Exploring a new route

India's largest truck maker Tata Motors came up trumps when it launched the Ace, a one tonner, in June 2005.The light commercial vehicle was a runaway success and has clocked sales of over one lakh units since its launch.

Now, Chennai-based Ashok Leyland(AL) wants to be in the LCV space too. About a month back the Rs 7,168 crore firm inked an agreement with Japanese auto major Nissan Motor to develop, produce and market an LCV. Three joint venture firms will be set up to make powertrains, develop technology and the vehicles; volumes in the medium term should be about 100,000 units.

To be sure, there's a market for LCVs. The market grew at a furious 34 per cent in 2006-07 though the pace has slackened somewhat to 16 per cent this year. According to Huzaifa Suratwala, analyst with Networth Broking, the market should grow at around 11-12 per cent over the next three years on the base of 1.92 lakh vehicles (goods and passenger)rolled out in 2006-07. With the country's roadways fast moving towards the hub-and-spoke system, large trucks will not be allowed to come into cities." The special economic zones and the retail boom will fuel demand for lighter trucks that can ply within the cities," says

S P Singh, senior fellow, Foundation for Transport Research & Training. Singh believes the market is becoming too important to be ignored. However, the space is already crowded with about half a dozen players and AL will possibly roll out its first vehicle only sometime in 2010. Existing players are upgrading their products""for instance, Mahindra & Mahindra plans a new range of CVs with International Truck and Engine Corporation.

Nonetheless, for AL, an LCV will plug the gap in its product range. "We plan to cater to the entire market and LCVs will be a major part of our portfolio," explains Prabal Banerji, CFO for the Hinduja Group, that has controlling a stake in AL. Also, as Ashutosh Goel, auto analyst at Edelweiss Securities, points out, the LCV space is possibly less cyclical than the M&HCV segment and it was high time AL made an entry. Adds Ramnath S, vice-president, SSKI Securities," The collaboration with Nissan will mean access to its engineering and technological expertise."

And that could give AL an edge over the competition. Nissan's current range, which boasts five models, comprises Kubistar that can handle a payload of 525 to 800 kg and New Cabstar that can take a payload of 1.8 tonnes. Banerji doesn't rule out the possibility of AL's entry into the pick-up segment, which technically is a rung below the LCV range. SSKI's Ramnath agrees it's one of the fastest growing sub-segment. "If AL wants to scale up quickly, it might want to look at models in this category," he observes. Indeed, a major part of the rise in LCV volumes has been at the cost of three-wheeled cargo carriers (see table) and today the likes of Bajaj Auto and M&M are moving fast to cater to this segment. Adds Goel, "Because of the hub and spoke model, the mid-range (7-11 tonnes) isn't likely to do too well."

If successful, a one-tonner can be profitable too. Suratwala estimates that while Tata Motors should be making an operating profit margin (OPM) of 14 per cent on its LCV portfolio, the margin for an Ace could be even higher. However, he believes that initially AL might manage only a single digit margin till it scales up to volumes of around 5,000 vehicles a month. AL's OPM in the June quarter was 9.5 per cent. Margins may be under pressure for sometime given the costs associated with the new venture. But the investment should pay off in the long run.