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Best quarter ever – engine warming up

JM Financial Institutional Securities Limited JM Financial Research is also available on: Bloomberg - JMFR , Thomson Publisher & Reuters, S&P Capital IQ, FactSet and Visible Alpha Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. CarTrade reported its best quarter ever with revenue reaching INR 1,453mn and adjusted EBITDA margin reaching 23.2%. While New Auto segment growth (c.15%) missed our expectations marginally, Remarketing segment surprised positively with 14% QoQ growth. CarTrade’s existing business delivered strong margin expansion with adjusted EBITDAM of 23.9% (358/397bps QoQ/YoY), primarily driven by New Auto segment. OLX Classifieds, as highlighted in our previous note, saw a dip in margin (270bps) due to investments made to drive the next growth boost. Management did reiterate that the business has normalised cost structure in 3QFY24 and would see robust margin expansion going forward. On consolidated level, company reported adjusted PAT of INR 225mn in 4Q. With three deeply moated and highly profitable business segments, we find incredibly favourable risk-reward at CMP. Reiterate ‘BUY’ with Mar’25 TP of INR 1,020 (~26% upside), as we believe the company to be perfectly positioned to benefit from rising digitalisation in Indian auto.

Standalone business delivers robust margin expansion despite modest revenue growth: At INR 491mn in 4Q, Standalone business delivered +14.8% YoY / -0.6% QoQ growth. As a testimony to the fixed cost structure enabling strong operating leverage, the segment saw EBITDAM expanding by 700 / 400 bps on YoY / QoQ basis. Though growth has been lower this quarter due to higher base, management remains confident of the segment growing ~2x of Indian auto industry growth with profitability rising even faster. We expect the segment to deliver INR 5bn+ revenue at c.40% EBITDA margin in FY29.

Repossessions likely to have bottomed out: Remarketing revenue in 4Q stood at INR 527mn (-0.7% YoY/ +14.4% QoQ), 9% beat on JMFe. Though, repossessions have been flattish in 4Q, healthy rise of retail business mix delivered improvement. Management feels that repossessions would be close to bottoming but they were not able to convincingly suggest a near-term rebound. With used car prices normalising and formalisation of credit in 2W and used cars, we expect repossessions business to reach INR 3.5bn+ in FY29, however, growth would continue to be lumpy.

 OLX Classifieds to grow with rapid margin expansion: OLX revenue for 4Q stood at INR 434mn, a flattish sequential growth. Going ahead, the focus will be on increasing paid listings and ARPU to drive revenue growth. Currently share of automotive classifieds is ~45-50%, which is expected to increase in the near-term with increased focussed over the next 2 quarters. We expect India’s used items (including used auto) market to grow strongly with consumers rising over the taboo of owning a used item. OLX, being the undisputed market leader, is expected to deliver 18-22% revenue growth along with sustained market expansion to reach INR 4.3bn at 40%+ EBITDAM in FY29.

 Retain ‘BUY’, Mar’25 TP increased to INR 1,020: With slower than expected growth in New Auto, we cut our revenue estimates marginally (<1%) over FY25-28E. However, increased focus on profitability would ensure that margins remain broadly unchanged. We value CarTrade using a SoTP based valuation to arrive at Mar’25 TP of INR 1,020 (~26% upside) with 20x/15x/22x FY26E EBITDA multiple for New Auto / Remarketing /OLX Classifieds business. On a consolidated basis, our TP implies ~28x FY26E PE multiple, considerably low for a company growing topline at 20%+ with steady-state EBITDAM of 30-40%.

Key Risks

 Key upside risks to our price target are: (1) sooner than expected reversal in remarketing business with sharp rise in retail channel; (2) higher than expected margin improvement with the newer verticals generating value; (3) any accretive acquisition not currently priced in; and (4) OLX classifieds delivering higher than expected growth or margins.

 Key downside risks are: (1) market share loss in new auto advertising to newer formats; (2) any after-effects of product and tech expense integration causing margin losses; (3) sustained pressure in repossessions; and (4) any mistakes in capital allocation (stock got beaten when rumours of GoMechanic acquisition were floated).

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