Turning the corner

Summary: Popular Vehicles suffered as weak auto demand and heavy fixed costs triggered negative operating leverage. Now, improving volumes, lower discounting and tighter inventory hint at a potential turnaround. The real test will be whether profitability can sustain through the next slowdown. Losses from last year onwards have rendered Popular Vehicles’ stock rather unpopular. Its investors have been left disappointed for most part of its nearly two-year journey since listing, as the auto dealership battles an industry slowdown. But things are looking up. And the company could be stepping into a meaningful rebound. To understand how, it’s important to first look at what’s been lagging it so far. Painful economics The losses are mostly due to the nature of the business itself. Dealership economics can be brutal. Popular Vehicles earns modest margins by selling new vehicles, pre-owned cars, spare parts and services. Low margins because it is a business where pricing power is limited, differentiation is minimal and competition is intense. The business runs on volumes, tight inventory control and disciplined costs, not on brand strength or product uniqueness. So when demand is healthy, the model delivers acceptable returns. When it softens, even slightly, the downside can be swift. That downside surfaced soon after its listing. As automobile d