CarTrade Tech Shares Swing As Citi Initiates Coverage With A 'Buy'
Citi has set the price target on CarTrade Tech at Rs 1,130 apiece, an implied return of 26.7%.
Citi Research initiated coverage on CarTrade Tech Ltd. with a ‘buy’, betting on cheap valuation of the marketplace for used vehicles, and benefits from digitisation in automotive retailing.
The company is well positioned to capitalise on the digitisation of India’s automotive ecosystem through greater cross-sell/up-sell opportunities to consumers and dealers, the research house said in a report. “Given its current business largely stems from advertising/lead generation and offline auctions, we think product innovations across consumer and dealer solutions have significant potential to drive up platform stickiness and monetisation.”
Innovations enabling better leads-to-sales conversion, it said, could boost ARPU per dealer. On the consumer side, innovations enabling richer user experience such as augmented and virtual reality showrooms, and greater aspects of the purchase journey to be conducted online could improve traffic monetisation.
Citi has set the price target on CarTrade Tech at Rs 1,130 apiece, an implied return of 26.7%. The stock, it said, is “relatively inexpensive” at current market price. “We don’t assign a high risk rating as the business is profitable and as we see no balance-sheet risk in this business model.”
Across research and discovery, sales and post-sales legs of the automotive purchase journey in India, the cumulative total addressable market for pure marketplaces stood at $10 billion in 2020, Citi said.
CarTrade Tech, according to the report, has a relatively strong positioning with its leadership in user traffic, online plus offline vehicle auctions platform and its upcoming franchisee-based pure marketplace model for used-car retailing.
Offline Drawbacks: The offline used-car ecosystem has several inefficiencies across selection, value, quality assurance and transactions workflow (registration transfer, financing paperwork for buyers and sellers alike, the research house said. “Each of those aspects provides opportunities for online platforms to improve the overall experience of consumers and not only formalise the used-car market, but also expand it by bringing in new customers.”
User Preference: The entire vehicle buying process for consumers is also becoming increasingly digitised, starting from browsing, research and price comparisons to dealer discovery/financing options, the report said. That, as well as the consumer sale of used vehicles, with online price discovery, identification of potential buyers, auctioning process, payments and post-sale processes.
Dealer Shift: Dealers are increasingly using digital platforms for listings, sourcing vehicles, lead generation, transactions, auctions and value-added services such as inspections.
Ad Spends: As the automotive market recovers from the Covid-19 pandemic, ad budgets for original equipment makers should rise, which along with a shift in ad budget from offline to online should benefit CarTrade, Citi Research said.
Still, India’s online automotive ecosystem is a crowded space. Five major firms, the report said, have cumulatively raised about $2 billion to date, excluding new entrants such as Ola and investments from global players. “…Online penetration currently stands at less than 2%, implying it’s very early days yet.”
Citi expects CarTrade Tech’s overall revenue to grow at an annualized rate of 30% over FY21-23. “Medium term, we estimate top-line growth at 18% CAGR over FY20-26.”
Shares of CarTrade Tech, which listed in August, closed 0.44% lower at Rs 891.75 after swinging between a 1.6% gain and 0.7% loss on Thursday.
Key Risks
The continued outbreak of Covid-19 could lead to fresh decline in demand for personal mobility owing to work-from-home arrangements.
Competition from well-funded rivals in the used-car space.
Digitisation of automotive retailing is hard given auto purchases are complex.
Customer reception could be weak for the franchisee-based mixed online plus offline used car retailing that was recently launched by CarTrade.
Attractive pricing or other incentives such as exchange programmes by manufacturers and dealers may make new cars relatively more attractive versus used cars.
Any negative publicity such as sale of stolen cars on the platform, data breaches, or failure to provide quality customer experience could reduce confidence.
Regulations aimed at social media and data protection may impact the company’s marketing channels.
