Rev up for the next car rental

The fleet of rental vehicles on Mumbai streets is set to grow with more agencies foraying into the business to plug the ever-widening demand-supply gap. The new kid on the block, Aarya Cabs, has been in good company with the known faces in the circuit - Meru Cabs, Ola Cabs, Mega Cabs and Carzonrent.

A subsidiary of Ballal Jyoti Travels, Aarya started off with a fleet of 30 cars. “The demand-supply gap in Mumbai is huge. Therefore, we complement each other in this business and are not competing with other rental services,” said V Gopalakrishnan, CEO, Aarya Cabs.

While Meru has around 2,000 cars and Mega Cabs has 250, Ola does not have a fleet of its own but hires cars from private contractors. Carzonrent owns 6,500 cars across India.

“We are hoping to have 500 cars by the end of this financial year and 100 cars are already on the way,” added Gopalakrishnan. He said expanding the fleet was the main challenge before the company. “We still do not have big private investors investing in the company.”

Rental agencies like Ola cabs, which offer car rentals via partnership with car operators, operate on a wider scale in alignment with several private investors. “We do not rent out cars. We simply partner with different operators and list results and prices of different cars from different operators. For this purpose we raised money from angel investors. Shaadi.com is also an investor,” said Bhavish Aggarwal, CEO of Ola Cabs.

Carzonrent, which targets the luxury car renting segment, caters corporate business travelers from major organisations. Their only mode of revenue is rental charges for the vehicles. According to Carzonrent CEO, Rajiv Vij: “In the organised sector we have the largest market share in car rentals. Our business sustains on consistent service excellence.”

Private Equity Firms are also showing interest in these services. “We are a private equity invested company. Seqouia Capital, SIDBI Ventures and BTS advisers are part of our investors,” added Vij.

BTS India Private Equity Fund recently bought a minority sake in Carzonrent for Rs 36 crore. They said Indian public transport sector was highly fragmented and unorganised compared to western countries. “As radio taxi and cars-on-rent businesses are at a nascent stage, we expect about 30-40 per cent growth annually,” BTS had said during the deal.

India Value Fund Advisors (IVFA), one of India's premier equity, finds a steady investor in Meru Cabs. An IVFA official justifying its investment in MERU argued: “We chose this industry as it had large market opportunity; and was marked by lack of good quality and reliable service.”

The website says that the transportation landscape is evolving in India with many cities keen to promote world-class taxi services. Aligning with Meru, IVFA formulated the bid strategy for airport concessions in Bengaluru and Hyderabad, developed and implemented strategy for alternate revenues and also finalised the blueprint for a new technology.

“Companies make significant investments in technology and management overhead which require some more scale for profitability. The average investment period is usually five to eight years from investment. If it is an organised player like Hertz or Carzonrent, the profits can be very high.,” said an industry insider. Another industry professional said: “The exit route for most of these investors is either an IPO or a strategic sale. Both opportunities exist.”

Meru also has other means of revenue generation. “We also sell media space on our cabs. The media division helps advertisers reach their brands to consumers all over the cities. They generate revenue through the ads put on the doors of the cabs,” said a Meru spokesperson.

The challenges in this industry range from expanding the fleet, assuring quality services and driver relationship management. According to Gavin Dabreo Executive Vice President of Sales & Marketing of Meru: “The demand for our service has grown manifold. The key here is to sustain the quality of service. Getting drivers and quality drivers is another key challenge. Often laws push the company to take drivers from only an existing set of drivers.”

Dabreo said, to become a taxi driver in Mumbai even with Meru, the applicant should have a taxi badge ( the person should have experience in drving regular black & yellow taxis). “Pricing in the industry is not market driven. There is no linkage to the consumer price index nor is there flexibility in terms of recovery of fuel price increases.”

Mega Cabs believes fund is one of the biggest problems in Mumbai. According to Vinod Mishra, vice president of Mega Cabs: “Advertising is one source of revenue, but one cannot bank on them.” Mishra said Mega Cabs was planning to get private equity funds to invest in the company.

Future growth prospects are also challenging. Meru, for example, is planning to ramp up operations by adding 2,000 more cabs to its fleet and hiring an equal number of drivers to meet increasing consumer demand across all cities by 2012. They are also evaluating expansion of their operations in the overseas market and also to cities like Pune, Chennai and Kolkata.

Mishra of Mega Cabs said they are planning a threefold growth. “We are planning to add 100 more cars to the existing fleet by the end of August.”

Rahul Vij of Carzonrent said: “The unorganised sector will eventually be eliminated in the car rentals market; hence the growth prospects are immense. Also, more and more travel-related services like Airlines and Hotels are looking at car rentals to better package their products. The entry of Mercedes in the car leasing segment would further generate greater customer interest in the services.”