Popular Vehicles and Services is an automobile dealer. The company caters to the complete life cycle of vehicle ownership, from sale of new vehicles, servicing and repairing vehicles, distributing spare parts and accessories, facilitating sale and exchange of preowned vehicles and sale of third-party financial and insurance products, and operating driving schools.

The company categorizes its automobile dealership business into three key segments: (1) passenger vehicles including luxury vehicles, (2) commercial vehicles, and (3) electric two-wheelers and three-wheelers, contributing Rs 1691.85 crore, Rs 961.63 crore and Rs 45.04 crore, respectively, to revenue in H1 FY2024.

The company’s PV dealerships business covers economy, premium and luxury vehicles for: (a) Maruti Suzuki India’s Arena and Nexa, (b) Honda Cars India, operated through subsidiary VMPL, and (c) Jaguar Land Rover India through subsidiary PAWL.

In the six months period ended September 30, 2023, the company sold an aggregate of 16,476 PVs across its dealerships.

The CV dealerships business covers vehicles of (a) Tata Motors through subsidiary PMMIL, and (b) Daimler India Commercial Vehicles (BharatBenz) through subsidiary PMPL.

In the EV segment, the company has electric three-wheeler vehicle dealership of Piaggio, including its CVs and cargo vehicles, through subsidiary KGPL. The company also has an electric two-wheeler vehicle dealership of Ather Energy, through subsidiary KCPL.

In H1 FY2024, PVs including luxury vehicles contributed 59.68% to revenue, CVs 33.92%, and electric two-wheeler and three-wheeler vehicles 1.59%.

In H1 FY2024, Maruti Suzuki contributed 48.15% to total sales, Honda 4.75%, JLR 6.58%, Tata Motors (Commercial) 24.13%, BharatBenz 9.75%, Piaggio 0.59%, and Ather 0.99%.

As of December 31, 2023, the company operated through its network of 61 showrooms, 133 sales outlets and booking offices, 32 pre-owned vehicle showrooms and outlets, 139 authorised service centres, 43 retail outlets, and 24 warehouses located across 14 districts of Kerala, eight districts in Karnataka, 12 districts in Tamil Nadu, and nine districts in Maharashtra.

The other business verticals of the company are services and repairs, pre-owned vehicles, spare parts and accessories distribution, sale of third-party financial and insurance products, and driving schools.

The company offers fully integrated services through its authorized service centres. In the six months ended September 30, 2023, and Fiscals 2023, 2022, and 2021, these contributed 14.83%, 14.60%, 15.29%, and 14.82% to total revenue, respectively.

In the six months ended September 30, 2023, the company serviced 419,729 PVs including 2,762 luxury vehicles, 103,116 CVs, 4,118 electric two-wheeler vehicles, and 883 electric three-wheeler vehicles.

The company plans to penetrate deeper into existing markets and expand into new markets through both organic growth and inorganic acquisitions.

As part of its strategic plan to expand business, the company acquired the entire operations of a sizeable spare parts distributor in Karnataka, in Fiscal 2019. The company also took over 11 service centres and two showrooms from a dealer of Maruti Suzuki in Kerala in 2021.

Offer and its objects

The IPO comprises fresh issue of equity shares, worth up to Rs 250 crore, and an offer for sale of 1,19,17,075 equity shares, aggregating up to Rs 351.55 crore, by BanyanTree.

The price band for the IPO is Rs 280 to Rs 295 per equity share of face value Rs 2 each.

The objectives for the fresh issue include Rs 192 crore for repayment and/or pre-payment of certain borrowings, and the remaining amount for general corporate purposes.

The promoters of the company are John K Paul, Francis K Paul, and Naveen Philip. The promoters and promoter group hold an aggregate of 4,35,58,086 equity shares, aggregating to 69.45% of the pre-offer issued and paid-up equity share capital. Their post-IPO shareholding is expected to be around 61.18%.

The issue, through the book-building process, will open on 12 March 2024 and will close on 14 March 2024.

Strengths

The company has a fully integrated business model. Its revenue registered a CAGR of 33.22% from Rs 2893.53 crore in Fiscal 2021 to Rs 5134.62 crore in Fiscal 2023, as per pro forma financials.

The company has established relationships with leading OEMs. Further, the wide presence across vehicle categories, including PVs, CVs, and electric two-wheeler and three-wheeler vehicles diversifies its revenue.

Growth in the premium category of PVs for leading OEMs like Maruti Suzuki and Honda is helping the company expand its business. Further, rising demand for EVs in the Indian market augur well for the company.

The company is expanding its business into other territories and states. It added 22 showrooms, 23 sales outlets and booking offices and 47 service stations across all its dealerships from Fiscal 2021 to Fiscal 2023.

The company is growing its presence in the service and repair business as this segment contributes to higher-margin revenue.

The company is led by experienced promoters and management. The Kuttukaran Group (the group of entities and business operated by the promoters and their immediate relatives) has over 70 years of experience in the automobile industry. John K Paul, its whole time director and one of the promoters, has over 49 years of experience in the automobile sector.

Weaknesses

The company derives a significant portion of revenue from top two OEMs: Maruti Suzuki and Tata Motors (commercial), accounting for more than 80% of the consolidated revenue in each of Fiscal 2023, 2022 and 2021. Non-renewal, termination or any adverse material modifications made by OEMs to the dealership agreements will have a material impact on business.

The company reported negative cash flows from operating activities in H1 FY2024. Persistent negative cash flows in the future could adversely affect the business.

The company derives most of its revenue from Kerala, Tamil Nadu, and Karnataka, representing approximately 96.91% of the consolidated revenue in H1 FY2024. Any adverse developments (including any natural calamities) in these states could have an adverse effect on the business.

There are outstanding legal proceedings (including criminal proceedings) involving the company, subsidiaries, promoters and directors. Any adverse outcomes in such proceedings may negatively affect the business.

The company received 76,607 customer complaints in Fiscal 2023. Of this, 32,682 remain unresolved. This may result in future litigation against the company.

The company is required to make significant capital investments in its existing showrooms, sales outlets, service centers, and other premises to keep up with the requirement of the OEMs. This can further reduce the low EBITDA margin.

Statutory auditors have referred to certain emphasis of matter in their examination report on consolidated Ind AS financial statements for the six months period ended September 30, 2023, and Fiscal 2021. Further, the CARO reports on the financial statements of subsidiaries PMMIL, KCPL and PMPL contain certain unfavorable remarks, qualification such as instances of cash misappropriation, sanction, and renewal of working capital limits more than the approved limits.

Valuation

In FY2023, pro forma consolidated sales increased 48.15% to Rs 5134.62 crore as compared to restated sales of FY2022. The OPM decreased by 15 bps to 4.48%, leading to 43.32% increase in OP to Rs 229.79 crore. OI increased 5.95% to Rs 19.41 crore. Interest cost jumped 21.04% to Rs 73.67 crore. Depreciation was up 21.8% to Rs 84.36 crore. PBT spurted 87.84% to Rs 91.18 crore. Tax expense was Rs 23.72 crore as compared to tax expense of Rs 14.88 crore in FY2022. Net profit jumped 100.4% to Rs 67.46 crore.

As per pro forma financials, the FY2023 EPS on post-issue equity works out to Rs 9.48. At the upper price band of Rs 295, the P/E works out to 31.

As of 6 March 2024, listed peers such as Landmark Cars traded at TTM P/E of 41 and Competent Automobiles at TTM P/E of 11. As per pro forma financials, Popular Vehicles and Services’ FY 2023 OPM and ROE stood at 4.48% and 19.67% respectively, as compared to 7.03% and 17.98% for Landmark Cars and 3.65% and 7.96% for Competent Automobiles, respectively.