Car Market: Ramesh Iyer on why the second-hand car market may boom

“Today used vehicles are not really very old vehicles. They are all three or two year old vehicles. So they are all well-maintained vehicles and therefore people see them as a good buy, so we definitely think the demand will remain,” he says. ramesh iyerDoctor of Medicine and CV, Mahindra Finance

How has the car business been? We’ve seen channel checks speak to a lot of pickup activity when it comes to the hatchbacks and the SUV category, in particular.
The demand for second-hand cars is very high and we see people who want to buy a second-hand car. It comes after two or three things. One, there is a delay in the availability of new vehicles, and therefore if people want a car, they may prefer to buy a second-hand car.

Second, for some of the segments, the price of new cars is very high and if the use is very limited, they may be looking for used vehicles. Demand is definitely high and supply is very weak, probably because for the entire past year, finance hasn’t reprocessed many vehicles. Therefore, they are not putting out too many vehicles to sell.

Second, with the unavailability of new vehicles, trade-in programs are slow and therefore supply has been affected. Put these two together and we think the demand will continue and is very high.

So demand is high, but in the future, do you expect demand destruction? There is inflation at play. The cost of funds will also increase. Have we already seen the surprise move from the RBI last week?

That’s why used vehicles will perform even better. If the cost goes up, the price of the vehicle will go up and people will probably think twice before investing in a new vehicle if a good second hand vehicle is available.

We find new customer segments coming in. We are seeing some of the two-wheelers graduate to smaller used vehicles. All of this is driving demand and I expect this demand to continue because price is something that people will put only if they can afford it and therefore compare the new vehicle to a used vehicle. Pre-owned vehicles today are not really very old vehicles. They are all three or two year old vehicles. So they are all well-maintained vehicles and therefore people see it as a good buy, so we definitely think the demand will remain.

What is the average ticket size for loans?
Ticket sizes are around Rs 2 lakh, 2.5 lakh, 3 lakh, maximum Rs 4-5 lakh. We are in the small segment. We are not in the luxury second hand vehicle financing segment as we do a lot of business in the semi-urban and rural markets and there the requirements are for vehicles in the Rs 2-4 lakh range.

Typically, when interest rates go up, resale financing rates go up as well; Then comes the question of affordability. How sensitive is the second-hand car market in terms of rising interest rates?
One has to look at it as the difference between the purchase rate for a new vehicle and the purchase rate for a second-hand vehicle. If the interest rate gap today is let’s say 2% or 3%, they would continue to hold, I don’t think it’s just going up the used car rate and not the new car interest rate. So that’s the first thing.

Secondly, if someone is putting up Rs 3 lakh and if the 0.5% interest were to go up, 0.5% interest on Rs 3 lakh is Rs 1500 for a year and that is not really going to decide whether one should buy or not to buy. The purchase of second hand vehicles comes from two angles; one, how good is the car and how good is the price you can negotiate for it and what is your actual use of the vehicle.

If you are going to use the vehicle for a long distance on a very regular basis, people will prefer a new vehicle because they do not want to go back to higher maintenance. Normally, second-hand vehicles have very limited use where maintenance is not very high. Therefore, my personal opinion is that a 0.5% increase in the rate should not kill the demand.

We always look at developed markets, especially the United States, to understand trends. If a trend has occurred in the US, it will come back to developing markets like India. But in the used car business, the US and developed countries have very big markets, unfortunately we don’t have such a big market.
I think one of the reasons is the availability of good cars. Only now do we have organized players trading vehicles; they restore and maintain the vehicle, they even offer an extended warranty on the vehicle. Those trends are about to arrive. Even five years ago the vehicles weren’t that well maintained, paperwork was a challenge and one wasn’t sure about RC transfers, tax implications and all that.

All that was left behind, very clearly now the documents are very clean, the vehicles are well insured and with an extended warranty. Price discovery is very good and people also don’t use the vehicle for a long time before selling it. So, the quality of the asset has gone up. I think now everything is ready for this market to really explode. Second, it has been a very urban type of market for a long time. Now we’re seeing him go deeper into the pocket.

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