CarTrade gains for second day, analysts now say OLX acquisition a ‘steal’

CarTrade made gains for the second day in a row on August 23 morning, belying concerns that OLX India would cannibalise its business. CarTrade recently acquired OLX India’s auto transaction business for Rs. 535 .54 crore, and the market feared that the acquisition might not work out well because the revenue models of the two businesses were at odds.

Explaining the rationale behind the acquisition in the investor call on August 21, the company said the management plans to continue to operate the businesses under the OLX brand and sees limited cannibalisation of CarTrade businesses.

The C2B transaction start-up is asset-light (carries the vehicle only for two-three days) and the management will focus on improving profitability over growth.

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The management reiterated the focus on improving the unit economics before pushing growth, suggesting that the losses from this segment should decline going forward.

What are analysts saying?

Broking firm Nomura, in an August 21 note, said OLX classified is a wider platform operating across multiple categories like auto, real estate, mobiles and electronics. Hence, it has a wider reach with more than 3.5 crore monthly unique visitors. This bodes well for the company as it could nearly double CarTrade’s business scale, and achieve potential cost synergy with people and technology costs.

The broking firm has a “buy” rating on the stock with a target price of Rs 678, an upside of 40 percent from the closing price of August 21.

JM Financial has labelled the acquisition a “steal deal”. Analysts at the firm attribute this to OLX’s horizontal nature of business. It enables the company to generate higher margins as there is a higher customer lifetime value (CLV) in a horizontal business.

“While a typical user would engage in auto sales and purchases once in four-six years, the same user can still be selling mobile phones, furniture, and electronics among others more frequently, thereby improving CLV for the company,” it said.

In comparison, competitors such as CarWale and CarDekho have a vertical business model. JM also has a “buy” call on the stock with a target price of Rs 710, an upside of around 46 percent.

Citi analysts, which also have a “buy” call, suggest that after the acquisition, CarTrade’s classifieds business will jump 2 times to Rs 370 crore, while transactions business will rise about 1.5 times. The broking company has a target price of Rs 624, amounting to 28 percent upside.

At 9.46 am, the stock was trading at Rs 514.10 on the National Stock Exchange, up 1.12 percent from the previous day.

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