Rise In Prices Of Used Cars Decoded
Why is there a sudden rise in used car demand and prices? Here is all you need to know
We are sure that you have read multiple different perspectives and analysis on how Covid-19 has completely changed our lives. While the Covid narrative has many facets to it, we are sure you might not have seen the following scenario playing out - a rise in demand for second hand cars in India.
There are several reasons behind the rise in demand for second hand cars. One of the biggest reasons is the rise in the price of new cars due to supply chain issues. Another reason could be a greater want of personal mobility means fueled by lack of safety of public transportation due to Covid. Another possible reason could be people getting more value for money by buying second hand cars that have more features and power compared to new cars they could get at the same price. Buying second hand cars in India is not seen as a taboo anymore and more and more people are willing to buy used cars.
“India’s used car industry stood at an estimated 3.8 million vehicles at the end of FY21 and is expected to more than double to 8.2 million units by FY25, according to the ‘Indian pre-owned car market’ study commissioned by Volkswagen India and Frost and Sullivan. The demand for pre-owned vehicles is constantly growing and the ratio of used cars compared to new cars is expected to become 2.1x by FY25. Further, there has been a substantial rise in demand across the organized sector of pre-owned passenger vehicles business, the report further added. From around 1.4 times, the used car market is expected to be 2 times the new car market in the coming years. As per estimates shared by JM Financial, India’s used car industry’s turnover is expected to rise from $17 billion in FY21 to $47 billion in the next five years.”- Excerpts from Moneycontrol articles.
Let’s try to identify and give a bird’s eye view of how different sectors have been impacted by the rise in sale of second hand cars.
One of the biggest beneficiaries of the current environment are used car websites like CarTrade, Cars24, CarDekho, Droom and Spinny. Estimates suggest that about 75% of the Indian secondhand car market is unorganized. However, the demand for sales via organized online used car channels is rapidly picking up. According to Mahindra, 64% of the people who have bought used cars in FY21 have used digital channels significantly in their purchase journey. 50% of them were specifically looking for an organized used car dealer. This pattern of using digital is as high as 73 percent for people who are in the consideration phase. Sandeep Aggarwal, the CEO of Spinny also echoed the positive sentiments. He said, “We have been witnessing a lot of trends proving that the financial uncertainty and decrease in disposable income have shifted the consumers towards used vehicles. For the first time, we crossed Rs 1000 crore GMV in March’21 and most of it came from used automobiles. The traffic on our used vehicle category has gone up by 100% in the last 6 months." Such a background makes it a perfect opportunity to invest in CarTrade. CarTarde is set to IPO on 9th August and is looking to raise about 3000 crore and has already secured 900 crores via private market placements. While Covid took its toll on most sectors of the economy, it did push people online into the hands of platforms like CarTrade.
CarTrade Tech Ltd is a multi-channel auto platform provider company. The company operates various brands such as CarWale, CarTrade, Shriram Automall, BikeWale, CarTradeExchange, Adroit Auto, and AutoBiz. The platform connects new and used automobile customers, vehicle dealers, vehicle OEMs, and other businesses to buy and sell different types of vehicles. The company offers a variety of solutions across automotive transactions for buying, selling, marketing, financing, and other activities.
Another big sector that will be impacted will be the auto manufacturing companies themselves. Recently, Maruti and Tata raised concerns over production bottlenecks due to a shortage of semiconductor chips. Tata raised the prices of their cars in order to cover rising input costs. The delays in production coupled with rising inflation is pushing people to buy second hand cars. According to Moneycontrol, German automotive company Volkswagen has seen significant growth in its used car business branded as Das WeltAuto (DWA). From the 105 DWA outlets, Volkswagen clocked sales of 20,000 units in FY21 compared to 10,000 in FY20 and about 3,000 in FY19. It is clear that all automakers will see a rise in sale of secondhand units, but it will be difficult to determine the impact of this trend on what proportion of revenue do leading Indian automakers derive from the sale of second hand cars.
The rise in the sales of used cars is here to stay. Numbers are indicative of the fact that the organized players are expected to see a rise in their market shares. According to Grant Thornton, companies in the online trade space witnessed a 175 percent surge in inquiries for pre-owned cars. Used car financing has also seen a major fillip during FY21. According to several news reports, for CarDekho who has partnered with NBFCs for providing used car loans, there has been a three-fold jump in financing in the same two years. The annualized run rate of car loan disbursals at the end of February FY19 for CarDekho was Rs 632 crore, which grew to more than Rs 2,000 crore by end of March FY21. The company is now aiming at Rs 5,000 crore annualized loan disbursals by the end of FY22.
Given the macro situation, we believe investing in companies involved in the secondhand car business can be a good bet. A rising middle class, a buoyant IPO market, the aspirational value attached to buying cars, a strong economy in tier II and III cities along with changes in behavior caused by Covid has laid the perfect foundation for companies like CarTrade to do well. However, it should be noted that we are not in any way saying that the sale of new vehicles in India will taper off. While the new car market is expected to record consistent growth, we believe that there is a strong possibility that the used car market will significantly outstrip that growth.