CarTrade Tech shares: Kotak downgrades stock to 'sell' after OLX Autos acquisition

CarTrade Tech has attracted a 'Sell' rating from Kotak Institutional Equities following the acquisition of Sobek Auto India (OLX Autos India entity) from OLX India BV. Kotak said the acquisition is a U-turn from CarTrade's asset-light model with OLX Autos likely requiring funding over the next few years. The brokerage has downgraded the post recent rally, saying it retains a cautious view on CarTrade.

CarTrade will acquire 100 per cent stake in Sobek through an all-cash deal. OLX Autos India operates a used car buy-and-sell (C2B) model, competing with select pan-India players such as Cars24, Spinny and Cardekho along with various sub-scale regional/local players and the unorganised market.

"The acquisition marks a reversal in Cartrade’s strategy, which typically shunned asset heavy buy-and-sell models. Although we do not have many specifics about the deal given limited details in the public domain, our industry discussions reveal that OLX Autos may require more funding over the next few years," Kotak said.

The brokerage has retained a cautious view on CarTrade. It, however, revised its fair value for the stock to Rs 460 from Rs 450 earlier, as it rolled forward its estimates to June 2025.

Sobek is currently owned by Prosus, which in March 2023, announced the decision to exit the OLX Autos business unit globally. OLX Autos India reported revenues of Rs 1,100 crore in FY2022; on that revenue base, the deal implies a trailing price to sales multiple of 0.5 times.

Kotak said used car buy-and-sell is a fairly competitive space in India and OLX Autos will face competition from start-ups such as Cars24, Cardekho, Spinny and other regional players. It, however, noted that CarTrade has sufficient cash to fund acquisition.

"Large used car dealers in India are few; hence, acquisition of OLX Autos seems to be CarTrade’s attempt to generate a steady supply of used cars. OLX Autos enabled 50,000 sale and purchase transactions in FY2023. Furthermore, this acquisition also marks the entry of CarTrade into the asset heavy buy-and-sell model, which it had stayed away from in the past. High competitive intensity and lack of clarity on regulations pertaining to GST registration of small dealers may defer value creation from this business for CarTrade," Kotak said.

The brokerage said CarTrade's valuations have run-up ahead of its comfort zone, warranting a downgrade to 'Sell'.

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