Summary:

CarTrade Tech, one of the earliest players in the digital automotive industry, has built a formidable online ecosystem through a slew of acquisitions and strong backing from its investors. However, we are not bullish on the company given the high level of competition in the used-car industry combined with CarTrade’s current business model. Further, its growth prospects in the digital business remain unclear with the passenger car industry largely being a two-player market and the likes of Google & Facebook gobbling up the majority of the marketing dollars.

You may also read Part 1 of our analysis here

While the company generates revenue from several business streams, they can broadly be categorised under Transaction driven income (primarily commission from the sale of used vehicles) or digital services and fees (primarily ad spend/ lead generation), with the former emerging as the larger growth driver in recent years.

Commission from transactions:

CarTrade earns a commission on the sale of used vehicles largely through facilitating supply-side transactions: C2D (customer to dealer) sales and B2D (business to dealer) auctions. CarTrade operates a marketplace that facilitates the listing of vehicles and ancillary services without inventory risk. Its dominant online presence and strong dealer network have aided its asset-light expansion to enable transactions. CarTrade bought a 55% stake in Shriram Automall, the used vehicle auction business of Shriram Transport Finance, which operates through 100+ auto-malls across the country. 

De-risking itself from inventory and ensuring a steady supply of vehicles (from BFSI institutions) has resulted in CarTrade becoming profitable over the last couple of years. However, this has come at the cost of the growth, with its largest digital competitors operating an inventory-led model. Both Cars24 and CarDekho offer to buy out cars from a customer within a specified time. This results in a superior customer experience with a significantly lower turn-around time vs CarTrade. Cars24’s initial singular focus on simplifying the sale of used cars for customers has led to it becoming the largest player in the space despite being the newest entrant. While CarTrade did have a higher base, adjusting for net revenue (excluding GMV & other income), CarTrade only grew at ~20% vs its peers Cars24 (~150%) and CarDekho (~70%) in FY20 vs FY19

The success of used car platforms primarily rests on creating a virtuous cycle where used cars are purchased and sold off quickly in a hassle-free manner. Cars24 and CarDekho have raised substantial rounds recently (USD 150 Mn+ each) to focus on selling used cars to customers directly instead of dealers whilst also providing a host of services including warranty, financing, customer service, in-house refurbishment, easy return policy, etc. While CarTrade also offers to buy used cars, its thin-stack marketplace model is not the best placed to capture this pie. Going forward, in our view, CarsTrade is likely to be profitable but face muted growth in the used car space. Further, the likes of Mahindra (First Choice), Maruti Suzuki (True Value) & Hyundai (H-Promise) have sharpened their focus on the used car business over the last couple of years. One of the primary reasons for the sale of used cars by customers is to buy a new car and OEMs have now combined such offerings to incentivise new sales. Given their existing dealer networks and brand salience, OEMs will provide strong competition in the future.

Digital business:

In its digital business, the company operates portals such as CarWale, BikeWale which rank number one on relative online search popularity. The company is betting on an increase in digital spends by OEMs and dealers for driving growth as well as an uptick in its subscription service for leads, technology solutions, etc. In our view, CarTrade properties have easily been the most viewed sites for vehicle search for several years now. However, the company has had limited success with the monetization of users on its platform.

The majority of vehicle shoppers start their journey by hopping on Google and firing off a few searches. Thus, the discovery of the vehicle/ brand usually occurs within Google itself. Naturally, a significant portion of the digital budget is attributed to Google/ Facebook. Further, even if a potential shopper opts to search on CarTrade’s websites, he is unlikely to make a decision solely on this information.  This is unlike other discovery platforms such as Zomato/ Swiggy, where aggregators can significantly influence the access and potential buying decisions of customers. This is further compounded by the fact that Maruti and Hyundai own more than ~65% of the market. Given their brand dominance and widespread dealer networks, these OEMs are not particularly dependent on leads generated by digital platforms.  Further, most vehicle manufacturers have all launched their digital portals offering 'online click to buy vehicles' (Maruti claims to have digitized 24 of the 26 steps to buy a vehicle online in the pandemic). This is likely to impact CarTrade as OEMs are better placed to digitize dealers thereby reducing the potential for lead generation/ upselling for the company.

Conclusion:

The company filed an Offer for Sale for 40% of its share capital. At the upper price band of its IPO, its valuation ask of ~27x EV/ Sales & ~100x EBITDA is steep given muted prospects for future growth. Further, with its competitors raising large sums, CarTrade, despite having substantial cash on its books, will not be well placed to compete for growth with its emphasis on profitability both pre and post the listing.  In conclusion, CarTrade is unlikely to emerge as a leader in the transactions space, while its growth prospects in the digital/ad-spend business are not very promising in our view. Lastly, most investors including the promoter group are selling and promoters hardly have any skin in the game.

Note: The above must not be construed as investment advice and is purely meant as an educational exercise

Image source: CarTradeTech RHP