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Indian CV players: Globally competitive?
Jul 11, 2005

The composition of Indian commercial vehicle (CV) market is significantly different from that of other leading CV markets of the world. While there are a number of players in the global arena (top 10 players account for around 90% of the market), the Indian CV market is dominated by two players who account for more than 80% share. The two players are Tata Motors (more than 60% share) and Ashok Leyland (more than 20%). In this article, we shall compare these two companies with Scania, the Swedish CV major, and determine where the Indian companies are headed.

Brief Introduction
Scania:  Scania is the fourth largest manufacturer of heavy commercial vehicles (HCV) in the world. In CY04, it had a market share of around 14% in the more than 16 tonne vehicles category. It should be noted that, traditionally, almost 90% of the world CV demand has been in this category. The company has presence across the geographies with Western Europe accounting for 57% of its volumes, South America contributing 13% and Central and Eastern Europe together share 9%. Apart from the diversified geographical spread, the company’s revenue model is also well diversified when compared to Indian players (see table below).

Tata Motors:  Tata Motors is the largest Indian CV manufacturer with 64% market share in the medium and heavy commercial vehicle (M&HCV) category, and a 55% share in light commercial vehicle (LCV). It entered in the passenger car segment in FY00 and has steadily gained market share over the years. In FY05, it enjoyed a 17% market share in this segment. In FY05, Tata Motors sold 92% of its vehicles within the country.

Ashok Leyland:  Ashok Leyland is the second largest player in the CV industry in India with a 22% market share. It should be noted that it has negligible presence in the LCV segment, which is hampering its overall growth in volume terms. However, the company has recently revived its efforts to enter this segment with the launch of ‘Ecomet’. In FY05, domestic sales contributed to 88% of the total units sold by the company.

Sales mix – a snapshot
  Scania** Tata Motors* Ashok Leyland*
Vehicles 67.3% 94.3% 77.0%
Engines 1.1% 0.3% 12.0%
Used vehicles 11.8% 0.0% 0.0%
Services and others 19.8% 5.5% 11.0%
* FY05   ** CY04

As can be seen from the table below, Tata Motors has outperformed both Ashok Leyland and Scania on all major performance parameters. This is despite the fact that the company had performed poorly in FY01 due to lower demand and higher costs. In fact, it had posted a loss of Rs 5 bn in FY01. Although Scania has grown its sales at a low CAGR of 3.9% in the last four years, the company has been able to achieve this growth despite a recessionary trend in Latin America till CY02 and also despite the after effects of the September 11 attacks in the US. In fact, had it been not the geographical spread of the company, the performance would have been worse. Further, the company has been able to improve its operating profitability and reduce debt burden during this period, which has improved its earnings in difficult times.

  Tata Motors* Ashok Leyland* Scania**
Net sales (Rs m) 174,191 42,584 395,010
CAGR (last 4 years) 32.4% 22.3% 3.9%
Operating profit {Rs m) 22,337 4,229 44,241
CAGR (last 4 years) 41.5% 13.1% 22.6%
Operating margin 12.8% 9.9% 11.2%
Net profit (Rs m) 12,370 2,714 26,745
CAGR*** 103.0% 43.3% 57.3%
NPM 7.1% 6.4% 6.8%
Units 399,834 47,606 56,082
CAGR (last 4 years) 29.7% 20.3% 5.1%
* FY05   ** CY04, Swedish krona converted into Indian rupee
*** CAGR in case of Tata Motors for 3 years, for others 4 years

On the efficiency front, both the Indian companies have out performed Scania on all the parameters (see table below). Post the downturn in the Indian CV industry, the manufacturers had resorted to value engineering, low cost borrowing, total productivity management, employee rationalization, prudent working capital management, increasing automation and research and development activities, which enabled them to weed out their inefficiencies and become competitive globally. It should be noted that Scania, since operating in a developed region, has a better pricing power as compare to the Indian players, which to some extent compensates for a lower volume growth.

  Scania** Ashok Leyland* Tata Motors*
RONW 20.8% 25.0% 28.6%
ROCE 11.5% 17.0% 21.4%
Units/employee 2 4 19
Inventory days 61 42 29
Debtor days 116 34 14
Sale/NFA 2 5 5
* FY05   ** CY04

As can been from the table above, Tata Motors have stood out on all aspects. As far as the future is concerned, both Ashok Leyland and Tata Motors are aiming to de-risk their business models in terms of geographical spread as well as revenue streams. While Ashok Leyland has set a target of around 25% of its revenue from non-cyclical revenue streams like spare parts, services, and exports, Tata Motors has been entering into joint ventures and acquiring companies in different geographical areas to increase its global reach. Further, Ashok Leyland has also made a foray in the used vehicle market through its group companies. On the other hand, Tata Motors has been aiming to increase the share of financing services to achieve the dual purpose of complementing the main business and insulate itself against the downturn.

We believe that Tata Motors is better placed to capture the international markets post the acquisition of Daewoo Commercial Vehicle Company, the South Korean major with more than 20% market share in that country. Apart from this, with the merger of Tata Finance with itself, we believe that the financing business will get a major fillip, which will enable the company to improve its market share. However, one should remember that financing business is a low margin game and to that extent the return ratios will be muted. Tata Motors continues to be our preferred player from the CV segment.

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