India's online used car market is revving up, with companies and investors jostling to grab a larger piece of the pie. The potential of growth in the country of 1.3 billion people is huge as the percentage of car ownership is still in single digits.
This was illuminated last week when SoftBank, the company run by Japan's second-richest man, Masayoshi Son, and other investors, stepped in with $450 million of financing to Cars24 Services.
The pivot to an alternative personal vehicle in India is prompted by a devastating second wave of Covid-19 infections and rising demand to avoid the country's overcrowded transportation system that contributed to the rapid spread of the pandemic.
“This consumer behaviour has trickled down to the online used cars market in India, given the large base of modest-income households,” says Nikhil Kamath, co-founder of asset management firm True Beacon and brokerage Zerodha.
India's used car market will balloon to $50 billion in value by 2026 from $27bn last year, with the relative affordability of pre-owned vehicles driving growth, according to consultancy Mordor Intelligence.
Investors' appetite to cash in on the huge growth potential of the market, especially its online segment, was underscored by Cars24, India's largest online used car platform, securing the backing of SoftBank. China's tech giant Tencent was among other investors in the latest round of funding that valued Cars24 at $1.84bn.
“We are extremely bullish. The automotive sector in India is going to grow multifold in the next decade or so,” says Gajendra Jangid, co-founder and chief marketing officer at Cars24.
Pandemic-related restrictions on the public transport system and the growing trend of people preferring to own cars to minimise chances of contracting the disease is only fuelling growth, he says.
There are just 22 cars per 1,000 people in India, according to Niti Aayog, a government think tank. That compares to 980 cars for 1,000 people in the US and 850 cars per 1,000 individuals in the UK.
India's economy, Asia's third-largest, and the purchasing power of consumers took a hit due to the pandemic. However, the economic rebound is set to expand 9.5 per cent this year, according to the International Monetary Fund. That, in the medium to long term, will support rising incomes and help in improving the country's cars per capita level.
“The population and per-capita dynamic in India is perhaps the biggest tailwind for the sector,” says Mr Kamath. “We have a huge chunk of middle-class households who long to own a vehicle but are unable to afford a new one.”
Online used car platforms in India are looking to grab this opportunity and benefit from tailwinds by using technology to offer consumers an easier way of finding used cars across different budget brackets.
These companies are not only taking the hassle out of the entire process of finding an appropriate car for every budget slab, they are also disrupting the unorganised used car market, which is dominated by small dealers spread across the country.
“There's huge room for disruption,” says Mr Jangid, adding that Cars24 currently has a 90 per cent share of the online used car retail market in India, selling some 250,000 cars a year.
Amazon has changed how consumers shop in India, as before Amazon all shopping was offline. However, "nothing of that sort happened in the used car industry”, he adds.
Through its platform, Cars24 buys used cars, refurbishes them and then sells them on to customers. To facilitate further growth, the company is setting up seven new refurbishment centres across major cities, including Delhi, Mumbai and Bangalore. These centres with total capacity of refurbishing 50,000 cars a month are scheduled to open by the end of this year, Mr Jangid says.
The aim is to boost customers' confidence in the online used car market and ensure every vehicle being sold on the company's platform meets all standards of quality, he adds.
“While the potential for growth is huge, the entire [used] automotive ecosystem is highly fragmented, complex and riddled with challenges,” says Divam Sharma, co-founder, Green Portfolio, a portfolio management services company.
A lack of standardisation of prices and sellers concealing faults in cars at the time of sale are among the biggest challenges.
“Historically, this has been a largely unorganised market”, but “improving brand equity of a few organised players, their warranty, reliability and quality assurance on vehicles has resulted in increasing preference for organised players”, Mitul Shah, head of research at Reliance Securities says.
“Players like Cars24 have an important role across the value chain by connecting different stakeholders and simplifying the process of buying and selling cars,” says Mr Sharma. “There is an inherent need for this market to get organised for it to grow fast.”
CarTrade Tech, CarDekho, Droom and Mahindra First Choice are other online used car platforms trying to jostle for a bigger share of the market.
With so many factors supporting the case of potential growth, there is keen investor interest.
“All of them [online used cars platforms] have received a large amount of funding from private equity investors or promoters,” says Mr Sharma. “Retail investor interest can also be gauged from the interest received for the CarTrade Tech IPO [initial public offering].”
The listing of Mumbai-based CarTrade Tech, an online auto classifieds platform, was 20 times oversubscribed.
It started trading last month but its shares have declined about 10 per cent since the listing, which Mr Sharma says is partly due to “stretched valuations”.
However, the near-term and long-term growth outlook is bright for such companies, analysts say.
Another factor working in favour of online used car dealers is the global shortage of semiconductor components, which is holding back production of new vehicles and has boosted the cost of buying a new car.
“Supply constraints on the semiconductor front has further escalated issues ... which is forcing consumers to buy used cars,” says Mr Shah.
“Investors believe in this high-growth segment” and more start-ups are likely to pop up in India's online used car market.
“Rising investment in this space would certainly encourage more entrepreneurs to venture into organised used vehicles industry,” says Mr Shah.
New investments will also fuel the “further expansion of the existing players in terms of increasing their reach in remote areas to capture growing demand from rural consumers”, he adds.
Cars24, currently focused on the Indian market, is also increasingly looking at expanding its international footprint for future growth.
It already operates in the UAE and Australia, and is gearing up for its launch in Thailand later this year.
“We want to be aggressive in the international market,” says Mr Jangid.
The company's immediate focus in terms of its international operations is on the UAE. It also intends to set up base in other Gulf markets and plans to invest about $100m of the latest funding round to boost its GCC expansion.
Part of the funding is also being dedicated to “continue with the growth story in India”, to maintain its dominant position in the market, he says.
Analysts say the continued investor interest and growth of companies such as Cars24 will drive the transformation of the pre-owned car sector in India.
It will lead to "acceptance of used cars among Indians", which will expand the size of the market significantly over the coming years, says Mr Sharma.
“Unorganised players will lose market share to the organised players.”
