Evaluating Popular Vehicles & Services Ltd IPO opportunity; Should you invest?

The company prides itself on its established relationships with industry leaders such as Maruti Suzuki, Honda Cars, Jaguar Land Rover, Tata Motors, and Ather Energy.

About the Issue  

Popular Vehicles & Services Ltd is launching its initial public offering (IPO) for equity shares valued at Rs 2 each. The IPO price range is set between Rs 280 and Rs 295 per equity share, resulting in a total issue size of Rs 601.55 crore at the upper price band.  

The IPO is scheduled to commence on March 12, 2024, and will conclude on March 14, 2024. The market lot size for the IPO is 50 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 650 shares or a total investment of Rs 1,91,750 assuming the upper price band.   

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Repayment and/or pre-payment, in full or part, of certain borrowings, availed by the company and certain of the subsidiaries, namely, PAWL, PMMIL, KGPL, KCPL and PMPL

2. General corporate purposes

Promoter holding  

John K. Paul, Francis K. Paul and Naveen Philip are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 69.45 per cent in the company.   

Company profile  

The company operates as a diversified automobile dealership in India, generating revenue through a fully integrated business model. It addresses the entire vehicle ownership lifecycle, encompassing the sale of new vehicles, vehicle servicing and repairs, distribution of spare parts and accessories, facilitating the sale and exchange of pre-owned vehicles, operating driving schools, and facilitating the sale of third-party financial and insurance products.

The automobile dealership business is segmented into three key categories including passenger and luxury vehicles, commercial vehicles, and electric two-wheeler and three-wheeler vehicles.

The company operates (a) passenger vehicle dealerships, encompassing economy, premium, and luxury vehicles across various OEMs including:

1. Maruti Suzuki India Ltd for both Arena and Nexa, through the company,

2. Honda Cars India Ltd through its subsidiary, VMPL, and

3. Jaguar Land Rover India Ltd through its subsidiary, PAWL

(b) commercial vehicle dealerships of:

1. Tata Motors Ltd through its subsidiary, PMMIL, and

2. Daimler India Commercial Vehicles Pvt Ltd through its subsidiary, PMPL

(c) electric three-wheeler vehicle dealership of Piaggio Vehicles Pvt Ltd, including commercial and cargo vehicles through its subsidiary, KGPL, and electric two-wheeler vehicle dealership of Ather Energy Pvt Ltd through its subsidiary, KCPL.

As of December 31, 2023, the company operated through a network comprising 61 showrooms, 133 sales outlets and booking offices, 32 pre-owned vehicle showrooms and outlets, 139 authorized service centres, 43 retail outlets, and 24 warehouses spread across Kerala, Karnataka, Tamil Nadu, and Maharashtra.

Financials  

The company has witnessed sustained and robust growth over the last few years. In FY23, both revenue and net profit witnessed strong year-on-year growth, with a 40 per cent surge in revenue and an 88 per cent rise in net profit compared to FY22. The H1FY24 figures were equally impressive, suggesting robust growth for FY24 if the current pace is maintained. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 19 per cent and 18 per cent, respectively, for the fiscal year 2023.

Valuation and outlook

The issue is priced with a P/BV ratio of 4.82 times, calculated using its Net Asset Value (NAV) of Rs 61.26 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualised FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 23. Popular Vehicles & Services Ltd exhibited superior performance in comparison to its listed peers, taking into account both valuation and returns simultaneously.

Given its fully integrated business model, which fosters stability and higher margins, along with its longstanding presence in the automobile industry and established relationships with leading OEMs, the company is positioned for growth. Hence, we advise investors to contemplate subscribing to the offering with a long-term perspective.