Used car start-ups with tech and investor money are upping the pace

Start-ups armed with tech and investor money are upping the pace and legacy players are upping the ante

The year 2021 has been remarkable for the Indian start-up industry. The country added 54 unicorns, the third highest in the world, only behind China and the USA. Even within this funding glut, one sector has been an investors’ favourite — the online used car platform.

A sector once dominated by traditional car makers such as Maruti Suzuki’s True Value and Mahindra & Mahindra’s First Choice has seen a surge of start-ups — Cars24, CarDekho, Spinny, CarTrade. Investors have been super-bullish about their tech-driven, asset-light business model — all the four companies turned unicorn in 2021 with CarTrade listing on the stock market.

The Indian used car market was already one of the world’s largest and fastest growing. A slew of regulatory changes and the Covid-19 pandemic accelerated the push. In FY20, used car sales stood at 4.2 million units; 50 per cent higher than the new-car industry, at 2.8 million. The market is estimated to register a compound annual growth rate (CAGR) of 11 per cent to log sales of up to 8.3 million units by FY26, according to consulting firm RedSeer.

“During the pandemic, there has been a strong trend of people shifting to personal mobility from shared mobility. Added to that is the section of buyers who suffered from reduced income or lost jobs, so the acceptability of used cars went up further,” said Shashank Srivastava, senior executive director, Marketing & Sales, Maruti Suzuki India.

Unlike Maruti and Mahindra, most used-car dealers face a lack of capital, finance options or standardised checks to determine the value of a vehicle. This is where the online platforms, flush with funds and armed with data and algorithms for car inspections and connecting customers, came in.

“The biggest problem that a customer faced while buying a used car was getting the right product that he is looking for,” said Vikram Chopra, CEO & co-founder of Cars24. “When he comes to a platform like Cars24, he has 10,000 cars from across segments and brands to choose from whereas when you go to a traditional used car seller, he will get 50 or 100 cars at best. Over and above that, we refurbish the car in-house.”

The confidence from financers in Chopra’s business model is evident from the fact that the company recently raised Rs 3,000 crore, its seventh round of fundraising, doubling its valuation from the last one in September. Another platform, CarTrade Tech, listed on the stock exchange and was subscribed 20.29 times, raising Rs 2,999 crore.

Unlike its competitor Cars24, CarTrade focuses on the B2B or auction platform, where it puts up used vehicles bought from retail customers, banks and insurance companies and earns a commission on sales. The company also earns advertising income and commission from its classifieds business, which is mostly through online websites such as Carwale and BikeWale.

Aneesha Menon, Chief Financial Officer of CarTrade, said the company is present in the entire ecosystem of transaction of a car that helps it improve its unit economics better than competitors.

As she explained, “The journey of buying a new car begins very early. It’s not an impulsive buy. The moment you come on our site, the customer has been monetised because OEMs pay us for branding. Closer to the buying journey, when the customer is dropping a lead, we monetise that, too, because the dealer pays for the lead. When the final transaction happens from the company’s platform, it gets a commission.”

In 2018, the company acquired a majority stake in Shriram Automall India, which gave it a physical presence in dealerships that put up unsold vehicles for sale in the used car market. “So the same transaction goes through an entire ecosystem, creating various monetisation opportunities for us, which is how the whole model becomes profitable,” Menon pointed out.

The company plans to spend up to Rs 750 crore to invest in companies in the automotive space. “We will look to acquire companies that share the same vision — it can be a complementary or allied business like a new technology, which can be disruptive, or a physical store if it has a synergy,” said Vikram Alva, CarTrade’s Chief Strategy Officer.

With the new-age players disrupting the sector, the legacy companies are also gearing up. “The organised car market has been increasing due to the entry of the new-age digital players. Competition helps us perform better. We have also improved dramatically on our digital platform — 70 per cent of enquiries are now coming through this medium. We are using artificial intelligence and machine learning for pricing and vehicle inspection. This means that we can now provide accurate and transparent pricing to the customer based on the actual condition of the vehicle,” said Maruti’s Srivastava.

Maruti plans to add 50 outlets to its existing 550 in 250 cities and drive traffic through its digital platform. “Average penetration of financing for used cars is only 16-17 per cent against 40 per cent for True Value. We now give the option of almost all leading financiers to our customers of pre-owned cars,” Srivastava said.

Mahindra First Choice Wheels (MFCW), which has around 450 franchised outlets, expects revenues in FY22 to grow 80-90 per cent over FY21. “Our unique ‘phygital’ approach to used vehicle commerce — e-commerce complemented with pan-India physical presence — has seen overwhelming acceptance amongst consumers,” said Ashutosh Pandey, CEO, MFCW. The company is leveraging carandbike.com, which it had acquired from NDTV in 2020, as a research vehicle and an e-commerce platform on which it has more than 5,000 vehicles listed. Pandey said that the company is looking to raise funding for expansion “to power the next four or five years of our growth”.

And the prospects for growth are still large. According to brokerage firm Citi Research, despite five major firms cumulatively raising about $2 billion in a single year, online penetration currently stands at less than 2 per cent. As Amit Kumar, CEO of OLX Autos, a trading platform network, put it, “A highly fragmented sector provides a lot of room for organised players.”