Landmark Cars

about 2 months ago
Landmark Cars

IPO Size: Rs. 552 cr 

  • Rs. 402 cr is offer for sale (OFS): 81% by TPG (reducing 30% holding to 11%), balance by the Promoter (60% stake to reduce to 55%) and other shareholders
  • Rs. 150 cr fresh issue for Rs. 120 cr debt repayment (of Rs. 464 cr gross debt)

Price band: Rs. 481-506 per share

M cap: Rs. 2,003 cr, implying 28% dilution

IPO Date: Tue 13th Dec to Thu 15th Dec 2022, Listing Fri 23rd Dec 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.


Car Dealer and Service Stations

Landmark Cars has 59 vehicle showrooms and 53 after-sales service stations for Mercedes-Benz, Honda, Jeep, Renault, Volkswagen, Ashok Leyland, mainly in Gujarat and Maharashtra. Company’s business is dependent on count of physical outlets and success of the vehicle models it retails. Since it has little ‘control’ over the latter, growth is a derivative of how OEMs perform and majorly ‘external’. Take for example, Landmark has 19 showrooms and 11 service stations for Renault (of total 112 outlets), but ~8% of revenue comes from Renault, as the OEM’s models are less popular.


Mercedes-Benz has an ‘Unusual’ Competitor

Mercedes-Benz accounts for one-third of Landmark’s operations. Last month, Mercedes-Benz India sales head commented that Systematic Investment Plan (SIP) in Mutual Funds is the OEM’s biggest competitor in the country. A luxury carmaker’s sales-head being so vocal of the demand pressure is unprecedented, and, we believe, preferring long term investment over discretionary consumption is financial prudence of Indians. Automobile sales is anyways very cyclical in nature, making company’s growth a ‘second derivative’ of macro progress.


Car Sales in an Upcycle

K-shaped recovery of Indian economy, post covid, led to uptick in sales of luxury and premium personal mobility like SUVs, increasing company’s PAT to Rs. 66 cr in FY22, from Rs. 11 cr in FY21. But just in FY19 (pre-covid), net loss was at Rs. 24 cr, highlighting the severe impact of cyclicity.

After-sales service and spares accounted for ~60% of the Rs. 188 cr EBITDA in FY22, pricing for which is also determined by the OEMs, like new vehicle prices. Thus, company has little hold on topline (both volumes and pricing) and can only control expenses (which also only limited), capping margin growth.


Expensive Pricing

FY22 PAT of Rs. 66 cr rose to Rs. 18 cr in Q1FY23, partly due to lower effective tax rate of 8% in Q1FY23. Based on normalised tax rates, FY23E PAT is likely to be at  around Rs. 62 cr, which leads to a PE multiple of 29 times.

This is very expensive as

  1. OEM dealership is not exclusive for the given geography
  2. Both new vehicle sales and after-sales service are ‘commoditized’ business, with negligible ‘differentiation’ or ‘value-add’ from the dealer end
  3. Post partial debt repayment from fresh issue proceeds, company’s net debt to equity ratio will remain 0.7:1 which is high for company’s margin profile.
  4. New vehicle sales clock extremely thin margins of just 3% EBITDA. While service business is ‘annuity’ income, it is not good enough to justify such a high earnings multiple.

Valuation multiples of Nifty auto index has risen lately, due to some OEMs having strong ‘electric vehicle (EV)’ presence, but Landmark only has 2 sales outlets of China’s BYD, whose electric cars are not fast-selling, as they lack fiscal incentives for EVs. Thus, company does not have any first mover advantage, in the high-growth EV space, making a PE multiple of 29x completely unjustified.


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