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Beneficiary of domestic car premiumisation

We initiate coverage on Landmark Cars (LMC) with an ADD rating and DCF-based target price of Rs766, implying multiple of 18x FY25E earnings. We believe, LMC is a direct beneficiary of the ongoing car premiumisation in India, which has resulted in a rising proportion of UVs and 10%+ CAGR in car ASP during FY21-FY23. Nevertheless, mean ASP in the India PV industry is only ~US$13k vs ~US$35k+ in the developed markets and ~US$20k+ in the developing markets. Thus, we believe, premiumisation of PVs in India has a long way to go and LMC is ready to benefit by adding new OEMs to its client-list in addition to the ones with whom it is already doing business (e.g. Mercedes Benz, Jeep, VW, etc). LMC is focused on maximising higher-margin service/spares revenue from its target catchment areas and existing stores for car sales instead of adding new sales outlets in new areas. By principle, it would avoid being a third or fourth player entering a market and having a lower share in it. Thus, in FY19-FY24E, without changing the net number of outlets, LMC is set to more than double its revenue. With stable profitability and asset-light business model, we expect the company to deliver ~20% RoE in FY24E- FY25E. Despite building-in capex-cum-investment at Rs1.1bn p.a. in FY24E-FY25E, we expect LMC to deliver FCF of Rs1bn p.a. on an average and an earnings CAGR of ~35% in FY23-FY25E. Factoring-in 12% WACC and 5% terminal growth rate, our implied FY25E earnings multiple at the target valuation is ~18x. As against forward P/E of ~6-11x for listed global car dealerships, we believe superior RoE and growth would drive a higher valuation premium for LMC on a sustainable basis.

* Industry growth + continued premiumisation + LMC targeting new OEM addition ≥ ~29% revenue CAGR in FY23-FY25E: Apart from industry growth and premiumisation trend, LMC is set to benefit in FY24E-FY25E from new launches by Honda and Renault along with potential addition of new OEMs to its kitty. Additionally, with rising vehicle population, servicing/spares revenue is set to continue with its ~20% value CAGR, accounting for ~20% of LMC’s overall revenue. Against ~23% CAGR in the volume of new cars sold in FY23-FY25E, the CAGR of total value of new vehicles (ex-Mercedes Benz) sold during the same period is expected at ~32%, implying an improving ASP (LMC is the largest dealer of Mercedes in India with ~17% share).

* Steady profitability and asset-light model helping LMC operate at ~20% RoE: LMC has been able to sustain its ex-Mercedes new car gross margin (GM) at ~5.5% across business cycles. Under the agency model, GM for Mercedes sales is ~6%. For service / spares, LMC has been operating at ~40-41% GM since FY15. Thus, we expect the company to operate at a steady GM of ~15-16% and EBITDAM of ~6-7%, with the variation being driven by operating leverage and mix change. Since LMC operates on a rental model, rise in sales of new vehicles helps ramp-up asset turns, pushing capital efficiency higher. We expect LMC to operate at a cross-cycle RoE of ~20% and become free of net debt by FY26E.

* Initiate coverage with ADD: We initiate coverage on LMC with an ADD rating and DCF-based target price of Rs766, implying ~18x FY25E earnings amid ~35% earnings CAGR through FY23-FY25E. As against global car dealerships trading at forward earnings multiple of ~6-11x, we believe superior capital efficiency and superior growth outlook justify the premium multiple we assign to LMC. Also, LMC is an integrated dealership offering both sales and service vs global dealerships in general, which either sell cars or take care of servicing. With Morris Garages already added to its client-list and new SUV model, Elevate, from Honda set to be launched in H1FY24 itself, LMC is poised for strong profitable growth in FY24E-FY25E.

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