CarTrade share price jumps 6% as analysts see potential for value creation in Sobek acquisition

CarTrade Tech share price rallied more than 6% on Tuesday, with the stock hitting an intraday high of ₹518.00 apiece on the BSE.

The gains in CarTrade Tech shares came after analysts maintained their positive view on the company’s acquisition of Sobek Auto India Private Limited, which includes OLX classifieds platform as well as OLX Autos C2B transactions business. 

On July 10, CarTrade Tech had announced that it had entered into a share purchase agreement with Sobek Auto India Private Limited and its holding company OLX India BV for the acquisition of a 100% stake in Sobek from OLX India BV for a cost of ₹537.43.

Read here: CarTrade Tech to acquire Sobek from OLX India BV for ₹537.43 crore

Experts see potential for value creation over the medium term in this acquisition depending on growth delivery. At ₹285 crore net revenue, CarTrade paid 1.45x revenue multiple for this acquisition while also becoming a stronger New and Used car classifieds business. 

Analysts at Citi said post-acquisition, the company's classifieds business will jump 2x to ₹370 crore and transactions business will rise 1.5x

At ₹1.77 billion July 2023 annualised revenue, OLX has the largest used classifieds platform in the country. In comparison to vertical platforms such as CarWale or CarDekho, OLX generates higher margins as there is higher customer lifetime value (CLV) due to the horizontal nature of the platform. 

Also Read: CarTrade open to more acquisitions in auto, autotech

According to analysts, while a typical user would engage in auto sales/purchases once in 4-6 years, the same user can still be selling mobile phone, furniture or electronics, etc. more frequently, thereby improving CLV/CAC ratio for OLX.

Analysts at JM Financial remain apprehensive of CarTrade’s ability to cross-sell to this customer base but still find immense value as the business has the potential to grow at 20% CAGR in the medium-term while generating ~30% PAT margin already if we allocate 50% product and tech expense (PDT) to this business. 

Over the analysts conference call, CarTrade Tech management mentioned that they expected to lower PDT by 40-60% once consolidated under CarTrade, implying sharp jump in PAT margin. 

Meanwhile, concerns prevail over losses in Transactions business as analysts doubt the company’s ability to turn it profitable amid high operating costs.

Also Read: Jio Financial Services share price hit 5% lower circuit for second straight session

The company’s management has reiterated that they will focus on improving the unit economics before pushing growth in this business, suggesting that the losses from this segment should decline going forward.

“Although we appreciate such an approach, we still remain unconvinced on CarTrade’s ability to make this business profitable due to extremely high CAC and huge operating expenses,” JM Financial said in a report.

The brokerage firm finds valuation comfort at current market price for CarTrade and believes this acquisition can further add ₹50 upside to its September 2023 target price of ₹710 using 30x forward PE multiple for the combined entity (including losses in C2B). 

The target price of ₹710 for CarTrade shares implies around 37% upside from Tuesday’s high price.

“We assume 20% growth in Classifieds while maintaining pre PDT margin, dip in PDT cost by 50% and pre PDT loss in C2B to decline to ₹0.5 billion,” JM Financial said while maintaining a ‘Buy’ rating on the stock.

At 11:55 am, CarTrade share price was trading 4.14% higher at ₹507.60 apiece on the BSE.

Catch Live Market Updates here

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.