IPO: Popular Vehicles & Services

Popular Vehicle & Services, an automobile dealer in India, has launched its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average return on equity (ROE) and return on capital employed (ROCE) are 14.6 and 17.4 per cent, respectively.
  
• Growth : The company's revenue and profit after tax grew by 30 and 41 per cent annually during FY21-23 on the back of higher volumes due to increasing demand for both passenger and commercial vehicles. Its new vehicle sales volumes grew by 17 per cent annually during the same period.
  
• Valuation : The stock is valued at a P/E and P/B of 32.8 and 3.3 times, respectively, compared to its peers' (Landmark Cars) median and average of 43.0 and 5.7 times, respectively.
• Overview : The company has benefited from growth in the country's passenger and commercial vehicles segment in the last four years. Catering to some of the country's most prominent players, it capitalised on the tailwinds.

About the company

Popular Vehicles & Services is a dealer of various automobile OEMs (original equipment manufacturers) in India. As of December 31, 2023, it has 61 showrooms, 133 sales outlets & booking offices, 32 pre-owned vehicle outlets, 139 service centres, 43 retail outlets and 24 warehouses. It mainly operates in four business segments:

• Passenger vehicles, including luxury vehicles - contributed 62 per cent of revenues in FY23.
  
• Commercial vehicles - contributed 32 per cent.
  
• Electric two-wheeler and three-wheeler vehicles - contributed 1 per cent.
  
• Others, including services & repairs - contributed 5 per cent.

The company operates dealerships for various OEMs, such as Maruti Suzuki, Honda Cars, Jaguar Land Rover India, Tata Motors (commercial segment), Piaggio, and Ather.

Strengths of Popular Vehicles & Services

• It is the seventh-largest passenger vehicle dealer (in terms of volumes) for Maruti Suzuki in India in FY23.

Weaknesses of Popular Vehicles & Services

• The company depends heavily on Maruti Suzuki and Tata Motors . These two companies contributed 86.4 per cent of vehicles sold and 80.7 per cent of revenue in FY23.
  
• Operates in a highly competitive and cyclical industry.

Risk report

Company and business

• Are Popular Vehicles & Services' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its FY23 profit before tax was Rs 85 crore.
• Will Popular Vehicles & Services be able to scale up its business?
  Yes. The growing demand for passenger and commercial vehicles will drive its growth. Besides, having two major players in its client list is a huge plus.
• Does Popular Vehicles & Services have recognisable brands with client stickiness?
  Yes. In FY23, it was the seventh-largest passenger vehicle dealer (in terms of volumes) for Maruti Suzuki in India. Moreover, it was the fourth-largest commercial vehicle dealer (in terms of volumes) for Tata Motors.
• Does the company have a credible moat?
  No. It operates in a highly competitive environment.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 61.2 per cent.
• Do the top three managers have more than 15 years of combined leadership at Popular Vehicles & Services?
  Yes. Francis K Paul, full-time director, has been associated with the company since 1983.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Popular Vehicles & Services free of promoter pledging of its shares?
  Yes. It is free of promoter pledging of its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. Its three-year average ROE and ROCE are 14.6 and 17.4 per cent, respectively. Its FY23 ROE and ROCE were 18.7 and 18.3 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flows from operations in the last three financial years.
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity stood at 3.1 times as of September 30, 2023.
• Is Popular Vehicles & Services free from reliance on huge working capital for day-to-day affairs?
  No. While it's a profitable business, it has a high amount of debt to fund its inventory and may continue to require in future.
• Can the company run its business without relying on external funding in the next three years?
  No. The company needs high capital for expansion and buying new inventory. Since most of the issue proceeds will be used for debt repayment, it may have to borrow in the future.
• Is Popular Vehicles & Services free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity stood at 8.0 per cent as of September 30, 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 4.6 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a price-to-earnings ratio of 32.8 times compared to its peer's level of 43.0 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a price-to-book ratio of 3.3 times compared to its peer's level of 5.7 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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