The amount includes a fresh issue of shares worth ₹250 crore, with the proceeds to be used for the repayment of loans. Private equity investor Banyan Tree is selling the remaining shares in the IPO. The promoter stake will drop to 61% after the IPO from 69%, while Banyan Tree’s holding will reduce to 10% from 30%. The promoters are not participating in the offer for sale.
The Kerala-based company has demonstrated a disproportionately high share of operating profit from the superior-margin services business compared with new car sales, thanks to its strong last-mile network in the southern states. Popular Vehicles has dealerships primarily of Maruti Suzuki cars and Tata Motors Commercial Vehicles in Kerala and Tamil Nadu where the vehicle makers have a market share of 37-76%. The company’s ability to turn around acquired dealerships at a regular interval has supported inorganic-led revenue growth. Considering these factors, long-term investors may subscribe to the IPO, keeping in mind that vehicle dealership stocks would always remain a second derivative to participate in the passenger car and truck growth in India.
Business: Started in 1984 with a Maruti dealership, Kochi-based Popular Vehicles now has a network of 30 showrooms for new passenger cars that include Maruti Suzuki, Honda and Jaguar Land Rover in Kerala, Tamil Nadu, and Karnataka, and 21 showrooms for commercial vehicles for Tata Motors and Bharat Benz catering to the Kerala, Tamil Nadu and Maharashtra region. It is also a dealer for electric two-wheelers and three-wheelers in Kerala – Piaggio 3W and Ather 2Wheeler.
Maruti Suzuki car sales accounted for 64% of the total sales volume and 48% of revenue in the first half of FY24, followed by Tata Motors CV which contributed 18% of volume and 24% of revenue. The company is the seventh largest dealer for Maruti but has the largest market share in services – a high-margin segment – for Maruti. New car sales fetch about 2% of the operating profit margin, while services provide 20%. Revenue from service centres accounts for 15% of total revenue but contributes nearly half of the operating profit.
AgenciesFinancials: Revenue grew 29% annually between FY21 and FY23 to ₹4,892 crore, while operating profit rose 16% on a CAGR (compounded annual growth rate) basis to ₹238 crore, implying a margin of 4.8%. Its operating profit margin dropped by 119 basis points in the last two fiscal years. Net profit expanded at a 40% CAGR to ₹64 crore between FY21 and FY23. In the first half of FY24, revenue stood at ₹2,834 crore with an operating margin of 5.12% and a profit of ₹40 crore.Risks: Maruti, Honda and Tata Motors CV sales volume accounts for 77-80% of the total revenue of the company. The contract with vehicle makers is not long-term in nature, therefore any termination or non-renewal of a dealership contract may weigh on its financial performance. Any introduction of a ‘me-too’ programme by a rival dealer in the services segment may affect the moat it has in the collision damage segment.Valuation: At the higher end of the price band, the company demands a 26.25 price multiple of the annualised earnings of FY24, while peer Landmark Cars – a play on premium cars – is trading at 45 times. The return on equity of Popular and Landmark was around 18% for FY23, but Popular has a higher debt-to-equity ratio (1.47) than Landmark (0.62).
