Is a good IPO on the cards for Carro?

Carro latest fy ended March 2023 numbers.. Essentially they are now a car dealer + car marketplace + financing company. With some extras thrown in like selling ads, insurance etc. it’s a nice synergistic business on the financing & marketplace side where 1+1 can be 3 or 4. 

The marketplace product has a high gross margin but can be at odds with in house dealer side as no sharp long term competitor dealer will want to work significantly with a marketplace that also owns one of their biggest competitor. It will be interesting to see how they navigate this issue. ASEAN Job portals mostly have up running employment agencies. Likewise property portals generally don’t run real estate agencies on the side. 

The car dealer side is lower margin as have to buy and sell the cars but it generates great gmv which  matters if revenue is the main goal.  Finally, the last product is financing side which has always been a good but not super scalable business as it requires access to cheap capital access. It’s telling how the older school financing companies in SG level out at certain loan book size. Only banks are different as they have access to deposits.

And based on the dealadvantage screen shots,  the financial numbers so far are showing it’s not strong synergies. I am not sure how well they run each component but the sum is loss making still even though each business by right should be profitable. I suspect it’s because they raised a lot of money and so hired aggressively and now their cost structure is not right sized for profit.

One recent quote substantiates my point, TIA article has their CFO saying that employee benefits as % of gross profit has fallen from 110% to 89% in 2023. To me 89% still ridiculously high! Profitable pure software tech companies have it at 30-50% for comparison. Also I see  revaluation of of investment assets affecting P&L. Investors evaluating must be careful here, non cash revaluation gains are usually once off and can also be written down in future if need to revalue. Moreover it does not help with cash generation.

Mgmt is saying ebitda in fy2023 is 5m and probably will be 30-40m in fy2024 and that’s a projection and off 1-3 mth annualized. And overall basis probably still loss making since they were down -98m  in fy 2023. It’s not quite possible to bring that to positive in one short year.

The saving grace is they raised at perfect timing and so still have 160+m cash. By the way 160m put in fd is already 8m profit there.

The other big saving grace is carvana stock has rebounded. One big difference is carvana is profitable and trading at 15-20 times ebitda. So carro if valued at 10-15 times ebitda (smaller size and loss making discount), then it’s probably worth $300m-600m at best? Still a lot of money but small for nasdaq. And it’s about right compared to how public markets have cut down asean tech stories. All about 60-80% off richly priced last round.

Let’s see what happens next 2 years as they try to get more money in. If I am a long term backer… I would back only if serious smart new money coming in to lead and to validate a new mark to market valuation. If as an earlier investor I paid a high valuation, I would be careful not to overpay another time.  Remember the lesson of grab, buka, Pgru, ipo! Latest few Investors all likely lose money including ipo investors.

The other smart thing the founder has done is it looks like he cashed out via secondary. It’s less said but quite a few of later stage tech founders have deftly navigated the bubble and cashed out for themselves anything from 1-5m to 20m usd. Willing buyer willing seller of course. And they don’t just buy a home but reinvest some as angels! Now that’s good for ecosystem and I think it’s fair up to 10m as it helps them derisk and at least provide for family. 

Nb: disclosure we are angel investors in motorist which is a car ecosystem platform competing with parts of carro. Previously were one shift investors too which is now owned by carousell. That’s why I am sure this space is fine but need great execution to create the synergies.