Company Overview
Popular Vehicles and Services Ltd. is a diversified automobile dealership company in India that has a fully integrated business model that caters to the complete life cycle of vehicle ownership, right from the sale of new vehicles, servicing and repairing vehicles, distributing spare parts and accessories, to facilitating sale and exchange of pre-owned vehicles, operating driving schools and facilitating the sale of third-party financial and insurance products. The company categorizes its automobile dealership business into three key segments, namely, (a) passenger vehicles including luxury vehicles, (b) commercial vehicles, and (c) electric two-wheeler and three-wheeler vehicles. Th company has over 70 years of experience in the automobile industry with diversified automobile dealerships and a fully integrated business model. The experience and diversity of the management team along with the long-standing presence of the promoter group has enabled the company to become valued partners of each of their OEMs, thereby giving them a distinct competitive advantage in the industry. Considering the segment revenue in the industry, vehicle sales remain the primary source of income for automotive dealers in India, accounting for 60-70% of their revenue. It is followed by service (regular maintenance and repair), which accounts for 20-25% of their revenue. The sale of accessories and insurance/ finance commission account for the remaining 2-7% (for PVs). As a plan to penetrate deeper into existing markets and expand into new markets through both organic growth and acquisitions, the company has acquired various operations of sizeable spare parts and dealer showrooms over the years.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
1). Repayment and/or pre-payment, in full or part, of certain borrowings, availed by the company and certain of its subsidiaries, namely, PAWL, PMMIL, KGPL, KCPL and PMPL; and
2). General corporate purposes.
Investment Rationale:
A fully integrated business model which leads to business stability & higher margin
The company’s diversified automobile dealerships and a fully integrated business model contribute to its position as a leading automobile dealership player in the industry. Apart from benefiting from the inherent synergies arising out of its business verticals, the company’s diversified income streams also contribute to higher profitability margins. The company offers fully integrated services through its authorized service centers that contribute to higher-margin business at each of the dealerships and help mitigate the cyclicality that has historically impacted some elements of the automobile sector. Further, its service centers act as points of renewal for vehicle insurance policies from the second year onwards. The sale of such extended finance and insurance products also helps the company increase its service and spare parts business by building a customer base for future repair work at its locations. The company’s emphasis on selling extended service contracts has bolstered its service and repairs vertical in each of the dealerships by ensuring customer stickiness beyond the term of the standard manufacturer warranty period. The company’s brand mix, distribution reach, and the complexity of modern vehicles, combined with its investment in trained technicians and advanced facilities and its emphasis on selling extended service contracts and synergies across the business segments and verticals has bolstered its business growth.
Consistent track record of profitable financial performance and higher growth
While the growth of the company is driven by the growth of the OEMs, the addition of new OEMs like Bharat Benz, Piaggio, and Ather to the portfolio has benefited the company in recent years. Further expansion of business through an increase in touchpoints across all the states in which the company has an existing presence as well as creating a presence in new states like Maharashtra has contributed to an increase in sales in new geographies. These factors together have led the company to a compounded revenue growth of 65% over FY2021-23 period and an EBITDA growth of 34% over the same period. The company’s ability to consistently demonstrate growth in its business has led to a consistent track record of profitable financial performance. . The growth in the premium category of passenger vehicles from the existing OEMs has helped the company to expand its business and strengthen growth. Also, the growth in demand for electric vehicles in the Indian market and the increase in production of electric vehicles by the company’s OEMs, coupled with the growth in the electric two-wheeler and three-wheeler vehicle sales and services segment has further attributed to the growth of the business.
Valuation and Outlook:
With expectations of outperforming over the medium term, India’s GDP is expected to grow at a CAGR of 6-8% over FY2023-28. Contributing about 7.1% to the country’s GDP, the automobile industry is one of the primary contributors to the Indian economy and is one of the largest automobile markets in the world, with annual domestic sales of over 20 million vehicles in FY2023. To support such growth of the industry, dealerships form an intrinsic part of the automobile sector, playing the role of an intermediary between customers and manufacturers. The dealership plays an indispensable role in the overall vehicle supply chain by providing a local vehicle distribution channel based on a contract with an automaker and providing aftermarket space by providing maintenance services and supplying spares/automotive parts and accessories. From the manufacturers’ perspective, dealers play the crucial role of retail distribution at regional, city, and local levels, and provide manufacturers with customer insights that are useful in the production planning of manufacturers. As of the latest fiscal, there were around 20,000 dealerships with nearly 70,000 touchpoints (including sub-dealerships, customer outreach centers, and authorized representatives of the dealer) across India catering to customers of two-wheelers, PVs, CVs, three-wheelers, and tractors. Typically, two-wheelers dominate the number of dealerships (with 55-60% share), followed by PVs (~15%) and CVs (8-10%) – three-wheelers and tractors account for the rest. Considering various demand drivers such as growth in new PV sales, rise in average vehicle prices, rising financial penetration and digital technology, we remain positive on the automotive dealership business in India. On the financial performance front, the company’s Revenue/EBITDA/PAT grew at a CAGR of 29.8%/20.7%/40.6% during the FY2021-23 period. On the upper price band, the issue is valued at a P/E of 28.9x based on FY2023 earnings which we feel is fairly valued. We, therefore, recommend a “Subscribe” rating for the issue.
