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Corporate Report

Published on: May 1, 2022, 6:43 p.m.
Amazon of the used car market
  • Aggarwal: adding new dimensions

By Lancelot Joseph. Executive Editor, Business India

The socio-economic impact of the Covid-19 pandemic has played havoc with everyone’s life in some way or the other. It has altered the way we live our lives. Like many other things, one element that has changed is our mode of transport.

"A car is no longer seen as just an aspiration, but new dimensions are added to it – like it being a safe, hygienic mode to commute that one hopes to provide to one’s family and loved ones. For many this would have been just like any other unfulfilled dream, had there been no used-car market segment. Many people can cater to this change of need in their lives now, thanks to the used-car segment,” explains Sandeep Aggarwal, chairman & CEO at Droom Technology. This is the second unicorn Aggarwal has formed after ShopClues, which became a unicorn with an investment of $70 million. Lighthouse Venture has been the biggest investor in the company and nearly one-third of the company’s holdings are with Aggarwal and his employees

“In India, the used car market is largely catered to by the unorganised segment who run their set-up usually near a garage shop. Despite the known fear of limited transparency in used car transactions, there are a few who buy cars from these ‘mom-and-pop’ sellers. These buyers often encounter an element of nervousness and anxiety till the deal is closed; their mind continues to remain strewn with apprehension about the future performance of the car,” says Rajinder Singh, a garage owner.

Changing scenarios

This sorry state of used car buyers is expected to become history over the next few years, thanks to the artificial intelligence (AI)-based interface developed by a Gurugram headquartered technology company – Droom Technology. The company provides an ecommerce platform to buy a used vehicle, dispelling all the fears of a used car buyer by using ‘data’ power. It collects an enormous amount of data pertaining to the used vehicles it sells, using the same to confirm they are from verified users before being posted on the ecommerce platform.

Furthermore, it runs more than 1,100 points of inspection on the used vehicle, after a buyer pays the initial booking amount, to get the 360-degree health check of the vehicle finalised. Additionally, the company also offers a six-month warranty after the vehicle is purchased from its platform, providing further comfort and peace of mind to the buyer of the used vehicle and an impetus to go ahead with the purchase. This entire exercise makes the process of buying a used vehicle more transparent and saves a buyer the hassle attached to buying a used vehicle from the unorganised segment.

The business model of Droom Technology is similar to Amazon’s, where the products are sold by a reseller but are fulfilled by Amazon. Similarly, in the case of Droom, the company maintains strict checks and balances regarding product quality, but inventory is not held by it and vehicles are sold from its cloud retailer. However, the final sale is done by Droom (in other words orders are fulfilled by the company like on amazon.com).

Aggarwal, says: “Just ten years ago, people were cagey even about buying clothes and shoes online, with a view that without ‘touch and feel’ these products cannot be bought. Companies since then have spent a lot on the market by adopting a blue ocean marketing strategy, and in the last decade we have witnessed this concept of ‘touch and feel’ gradually diminishing; no wonder the online sales of clothing and shoes are now more than 10 per cent of total industry sales. Used car sales driven by data and assurance from sellers too are likely to bring an inflection point in used car penetration and in the next 5-7 years, online used cars could reach north of 10 per cent.”

In order to maintain quality and consumer product satisfaction, Droom has crafted a stringent process for adding mom-and-pop outlets to its list of cloud retailers. The company has around 21,000 cloud retailers across 1,151 cities; after vetting more than three lakh mom-and-pop resellers, every car listed on the Droom platform must undergo quality testing even before it’s placed on its selling platform. Based on patent Orange Book or OBV technology, Droom suggests a fair market value for any used vehicle and it recommends its reseller keeps the OBV price in order to get a fast response.

 Core strength

The main skill set of Droom Technology, its core strength, emerges after a vehicle is put out on the platform and a prospective buyer selects it based on his requirements. The prospective buyer needs to pay 3 per cent of the asking price on the platform; Droom then sends its mechanic with its proprietary devices to fetch all the data about the vehicle, which is parked at a mom-&-pop seller’s space. Through this device, Droom collects a host of readings from the vehicle concerned such as engine sound, taking a picture of the tyre tread, wear & tear on the gas pedal and photographs of the vehicle’s bumpers, fenders, etc.

With the help of the pictures and an ancillary device, the changed density of the paint coat can also be checked – this can signal if the vehicle has been dented due to an accident and if it has undergone any body shop repairing. Similarly, the abrasiveness of metal on the pedal shift provides a fair estimate about the mileage, helping one to check whether the odometer has been tampered with. Likewise, the tyre tread gives one a fair idea about the number of kilometres the vehicle has travelled.

All this data is sent to the cloud by a device carried by the mechanic and further processed, analysed, and interpreted by an algorithm to arrive at the health of the vehicle. This also aids in calculating the estimated remaining life of the vehicle. This estimate helps in the preparation of terms and conditions for the warranty that covers any eventual surprises that may occur in the six months from the date of purchase.

Droom gets 3 per cent of the total sales amount of the vehicle as its fees, which in technical parlance is called the ‘take rate’. In addition, there is also scope for an additional revenue from value-added services like providing finance and insurance. “Loan penetration in the used car space is less than 15 per cent and the interest rates are high, as lenders remain cagey about the remaining useful life of the vehicle; this offers a lot of potential for Droom to scale up value-added services,” adds Aggarwal whose average realisation in the passenger vehicle space is around Rs10.5 lakh, while conventional reseller ASPs are around Rs4 lakh. 

About half of the cars sold by the company are in the mass market, followed by 30 per cent in the mid-range and 20 per cent in the luxury segment. Almost zero expenditure on paying rent (which is 10-12 per cent of the gross margin for inventory-based resellers), and other low costs have resulted in reduced losses for the company – it incurs nearly one tenth of loss on sales per vehicle compared to inventory-based organised resellers.

Gross Merchandise Value (GMV) – the amount of the total sales value sold on the e-commerce platform of Droom, was Rs6,696 crore at the end of FY20, which dropped to Rs5,019 crore in FY21 due to the pandemic, according to the company’s Draft Red Herring Prospectus (DHRP) filed with SEBI in November 2021.

The next go to 

According to analysts, the GMV of Droom is estimated to have crossed more than $2 billion in FY22 and with the continued tailwind and rising digitalisation, this could potentially reach $15-18 billion in the next five years. According to Axis Capital, the GMV pool of used cars is likely to grow to Rs4.4 lakh crore in FY30, compared with Rs1 lakh crore in FY21, implying an annual growth rate of 14 per cent. This could open an operating profit pool of around Rs26,000 crore in FY30 from a mere Rs5,100 crore seen in FY21 for online resellers. 

According to a Citigroup assessment, the transactions in the used vehicle space have a GMV of around $119 billion and with the associated value-added service, the total TAM is expected to be $225 billion. This potentially opens up a $10 billion revenue opportunity for online auto resellers. India’s used-car to new-car sales ratio is expected to rise from 1.6x in 2020 to 1.75x by FY26 – resulting in an 8 per cent growth in the used-car market compared with a 6 per cent growth in the new car market, according to the Citi forecast.

The biggest moat of the company is its data; it has a database for more than five million vehicles, which will provide it an edge over its peers. “We have a lead time of around five years as compared with our peers if they turn totally towards e-commerce, thanks to a repository of data for vehicle health and customer demand that can’t be acquired by the monetary power of private equity capital,” says Aggarwal.

Valuation picture

Droom was valued at $1.2 billion when it completed the last round of fund raising in the early part of 2021, with an investment of about $90 million. The monthly sales run-rate of Droom is estimated to be around 17,000-18,000 vehicles by the end of FY22, compared with 10,000-11,000 at the beginning of the last fiscal.

According to DHRP, Droom had 238,105 vehicles listed on its platform and it sold 45,445 in FY21; this translated into a revenue of Rs125 crore in the same period. With volumes improving, the company’s profitability has been consistently improving. The EBITDA to GMV was 2.08 per cent in FY19, which narrowed to 1.09 per cent in the first quarter of FY22, according to data from the DHRP.

With monthly sales volume run-rate sustaining north of 17,000 vehicles a month and operating leverage started to kick-in, analysts are forecasting the ratio of EBITDA to GMV turning positive in the current year. Droom aspires to become the Indian version of Carvana – one of the largest online used vehicle companies in the US, which had a revenue of $12.8 billion in 2021.

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