressable market of USD 14.3 billion (Over a lakh of crore Rupees). As against that the company’s top line for FY21 was Rs 282 crore. This hints at the magnitude of opportunities.

And mind you, CarTrade Tech owns some famous brands such as CarWale, CarTrade, Shriram Automall, BikeWale, CarTrade Exchange, Adroit Auto and AutoBiz.

What are the income sources of CarTrade tech?

  • Rates and commissions on transactions/auctions
  • Listing subscription and ad sales revenue from OEMs, dealers and advertisers
  • Fees for software services offered to OEMs, dealerships and banks
  • Fees for value-added services, such as auto inspection, insurance, finance, servicing and accessories amongst others

Sector-specific trends offer tailwinds to CarTrade Tech

Used car sales as a percentage of the total car sales volume in India—known as the parc turn rate, is 16%. This is more or less in line with the parc turn rates in some other major countries. However, considering low car penetration in India, there’s a scope for improvement. In 2020, close to 44 lakh cars were sold in the pre-used cars market. According to Redseer estimates, used-car sales volumes in India may touch 83 lakhs by 2026—11% compounded annualised growth.

Price, quality of the vehicle and product availability are the three important checkboxes that buyers want to tick before buying a pre-owned vehicle. On the other hand, sellers expect hassle free sale of vehicle and quick price realization, besides a good price. For efficiencies they bring, online platforms such as CarTrade Tech are likely to remain popular for buying and selling pre-used vehicles.

Short term trends appear positive too.

New variants of coronavirus are posing a threat even to the vaccinated population. As a result, social distancing in commutation is going to be an additional factor which may drive purchasing decisions of consumers, besides convenience, comfort and status quotient.  

Similarly, shortage of semiconductors is going to affect new car sales to an extent, due to production delays and long waiting periods for new vehicles. Under such a scenario, the pre-owned car market might get an additional boost.

Formalization of pre-owned sector is on the cards

Nearly 90% of India’s pre-owned car market is controlled by the unorganized sector at present. However, with growing popularity of the online market, the formal sector is expected to gain massively, over the next few years. The green shoots are visible already.

And not just that, CarTrade Tech may grow other verticals of its business immensely as the entire ecosystem develops further with formalization. For instance, 90% of automobile buyers use internet to gather information pertaining to price, features and performance of vehicles, pricing and value-adds, amongst others, in their buying decisions. Under such a scenario, multi-channel auto platforms such as CarTrade Tech may get exciting opportunities to grow their digital and ad sales revenue.

Digital advertizing by auto players in India has been growing at a ~20% compounded annualized rate over the last 3-4 years.

Valuation of pre-owned vehicles is a major concern for insurance companies, banks and other financial institutions for offering insurance cover and vehicle finance. Just 17% of pre-owned vehicles in India are financed, against 37% in the US.  

Companies such as CarTrade Tech offer a range of value-added services such as car inspections and quality evaluation amongst others. As a result, they may develop unparalleled insights and huge analytical capabilities about India’s automotive system as the market evolves and tech adoption catches up across the transaction chain.  

Do you want to read more about CarTrade Tech? Click here to access our full IPO research report. Besides IPO details and a commentary on the company financials, the report talks about opportunities available to the company and risks it is exposed to. We strongly suggest you to read our coverage on CarTrade Tech before applying for the IPO.

Now about the IPO…

CarTrade Tech isn’t raising any fresh capital. The IPO is meant to provide an exit route to some of its existing investors. The company has fixed a price band of Rs 1,585 and Rs 1,618. At the upper end of the price band, the company is valued at Rs 7,416 crore.

At the IPO price, the company commands a valuation of over 100X even on FY22 earnings. By conventional parameters, these valuations might appear frothy and perhaps insane. Again, you need to consider the size of the total addressable market, like you do in the case of other platform economy stocks which are not even making profits.

You see, the IPO market is buzzing like it never did before. And not everything that’s in vogue is bad, particularly when we are in a bull market.  Bull market mistakes can be costly, without an iota of doubt. But if you miss good investment opportunities when the bulls are charging, you can’t blame the markets for being unkind to you when the bears take over.

Happy investing!

You may also like to read: Q1FY22 update: Are private sector banks getting a new bellwether?


Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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