Daybreak - Cars24 is turning into a full-blown fintech. Its core business is taking a backseat.

Episode Date: August 6, 2024

The last nine years have been quite a wild ride for Cars24. It has gone from being a consumer-to-business auction platform for dealers to buy used cars, to becoming a consumer-to-consumer marketplace for used cars. It has seen its fair share of highs and lows along the way. Off late, once again, the business has been floundering. But Cars24 is dealing with it by undergoing its most intense and unexpected makeover yet. It seems to be transforming into a full-blown fintech. The startup got a non-bank license  to finance used cars half a decade ago. Back then, its financing arm was meant to be a lever to sell more cars. But now it is much more than that. Tune in. 

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. The last nine years have been quite a wild ride for Cars 24. It's gone from being a consumer to business auction platform for dealers to buy used cars to eventually becoming a full-blown consumer to consumer marketplace for used cars. And along the world,

way, it's seen its fair share of highs and lows. Now, off late, once again, the business has been floundering. But Cast 24 is dealing with it in the most characteristically cast 24 way by undergoing yet another makeover. But this one may be its most intense one yet. Cast 24 seems to be transforming into a full-blown fintech. It does help that the company is backed by some heavyweight investors and with them back, backing it up, the startup is all set to launch a new brand, Loans 24.

You see, the startup got a non-bank license to finance used cars about half a decade ago. But back then, its financing arm was meant to be a lever to sell more cars. Now, it is so much more than that. It's digging deeper and really taking things to the next level. So with Loans 24, it'll offer a whole gamut of financial products, including personal loans and loan. secured against used cars. But here's the thing.

Used car financing is complicated and very often messy. Generally, banks have had a concern about the space because buyers typically have a higher risk profile, meaning cases of default are pretty common. We'll get into why later on in this episode. But what you need to know now is that Cars 24 is convinced it will be able to manage the risks because of its deep understanding of the used car industry.

Apart from becoming a one-stop player, amping up ancillary businesses like this one is how the company plans to drive up profits. So it's going all out. It's managed to strike up partnerships with some titans in the non-banking sector like Bajajaj finance. It also hopes it will give it the edge that it needs

in a pretty competitive market where it's up against the likes of spinning and room. not to mention automakers used car divisions like Maruti Suzuki True Value and Mahindra first choice wheels. This is crucial because currently at a group level, Cars 24 is neck deep in losses. The company believes that its non-bank arm will play a big role in turning things around. So far, its bet seems to be paying off because it has managed to make a neat profit of about 18 crore rupees for the 2024 fiscal. It may not be the biggest amount, but it could really help Cars 24 with its ambitious mission to go public. It still has a long way to go.

But this is a journey Cars 24 is ready for, even at the cost of its core business, buying and selling used cars. Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahil Filippos and I'll be joining Snikta Sharma every week to bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 7th of August. Back in 2019, there were a lot of big changes taking place at Cast 24. It finally set up its financing arm. It started out as a platform for dealers who were struggling to secure loans

due to their cash-heavy operations and lack of credit history. Simultaneously, its car marketplace was transitioning from C-2-B to C-2-C. It worked out well for the company because it meant it could cross-sell financing to its own customers. This is where the seed was sown. It was a huge opportunity for car 24. It recognised a massive grey space in the used car loan segment. You see, if you wanted to get a loan to purchase a used car, in all likelihood the bank you would approach would sanction a massive loan amount.

That's because to determine the valuation of a used car, banks usually depend on a third-party evaluation report. And very often, they overvalue the used car. banks are also usually hesitant to issue loans for used cars because of the high risk involved. Basically, banks believe that people who purchase a used car can't afford a new car, so their credit score will likely be of a lower grade. The assumption is that they will default on payments. Therefore, to mitigate the risk, they charge higher interest rates,

because in case of defaults, banks won't be able to recover the loss, even if they were to repossess the car. Now, this is where Cars 24 sees an opportunity. A spokesperson of the company explained it to the Ken. They said that the company's expertise and deep understanding of car valuations

and their depreciation over the loan tenure allows it to better assess the true value and risk of the collateral. So, Cast 24's average loan ticket is about 5 lakh rupees with interest rates ranging from 10.5 to 19% depending

on the customer's risk profile. To grow sales, the company was depending a lot more on its own financing unit. But that proved to be a can of worms that resulted in a hit to its loan books as well as to its partnerships. More on that in the next segment. When Cast 24 was just setting up its non-bank business and finding its fate, it was able to strike up partnerships with several established players. So Bajaj finance, Poonawala FinCorp, ICICI Bank and Piramal Finance. There was a fair bit of churn along the way, of course,

but Bajaj and Punawala eventually proved to be their strongest partners, taking care of a majority of the lending. Eventually, over time, the business grew and Cast 24 was able to start lending from its own books. That may not have been the best decision, however, because as more and more customers started defaulting on loan payments, the company started losing credibility with its lending partners. customers would pay on time for about 5 to 6 months and then they would start delaying or defaulting on payments.

Executive said that to build its loan book, the business team was taking on more risk than necessary. So they were doing crazy things like giving 100% loan to value, meaning covering the entire cost of the vehicle, which is usually a deal only someone with a fantastic credit score looking to take a loan for a new car could swing. They were also increasing the loan tenure significantly. in some cases from four to five years to six to seven years.

In the process, its partnerships were getting affected. The company's system to allocate loan leads to different partners also didn't help matters. You see, Bajaj always had first pick. That's because the company had something called a co-lending model where the income was shared and the liability was completely on Bajar's books. With other partners, both income and risk were shared. That also meant that Bajajin invariably got the cream of the crop, while the loans that CAS 24 took on its own books were of subprime quality.

In the process, other partners like the Punawala's, for instance, felt like they were getting the stepchild treatment. The tension resulted in Punawala and CAS 24 eventually halting their partnership in used car financing over the past six months. Although, CAS 24 will still pass on personal loans to Punawala under the Lones 24 project. despite the hurdles CAST 24 charged on with its financing dreams.

According to one executive, the company was approving 70 to 80% of the loan requests coming its way. A spokesperson of the company refused that claim, saying only 50% loans were approved. But that doesn't change how the company's loan book is fairing. So it had to change strategies. Stay tuned. Since 2023, CAST 24 has been in crisis mode

trying to fix its loan books. It has changed the way it hands out loans significantly. Initially, its main metric was the share of used card buyers who were opting for financing for Cast 24. But now, the risk team is being more discerning and taking on projects that will help it identify higher risk profiles. It then adjusts loan parameters for those customers. But while it was going all out with its financing business,

its core business has taken a backseat. The signs of its struggling sales became visible in March 22, when Cars 24 sales had been stagnant at around 5,000 cars a month for the past six months. This is also why the company's appetite for risk has significantly come down. This, despite the fact that the used car segment really had its moment post-COVID. VCs were infusing a great deal of money at crazy valuations trying to cash in on that wave. But the asset-heavy full-stack model and the lack of repeat business meant that the unit economics have proven difficult to turn around.

So even after all that experimentation, Cast 24 is still facing a tough fight, both from organised players as well as the unorganized dealer market. The bottom line is, before getting ahead of itself in the non-back space and in the marketplace, it needs to get its core business in order. Daybreak is produced from the newsroom of the Ken India's first subscriber-focused business news platform,

What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's, produced by me Snikda Sharma and edited by Rajiv Sien.