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OLX Acquisition – Steal Deal

CarTrade announced the closure of acquisition of 100% stake of Sobek Auto India Private Limited, which includes OLX classifieds platform as well as OLX Autos C2B transactions business. The company paid cash consideration of INR 5.35bn with the acquired entity having liquid assets and cash of roughly INR 1.2bn, implying equity value of INR 4.15bn. As the acquired entity is currently loss-making (~INR 1bn annualised including product & tech expense), initial investor reaction to the transaction is negative to neutral. However, it is important to understand the intricacies of the acquired businesses to appreciate the immense value potential of this transaction. At INR 2.85bn net revenue, CarTrade paid ~1.45x revenue multiple for this acquisition while also becoming a stronger New and Used car classifieds business. Given tougher unit economics in C2B business, we are not ascribing significant value to that business but still find it to be a steal deal basis just the classifieds platform, which has the potential to add >8% to our published TP for CarTrade of INR 710.

* Classifieds to grow at 20% CAGR while retaining margins: At INR 1.77bn Jul’23 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 horizontal nature of the platform. 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/electronics etc. more frequently, thereby improving CLV/CAC ratio for OLX. We 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 call, management mentioned that they expected to lower PDT by 40-60% once consolidated under CarTrade, implying sharp jump in PAT margin.

* Management to focus on unit economics before scaling C2B Transactions business: While Classifieds business looks lucrative and in itself can justify the consideration paid, it is the loss in Transactions business that is worrying. As of Jul’23, this business generated net annualised revenue of INR 1.08bn at ~6.5% buy-sell margin (GMV of INR 16.6bn) but each rupee in revenue needed ~2.5x in costs, assuming 50% PDT allocation. However, management reiterated over the call 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.

* Valuation cheap but upside trigger would need dip in C2B losses: We find valuation comfort at CMP for CarTrade and believe this acquisition can further add ~INR50 upside to our Sep’23 TP of INR 710 using 30x forward PE multiple for the combined entity (including losses in C2B). 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 INR 0.5bn.

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