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Auto supply normalisation to drive ads and lead generation

New Auto in India witnessed an unprecedented supply-demand mismatch due to COVID. This was induced by demand for cars rising sharply due to safety concerns as buyers shunned public transport while supply got disrupted by labour shortage first, followed by chip shortage. With chip shortage easing in FY24 and automakers fulfilling the pent-up demand, we seem to finally be reaching a normalised state with reported inventory of around 45-50 days (Exhibit 1), similar to pre-COVID levels. As highlighted in our reports earlier, OEMs did lower their ad budgets due to their inability to service the existing demand. With supply normalising, we expect OEM ad budgets as well as dealer lead buying to grow faster than auto industry revenue growth in FY25. Furthermore, we reiterate expectations of sustained rebound in Remarketing segment while OLX would benefit from picking low-hanging fruits such as ads integration, price hikes and integration with Carwale classifieds. We roll forward to Jun’25 and reiterate ‘BUY’ with a TP of INR 1,120 (~45% upside), expecting the stock to sustain strength with long-term secular tailwinds.

* Dealer level inventory at pre-COVID levels: As per data released by Federation of Automotive Dealers Associations (FADA), there was 50-55 days of average passenger vehicle (PV) inventory with the dealers as of Feb’24. Our analysis basis retail sales vs wholesale sales data suggests roughly 50 days of inventory with dealers as of May’24. This is similar to pre-COVID levels of 45 days, implying a more normalised supply-demand scenario. It needs to be noted that retail sales in YTDFY25 still remain higher by ~8% YoY, suggesting sustained demand strength and worries about a slowdown in Indian auto is a bit premature. Such a scenario with normalised inventory level along with unrelenting demand will result in OEMs spending more on advertising, helping stronger growth in CarTrade’s new auto segment.

* OEM ad spends to revert to 2.5% of revenue: With most PV make-models on waiting periods exceeding a couple of months due to supply constraints, auto industry lowered their ad spends (as % of revenue) to ~2% in FY22. This was substantially lower than preCOVID steady-state of 2.5%. Data from the six listed OEMs suggests ad spends in FY23 to have been lower by 40bps/120bps in 2W/PV OEMs vs FY19 numbers. The sharpest dip (209bps) was seen in Mahindra & Mahindra, expectedly as the OEM saw the lengthiest waiting periods on popular models such as XUV700 and Thar. Our industry checks suggest FY24 ad spends have increased slightly to 2.1% but an upsurge is anticipated with ad budgets rising sharply in comparison to the new auto value growth in FY25-26.

* Reiterate ‘BUY’ with Jun’25 TP of INR 1,120, ~10% higher than our previous TP: We roll forward to Jun’25 while valuing CarTrade using a SoTP based valuation to arrive at a TP of INR 1,120 (~45% upside) with 22x / 14x / 25x Jun’26E EBITDA multiple for New Auto / Remarketing / OLX Classifieds business. These multiples compare favourably to companies with similar business models but lower growth. On a consolidated basis, our TP implies 36X FY26E PE multiple, considerably low for a company with revenue growth of ~20% with steady-state EBITDA margins of 30-40%.

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