Is the glass half full? Or half empty?

Jagdish Khattar, 73, managing director of Carnation Auto, would have you believe it is the former. And if you indulge him a bit, Khattar goes on to painstakingly make the case, in a way only an irrepressible entrepreneur can, that Carnation is a “true" turnaround story, where, six years after starting out, the business has returned a profit, at an operating level, in the last quarter. For the first time (Khattar won’t share the number).

There’s more to this case.

That Carnation has finally figured out what it wants to be—a hybrid. It aims to become India’s largest car inspection company plus manage a large network of franchisees, who will dabble in both used-car sales and service.

How many of them? 648 outlets in all. And growing.

“We have done in six years what others have taken over 12 years to do," says Khattar. “Carnation has turned around in record time. After many years of efforts by the team and continuous refinement, we have finally been able to establish the business model."

Perhaps.

But then, there’s the part about the glass being half empty.

On 18 December 2007, Khattar quit Maruti Suzuki India Ltd after an eight-year stint as managing director. His tenure that saw Maruti establish itself as India’s largest car company. In January 2008, he arrived on the entrepreneurial scene with Carnation Auto, with the idea of setting up multi-brand car dealerships (for new cars) and service outlets across the country. That never saw the light of day. Car makers baulked at the idea of sharing space under one roof.

In late 2008, Carnation did a pivot (start-up lingo for change in business model) and figured that its go-to-market strategy should be service—your friendly neighbourhood garage. Khattar raised money and invested heavily on setting up workshops across the country. But car manufacturers balked again and they restricted sale of spare parts in the open market. Carnation was caught unawares once again.

In 2009, in another pivot, Khattar figured that a viable business idea would be the selling of used cars, which, in turn, could become fodder for his idle facilities. So, an entire organization was created with purchase, inventory management, inspection and sales functions. The idea didn’t fly.

While Khattar went about building his business, he completely missed the online wave. This saw the rise of new players, aggregators of used-car listings. These scaled rapidly, thanks to the push from venture capital investors. It was only late last year that Khattar figured that a rethink was called for; that owning facilities was a bad idea and it would be best to take the franchise route. He also stumbled upon the car-inspection business. And voila—Carnation became an asset-light model.

Needless to say, Carnation’s numbers reflect what has come to pass. From 2009-10 to 2013-14, its cumulative losses stood at 278 crore, according to filings with the Registrar of Companies. The losses completely wiped out investments by private equity firms— 104 crore by Premji Invest and IFCI Ventures and 84 crore by Gaja Trustee Co. Pvt. Ltd.

But Khattar is unruffled. “The investors continue to support us till date and they are very much part of our journey," he says.

Mahindra First Choice Wheels and Mahindra First Choice Services—the Mahindra Group’s used-car and service businesses—are the closest rivals to Carnation and have been through a similar trajectory. The only thing that differentiates the Mahindra ventures from Carnation is a strong backing from the parent firm. While the used-car business, launched in 2008, turned profitable in 2012, the service business, also launched in 2008, has yet to turn in a profit, say officials at these firms.

Like Carnation, Mahindra also began with outlets that were owned and operated by the company and started converting them into franchises a year back. The used-car business has 517 outlets now and plans to add another 183 by the end of fiscal 2016, according to Nagendra Palle, chief executive of Mahindra First Choice Wheels.

“Buyers of used cars will always want to kick the tyre and see the car before concluding the purchase," says Palle, adding that online used-car portals will have their own space in the marketplace but will never replace physical showrooms. The service business has a more aggressive expansion plan—adding 8-10 outlets to its network of 70 outlets every month, says Y.V.S. Vijaykumar, chief executive at Mahindra First Choice Services.

The turnaround duo

At Carnation, there are two Khattars at the helm now. Kunal Khattar, 43, has joined his father in the business.

Both believe that it is the hybrid model that is the firm’s true calling. The best of both worlds—the so-called online marketplace and the asset-light franchisee business. Clearly, the marketplace model, which underpins the strategy of e-commerce firms in India and abroad, has been a huge success across all the verticals—from used cars, furniture and taxi services to grocery and home shopping.

“Now that we have restructured, we have the management bandwidth and we will focus more on the marketplace model for all the three businesses—car inspection, car service and used-car business," says Khattar junior, co-founder and vice-president at Carnation.

So how does it all work? Kunal Khattar believes that Carnation is the brand name, which will become the calling card for franchisees. They will sell used cars and service them, using Carnation for the sourcing of parts and expertise. Carnation’s engineers will go door to door and certify vehicles both for its own franchisees and for companies such as Quikr, with which it has an arrangement. To make the deal sweeter for franchisees, Carnation has partnered with 21 insurance firms, which help workshops get more accident repair and body shop jobs.

“They can’t get this on their own. It helps them increase volumes by three to five times," says Kunal Khattar. “There is a huge complementarity between used-car and service business," he says, adding that every time a second-hand car gets sold, the transaction history is captured by analytical tools, which helps the firm cross-sell other products, such as insurance and service. An average customer spends close to 35,000 a year in car solutions, which includes everything from waxing and polishing to maintenance and repair. “The idea is to stay relevant to the customer throughout the life cycle of the car," he adds.

It is another matter altogether that Khattar senior is already celebrating and doesn’t regret what has happened in the past. “India is a challenging market, that I was always aware of," he says. “I was determined to make Carnation a success because of the use case that existed. One where car owners needed a quality service provider between the authorized service station and the roadside garage. We have finally been able to achieve success."

Well, not quite.

The sceptics

People who have evaluated Carnation from close quarters don’t think much about its prospects. Primarily because Carnation falls somewhere in between two existing business models—it is neither a used-car marketplace, let’s say like a Cartrade.com, where buyers and sellers and dealers log in to trade. Nor is it a completely offline retail used-car firm like a Mahindra First Choice.

Both of them are pretty sizeable businesses. Cartrade has the most certified and non-certified listings, around 180,000 vehicles. Mahindra First Choice has a network of nearly 517 franchisees spread across 240 locations.

With its network of franchisees, it seems Carnation is working as a lead-generation firm. This can be scaled up only so much. “What stops these franchises from logging on to a portal where they will get more and better leads?" asks a competitor, who didn’t want to be named. “Enough and more dealers are on our platform already. Carnation has to decide what they want to be, a complete online marketplace or a retail model." So, is the new business model working? Yes and no.

A year back, when Hindustan Motors Ltd shuttered operations, the fate of Ashok Mittal, owner of the company’s authorized workshop and the 35-odd mechanics he employed, hung in the balance. To ensure that the 10-bay workshop remain fully utilized, Mittal became a franchisee of Carnation Auto. His investment? 2 lakh (a refundable deposit) and a monthly royalty fee of 30,000. What does he get in return? Technical support from Carnation and access to the company’s network of contacts for sourcing spares, and tie-ins with insurance firms. Mittal is gratified. He says the flow of customers has gone up and his revenue has doubled over last year.

Tiruchirappalli-based K. Kevin, however, is not as lucky. Five months after he became a franchisee of Carnation’s used-car business, he is struggling. On an average, the outlet sells four to five units a month. Kevin fears that if the sales continue to be the way they are, he will have no option but to shut shop.

Like Mittal, Kevin too paid a refundable deposit and pays a royalty fee for the use of the brand. The association with Carnation, he says, is one-sided. “I am promoting the Carnation brand but am not getting anything out of it," he says, adding that the firm has no interest in growing the business of an outlet tucked away in the southern part of the country. “I have not got a single lead from them in these five months."

Carnation’s inspection business has its fair share of issues. While the company claims that it is the No. 1 car inspection company in the country, it wouldn’t say what exactly the metrics are, except that the company has enough people to carry out 20,000 inspections a month. It is a claim that others make as well. Cartrade says it has an internal team of 150 people dedicated to carry out inspections. “All I can say is that we are the largest," says Vinay Sanghi, founder of Cartrade. “We have eight times more certified cars than any other platform."

Mahindra First Choice claims that it is India’s first online third-party inspection firm, after it launched Autoinspekt in June 2013. And that since then, it has carried out more than 150,000 inspections.

Clearly, everyone wants a slice of this opportunity. India is a large used-car market—more than 3 million used cars are sold every year. But is car inspection the next billion-dollar opportunity? Sanghi is quick to dismiss it. “At best, it is an enabler," he says. “It cannot be a big revenue-generating item in itself."

Investors in Carnation don’t seem to be worried. “Some things went wrong," says Gopal Jain, managing director of Gaja Capital. “For instance, we never saw the sluggish period in automotive coming. But we have immense faith in Jagdish. He has put everything behind this venture. Both financially and in effort. We are very confident about this."

But, will this new idea work?

“It is a case of seeing a glass half full or half empty. We see it as half full and we are quite comfortable with it," says Jain.

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