Used car market poised for massive growth post Covid

Ramakrishna Desiraju, a Mumbai-based advertising professional, was looking to buy a rugged Sports Utility Vehicle (SUV). During his pre-purchase research, he realized that he had to wait for six to nine months for buying a new vehicle, which will cost him at least Rs 20 lakh. After vacillating between different models, he went for a Mahindra XUV5OO (RW10 AT variant) for Rs 12.5 lakh (inclusive of other charges) last year from a used-car showroom.

“I needed a car immediately at my doorstep. Also, this pandemic taught us to be a little bit more humble. So we didn’t go for pretensions and got down to the basics. Above all, I was looking for a vehicle meant for weekend getaways, can accommodate pets, has voluminous boot space, has off-roader credentials, etc., and XUV5OO ticked all the right boxes,” said Desiraju.

Similarly, Sachin Mayekar, a businessman in Mumbai, wanted a large sedan for his wife. Instead of forking out Rs 25-28 lakh (excluding taxes and other charges) for a brand new model, he feels he has hit the jackpot by getting a pre-owned Hyundai Elantra (2014 edition) for Rs 6.5 lakh (including taxes and other charges) in October 2022.

“Buying a new vehicle for say Rs 18-20 lakh would have compelled me to make a down payment of Rs 3.5 to 4 lakh, including RTO registration charges, taxes, insurance costs, etc. But when you buy a used car which is less driven, you save that much money. So getting a second-hand car which is less driven and is in a very good condition makes sense despite the rate of interest being 1-2 percent higher,” Mayekar said.

Thanks to pre-owned car buyers like Desiraju and Mayekar, India’s used-car market, which was already growing before Covid, got a further boost. Deeper penetration of the internet across the country has also resulted in greater trust and transparency that online retail players have fostered among prospective buyers through better deals and allied benefits.

Dissecting the market

The Indian used-car market, which was at approximately 4.4 million units per annum during the last financial year, is expected to grow by approximately 6 percent in FY23 to become close to 4.6 million units, as per IndianBlueBook (IBB) report.  The same report, which is prepared by Mahindra First Choice Limited (MFCL), claims that by FY27, it is expected to reach around 8 million units. Currently valued at $23 billion in 2021-2022, the pre-owned market is projected to expand at a CAGR of 19.5 percent, as per IBB’s findings.

“During Covid, as you know, people moved away from public transport and shared rides for better protection against the raging virus. A number of buyers, therefore, shifted to used cars (as well as new cars, where available). Used cars, being a cost-effective alternative, was amongst the topmost options customers settled for,” said Ashutosh Pandey, one of the authors of the IBB report.

As per the IBB report, the total market in FY20 was 3.9 million units, it went down to 3.6 million units in FY21 (due to the Covid-induced lockdown) and 4.4 million in FY22.

Pandey is also MD & CEO at Mahindra First Choice Wheels Ltd (MCFL), India's largest multi-brand pre-owned car company which sells certified used cars to its customers. MFCL facilitated buying and selling of about 180,000 cars in FY21, which has been growing steadily and is likely to reach 250,000 cars in FY23. At present, it runs eight superstores and 996 franchisee stores with plans to have 2,000 touchpoints by FY27.

“Our target is to facilitate sales of 800,000 used vehicles by FY27. This accelerated growth will be driven by an expansion of our pan-India franchisee network and big-format superstores,” Pandey said. He also revealed, “SUVs form 18 percent of our monthly volumes currently and is the fastest growing segment in our sales. It is expected to grow to 30 percent by FY27.”

As per MFCL’s internal survey, nearly 63 percent of used car buyers are planning to change cars within three years. Buyers are increasingly looking for certified cars and around 90 percent of buyers want some form of warranty. Furthermore, finance penetration is also set to rise to 35 percent by FY27 from 20 percent presently, as revealed in the survey.

Industry executives from the banking and finance industry claim that the rates of interest on used cars have always been higher vis-à-vis pre-owned ones.

Debasish Kar, Business Head, Auto Sector,  Mahindra Finance stated that the total amount sanctioned for a used car loan is 100 percent of the Insured Declared Value (IDV) vis-à-vis the on-road price of a brand new vehicle (including registration and insurance). He said the rate of interest (ROI) varies from 10 percent to 14 percent IRR based on vehicle model, customer profile, etc. In his view, this is slightly on the higher side than a new car, where the best rates are at 8.25 percent upwards.

“Used-car business is definitely picking up after Covid. Mainly because of the short supply and people preferring a used car to a 2W. The finance penetration in this market has also increased by 3 percent post Covid,” Kar told Moneycontrol.

Start-ups on digitization drive

As per market information, over the last few years, venture capital investors have invested close to $2 billion, which has increased the pace of formalization in the unorganized industry. A variety of new-age start-ups which have digitized the sales process have contributed to the trend of buyers choosing used cars.

For instance, Spinny, a full-stack used-car retailing platform, which used to do 450 transactions per month before Covid, executes over 6,000 transactions post pandemic.

Niraj Singh, Founder & CEO, Spinny, said, “With customers getting great prices and a hassle-free selling experience for their existing car, there is a trend of upgrading/exchanging with a better used car, suited better for unique needs and aspirations of each customer.”

On similar lines, CARS24, which is a leading global e-commerce platform for pre-owned vehicles transacting over six lakh cars since it began operations in 2015, saw a 39 percent growth in the number of transactions post Covid. From Rs 2,741 crore in FY22, it is on course to earn Rs 5,136 crore in its revenue from operations in FY23.

“Pandemic really made owning a car a necessity and not just a luxury for a lot of people. Safety became a huge pull when it came to the need for a car, and post-Covid, the number of first-time buyers increased from 45 percent to 60 percent,” Vikram Chopra, Co-Founder and CEO, CARS24.

Carmakers keen to jump on the bandwagon
Most of the carmakers Moneycontrol reached out to also affirmed that the desire for personal mobility is likely to give an impetus to their used-car verticals. For instance, Maruti True Value, the used-car vertical of the company, is expecting around 4.25 lakh unit sales this year against 2.9 lakh last year, a 45 per cent jump.

“While the first-time buyers have been about 65-66 percent of the used-car market, we have seen a jump in additional car buyers to about 32 percent. The buying prices and therefore the selling prices have also increased, said Shashank Srivastava, Sales and Marketing Head at Maruti Suzuki India, adding, “The organized used-car market is about 20 percent of the car market and is expected to be around 1 million this year.”

Despite all the buzz, the used-car industry is still largely consumer-to-consumer (C2C) and unorganized. The unorganized segment still makes up roughly 45 percent of the market; with organized segment being 20 percent and C2C transactions being 35 percent, as per the same IBB report cited above. “The organized segment is growing rapidly owing to consumers wanting refurbished, certified cars with warranty and hassle-free buying and ownership experience. By FY27, we expect 45 percent of the industry to be organized,” added Pandey.