CarTrade IPO: Despite Buy Rating, ‘Exorbitantly’ Priced Shares Remain A Concern

Online car marketplace startup CarTrade’s IPO opens for subscription today (August 9) and will continue till Wednesday (August 11). The Mumbai-based startup is looking to raise about INR 3,000 Cr via a combined sale and issue of 18.5 Mn equity shares in the company at a market capitalisation of up to INR 7,416 Cr — which will give it a unicorn valuation.

While the IPO price band has been set at INR 1,585- INR 1,618 per share — a retail investor would have to shell out at least INR 14,265 to get an allotment as the minimum lot size has been set at 9 shares. This means that approximately 6.5 Mn shares — or 35% of the issue — can be availed by retail investors.

But, the question to ask is should a retail investor bet on CarTrade IPO?

Shashank Kanodia and Jaimin Desai, analysts at brokerage firmICICI Direct, have assigned a ‘Subscribe’ rating to the issue for listing gains.

“CarTrade offers a unique play on rising digitisation of new and pre-owned vehicle transaction value chain/ecosystem… Long-term wealth generation at CTT will be a function of scalability, relevance and journey towards healthier return ratios,” said the duo.

While the company’s unit economics has improved by leaps and bounds in the past two financial years — its net profit rose from INR 16.7 Cr in FY19 to INR 91.2 Cr in FY21 at a compounded annual growth rate (CAGR) of 133.%, sales have remained flat in the same period growing at a CAGR of 1.3%. However, after about two years of sluggishness in the auto sector on the back of a spike in vehicle ownership and running costs, slowdown in economic activity, Covid impact, etc, the industry is poised to post healthy double-digit medium-term growth (new vehicles) riding on pent up demand. 

More importantly, India’s ratio of used cars sold to new cars sold is ~1.5 vs. ~2-3 in major economies, with parc turn rate (ratio of used cars sold divided by total car volume) at ~16%, signalling the potential for faster growth than new car sales in future. “The same bodes well for CTT given its direct linkage to the underlying health of the Indian auto sector,” said the ICICI Direct analysts.

Rajnath Yadav, an analyst at Mumbai-based equity brokerage firm Choice India, concurred, saying, “At the higher price band of INR 1,618, CarTrade is demanding an enterprise valuation to 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.

Interestingly, two leading brokerages — JM Financial and Axis Capital — have chosen to stay neutral and did not make a suggestion on whether to subscribe to the CarTrade IPO or not. While brokerage firm Anand Rathi assigned a subscribe rating due to the company’s first-mover advantage, it flagged the ‘exorbitantly’ at a price-to-earnings ratio of 199.26X if the accounting adjustments for deferred tax are attributed to equity.

Jehan Bhada and Mahima Mehta, analysts at brokerage firm Nirmal Bang, also assigned a subscribe rating to the CarTrade IPO.

“With a war-chest of INR 668 Cr in the balance sheet, CarTrade is well-positioned and plans to capture adjacent business opportunities such as insurance, financing, servicing of vehicles, accessories and refurbishment cum sale of cars. We believe CarTrade offers an attractive opportunity to participate in a new age business with a leading vehicle platform company,” they noted.

However, one of their concerns regarding the company is the evolution of the competitive landscape amid a funding binge in the ecosystem. “With India gaining prominence as a startup opportunity globally, many companies have entered the vehicle platform business since 2014 including the bigger competitors like Cars24 and Droom who, just like CarTrade 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 CarTrade and its profitability,” they added.