Breaking down Cars24’s billion-dollar valuation and how it got there

The unicorn valuation surprised many in the startup world. But DST Global, which invested $200 million Cars24 recently, is convinced about the company’s growth, having had a close relationship with the used-car buying platform for a while.

November 25, 2020 / 03:20 PM IST

When online used-car buying platform Cars24 said it became a unicorn- valued at a billion dollars by raising $200 million from DST Global, it raised many eyebrows in the startup ecosystem.

On the face of it, it is hard to justify the valuation in a sector that is yet to show sustainable economics, impact of the COVID-19 aside, when people have been home for months and travel is likely to be muted for a long time.

While the valuation may still be aggressive, there is more to Cars24, and DST’s investment, than what meets the eye. Moneycontrol spoke to industry insiders and people directly involved in negotiations to understand this deal and what it means for the company.

What does Cars24 do?

Cars24 originally started out wanting to buy used cars from owners, and find a dealer to sell it to at the best price, known as a consumer to business (C2B) model, in the industry. While this still forms a large part of its business, today it also runs a classifieds model, similar to say Olx, and even CarDekho, where the online platform gets paid for each lead it generates (C2C).

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It also sells pre-owned two-wheelers and has an NBFC licence since July 2019 to offer car loans.

Cars24 has been motoring along for five years, having raised a total of $150 million until the end of 2019, most notably from Sequoia Capital. But Sequoia, in fact, has a relatively small shareholder owning, less than 10 percent, sources said.

Its other investors include Exor Seeds (controlled by Fiat Chrysler), Shravin Bharti Mittal’s Unbound, and even a small cheque from cricketer MS Dhoni.

So what happened this year?

The current round happened at $850 million pre-money, taking its valuation to $1.05 billion, up from the $550 million it was roughly valued at a year ago. Cars24’s growth in the last six months is the biggest reason for DST backing it. While growth is a vague catch-all term, Cars24 has sold 15,000 cars each month the past quarter, with about $50 million in monthly Gross Merchandise Value (GMV)- one of the key metrics DST funded it on. The run rate of $600 million annual GMV is nearly double last year’s figure, a source said.

For the last year and a half at least, used-car buying has been on a tear. Although the auto industry, overall, saw sales plunge, the used-car market has been growing 18% year-on-year. COVID-19 led people to buy even more used cars, a safer alternative than cabs or public transport, and a cheaper alternative during an economic slowdown.

Even luxury cars in the used segment are growing 20 percent year-on-year, as per a Mint report. These macro factors helped Cars24.

Does that justify a billion-dollar valuation?

Two people directly involved in the deal, requesting anonymity, said that they were surprised by the unicorn valuation and found the company overvalued in this round.

But they went on to break down the deal dynamics. “Their unit economics are good, and they are EBITDA-positive on a monthly basis, with an annualised net revenue of $50-60 million” said the first person. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is an indicator of operating profits.

The economics have so far been hard to crack in the online car retail business, so this was a positive sign for investors as well. But a valuation at 16 times the revenue is unusual for an operation-heavy business.

What about DST Global?

Cars24’s unicorn valuation must be seen in the context of its investor. DST invested for a couple of very specific reasons. “Apoletto, the personal investment arm of DST leader, billionaire Yuri Milner, is already in Cars24. DST has had a very close relationship with Cars24 for a while now,” said a person involved in negotiations, requesting anonymity.

Secondly, “DST’s primary metric is growth. There are no two ways about that. The market’s growth and Cars24’s growth are two big reasons for the investment. And with at least $3 billion in assets to manage (as per estimates), a $200-million deal for a 25 percent ownership matches their risk appetite,” the person said.
M. Sriram
first published: Nov 25, 2020 02:48 pm

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