Why investing in CarTrade is risky?

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As CarTrade looks ahead to an IPO, it has to contend with well-funded competition in the space as well as the challenges for the used cars market in India

With the expected growth for electric cars, autonomous vehicles and more in the next few years, will older ICE used cars remain appealing in the long run?

Beyond this, CarTrade is also uncertain about how deep the impact of Covid will run with no clarity on the economic recovery or any government regulations that may impact the sector

Automobile marketplace CarTrade filed its draft red herring prospectus (DRHP) with Indian markets regulator Securities and Exchange Board of India earlier this week in preparation for its upcoming initial public offering (IPO). While there is no timeline for the IPO, companies typically execute their listing within six months of filing the prospectus, given that market conditions and therefore the confidence of the market change quickly in the tech industry.  As usual, CarTrade has listed the risks it sees for itself in the future after its IPO.

For CarTrade, the challenge is not just overcoming the slowdown of the past year, which has been severe on the mobility and automobile sector but also looking at the changing market landscape within this industry. At the moment, the company is only going for an offer of sale and not looking to raise massive funds from the stock market through its IPO. But as usual with any IPO from the tech startup ecosystem, there are plenty of risks and questions around CarTrade’s public offering too.

Are New Mobility Models A Risk For CarTrade IPO?

To begin with, the company acknowledges the risk and the potential threat from changing models of ownership and rentals in the automobile industry. With the expected growth for electric vehicles, connected vehicles and more, will older used vehicles remain appealing in the long run as these new-age automotive platforms enter the market?

“Demand for cars sold through our platforms may be adversely affected by trends that lead to a decline in demand for cars. In addition, a growing share of younger people no longer purchase or lease their own cars, opting for ride-hailing services, ride-sharing services, car rental services and public transportation instead” — CarTrade’s DRHP

While the company admits that ride-hailing and shared mobility took a backseat during the pandemic when personal vehicles were more predominantly used, it does say that ride-hailing services, public transportation and shared mobility services may continue or even intensify after Covid, due to urbanisation continues and population migration back to major cities. This could once again become a risk factor for investors backing the used cars industry.

VG Ramakrishnan, founding partner and MD of advisory and consulting firm Avanteum and former South Asia MD at Frost & Sullivan where he co-lead the automotive and transportation practice, believes personal mobility has seen a bit of a resurgence, but right now neither personal nor shared mobility is rising. “Shared mobility is bound to come back as normal operations resume, assuming that the vaccination count keeps rising. It saw major growth because of the convenience it offered to those in cities, and that is not going to change.”

As mentioned earlier, the company is also wary of the advent of newer connected vehicle solutions that could make it difficult to provide the supply for the customer base. “Further, demand for certain types of used cars may suddenly decline due to the introduction of innovative technologies for new cars, such as autonomous driving systems. The used cars listed on our platforms may not offer such innovative features and we cannot guarantee that more innovative cars will be sold on our platforms as it may take several years before they become available in the used car market,” the filing read.

But from the investor point of view, this is not much of a risk, according to Avanteum’s Ramakrishnan. “Will we see electric vehicles being sold in big numbers by 2027 in India? I don’t think so. This is not a risk for the investor per se, since even today when you go to the marketplace you will see cars bought two years ago being sold,” Ramakrishnan told Inc42.

Besides the next generation of vehicles, CarTrade is also concerned about financial partners offering better deals for newer types of vehicles. It also cited challenges related to anti-pollution standards, which require commercial vehicles to be replaced regularly. “This could make buying a new vehicle more attractive. As a result, sales of used vehicles through our platforms may decline,” CarTrade stated.

The Covid Impact – CarTrade Treads On Uncertainty

Beyond this, CarTrade is also uncertain about how risk from the impact of the Covid pandemic ahead of its IPO. The company said, “it may affect our ability to execute our growth strategies and expand into new products and services”. The expected impact of the pandemic is widespread according to CarTrade and the company claims to be assessing the situation as it plays out.

However, the actual impact of the pandemic remains uncertain and will be dependent on the spread of the coronavirus and steps taken by the government to mitigate the economic risks and impact and it may differ from the company’s estimates.

“Any intensification of the COVID-19 pandemic or any future outbreak of another highly infectious or contagious disease may adversely affect our business, results of operations, cash flows and financial condition. Further, as COVID-19 adversely affects our business and results of operations, it may also have the effect of exacerbating many of the other risks…” it added

Amid the second wave, major players in the industry have seen a decline in sales, which could impact the future supply of used cars. While demand remains strong, there are challenges in supply chain, dealership activity, labour and customer movement. In the passenger vehicle space, Maruti Suzuki registered sales of 1,35,879 units in April, a decline of 7% from March (1,46,203 units), and Hyundai India’s sales declined by 6.8%, Tata Motors sales were down by 15.4%, while Kia India was down by 15.6%.

How Quickly Will The Used Cars Market Grow? 

India’s pre-owned car market grew steadily in 2020, touching 4.4 Mn units, as per Inc42 Plus analysis. The preference towards pre-owned cars in India is due to more affordability being provided by them as compared to new cars. India’s used car market is estimated to reach between 6.7 Mn to 7.2 Mn units sold per year by 2022, with the value of the segment pegged at INR 50,000 Cr, according to the outlook report by Mahindra First Choice.

A major challenge with the used-car market was matching the right model car with desired features, price and overall condition of the vehicle that the customer required. However, with digitisation and automation in the listing and inspection process, such challenges have been largely overcome. On the back of this, the organised used car channels are expected to grow from an 18% market share in FY2019 to 30% in FY2022. The question for CarTrade is whether it can continue to compete with the host of competitors in this space that are also equally capitalised.

It could very well boil down to which startup has the most efficient and effective customer acquisition strategy, and in this regard, CarTrade would have to change its tack from being reliant on word-of-mouth in the past year to increase its marketing spend. This would also ultimately affect its profitability given that a large portion of its INR 85 Cr profit in FY21 till December 2020 has come due to customer acquisition costs being cut by nearly 80% in this period. CarTrade may have to give up its profit margins or lose out on user reach when things bounce back to normal.

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