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Got a push, can coming quarters provide the necessary shove

CarTrade Tech Limited reported numbers that demonstrate a sustained bounce back in new auto advertising and lead generation (0%/+55% QoQ/YoY) business while remarketing business saw sequential de-growth (-15%/+57% QoQ/YoY) due to the seasonally high Q4. On the margins front, adjusted EBITDA margin declined to 9.4%in Q1FY23 from 20.6% in Q4FY22, largely driven by rise in employee benefit expense (excl. ESOPs) to 53% of revenue from 43%; impact of wage increments in April. CarTrade also reverted back to PAT level profitability (4.6% PAT margin) in this quarter as IPO-related ESOPs were completely vested and expensed in FY22 itself. The company continues to see steady monthly unique visitors at 31.1mn with 85% organic visitors for the quarter, establishing its strong positioning in the car buying journey of India. Vehicles listed for auctions did saw a sequential dip of 16% due to seasonality with conversion rate also dropping to 21% from 23% last quarter. Furthermore, the company now has 57 abSure outlets in 34 cities, though this business is not generating significant revenue yet with the management still focused on establishing the right value proposition for franchise used car dealers and customers. We retain ‘BUY’ rating with Jun’23 TP of INR 840 (~20% upside), 2% lower than our previous TP, reflecting a marginal decline in revenue forecasts over FY23-FY25 period.

* Revenue showing constant strength since COVID: While remarketing business did recover to pre-COVID levels last fiscal year itself, our analysis suggests that new auto advertising and lead generation business has also finally recovered to align with new auto sales. Auto advertising has recuperated from COVID as well as from supply-demand related mismatch due to chip shortage and we are now seeing several new launches hitting the market. This sets up the company well for the coming festive season and we anticipate CarTrade to deliver double digits QoQ revenue growth for the next two quarters

* Wage increments drive employee expenses upwards but other expenses remain almost stable: In comparison to Q4FY22, employee benefits expense (excluding ESOPs) has gone up by 9.1% QoQ (24.7% YoY) due to wage hikes while other expenses have gone down by 6.3% QoQ (+57.4% YoY). While these expenses might drift up slightly in the coming quarters, they still seem decently predictable and mostly fixed in nature with YoY growth primarily because of COVID-impacted Q1FY22 being base. This augurs well for future margin expansion of CarTrade with incremental revenue directly converting to EBITDA.

* IPO-related ESOP expenses already vested and expensed: The company has completely recognised the income statement impact of INR 1,447mn for IPO-related 1.5mn ESOPs that were granted on Mar 31, 2021. While this did cause FY22 net profit to turn negative, we will not see the impact anymore and that will help drive improvement in EPS as the business grows further

* Maintain ‘BUY’, Jun’23 TP of INR 840: We have lowered revenue growth marginally due to slower than expected revenue increment seen from abSure business. Additionally, reported EBITDA and EPS have been revised upwards as ESOP expenses are expected to be lower than our earlier forecasts. This has resulted in our revised Jun’23 TP of INR 840(INR 860 earlier). Additionally, we believe CarTrade Tech is positioned ideally to drive revenue and EBITDA growth from the strong new auto market this year.

* abSure business monetisation slower than expected: Though the company now has 57 outlets in 34 cities, management explained that they are continuing to focus on stabilising operations and consumer experience for now rather than monetisation. As these are not really new outlets but existing used car dealers converting to abSure outlets, we anticipated each outlet to provide revenue generation from day one. Our proprietary analysis suggests that each abSure outlet should generate INR 1.5-2.0mn in annual commission revenue. With the company unwilling to discuss any details on monetisation, we are gathering belief that monetisation is actually being more complicated than anticipated.

* Remarketing business saw seasonal impact but supply mix bumped take rate: The company listed 16% lower vehicles and slightly lower conversion rate caused vehicles sold to decline by 23% sequentially. However, take rate per vehicle sold went up from INR 7.6k to INR 8.4k. Management explained that this was a result of a higher supply coming from singer users. We also believe that this could have also gone up as a result of higher parking fee coming from a slower vehicle churn across the 123 automalls.

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