TVS Logistics breaks its traditional shackles

Unlike other TVS group companies, it wants to achieve global scale through acquisitions. Will it succeed?

The $6.6-billion TVS Group, whose interest ranges from two-wheelers to finance and electronics, is widely hailed as a conservative group that believes in going slow and steady. But one group company is breaking the ranks in search for growth.

Moving away from the norm, TVS Logistics, headed by 46-year-old R Dinesh, is pursuing an aggressive acquisition strategy. The change is being spurred by TVS Logistics' ambitious growth target. By the end of the fiscal, it expects to clock a revenue of around Rs 2,500 crore, and by 2015, it wants to become a $1-billion company, mainly on the back of overseas acquisitions. The company also aiming to increase the share of inorganic growth in revenue from 25 per cent to 50 per cent by 2015.

So in recent years, TVS Logistics has been in an acquisitive mood. In 2004, it acquired UK-based CJ Components, wholeseller and distributor of commercial vehicle parts, for Rs 100 crore. It followed it up with two more acquisitions in the UK, that of Multipart Holdings in 2009 for Rs 125 crore and Rico Logistics, a same-day courier company with clients such as Dell and IBM, early this year for Rs 100 crore. Besides the UK, the company is also looking at the US and Europe to expand its footprint. In 2011, it had acquired Michigan-based Manufacturer of Equipment and Supply Company (MESCO) for Rs 50 crore.

These additions, the company says, have helped it develop new capabilities and given it access to new know-how. For instance, while Multipart Holding brought with it the know-how in management of aftermarket warehouses or meeting the requirement of dealers by maintaining an inventory of spares, MESCO has added core competence in the tool manufacturing supply chain and Rico Logistics has provided the company with rapid delivery and response system that feeds urgent requirements for technology and auto verticals.

Double gains
More important, the overseas acquisitions have helped TVS Logistics gain new clients and generate steady revenue streams. For instance, with Rico, the company has got access to customers such as BMW, Siemens and Coco-Cola, who were important customers of the US company.

Rico has also added new verticals like IT and telecom and equipment products to the company's portfolio. The strategy is paying off. In five years, TVS Logistics has reduced its dependence on its group companies from 48 per cent to 28 per cent now. The company posted a revenue of Rs 1,800 crore in 2011-12.

The capabilities gained through overseas acquisitions are also likely to help its India plans. It is already thinking of replicating Multipart's aftermarket warehouse model in India after the roll-out of the unified tax regime or GST. According to credit rating agency ICRA, acquisitions are expected to support the company in the coming years by providing it the benefit of scale in countries across the world.

As the GDP grows, logistics also has to grow, says Dinesh, the company's managing director. "Today, the biggest problem is wastage in the supply chain, which calls for good logistics players."

Bridging the gap through acquisitions, though, requires a lot of capital. So far, the closely-held company has depended heavily on private equity funding to fuel its growth plans. It was the first among its group companies to go for PE funding. It raised Rs 100 crore from Goldman Sachs in 2008 and another Rs 242.2 crore from US-based KKR and Co. in 2012.

"If you are growing at 10-20 per cent a year, definitely there is a requirement for adequate capital and private equity is one of the major avenues for funds. Otherwise, companies have to look at IPO," he says.

Banking on PE funding also has a strategic cause. Along with the money, they also bring networking capabilities and access to unexplored markets and new customers. "KKR (US-based PE firm) did open doors for the company in new countries, but one has to remember that PEs can only place us in front of the opportunities and you have to use your capabilities to grab the opportunity," says Dinesh.

For now, finance is not an obstacle for the company and it seems well-funded to pursue its acquisition strategy. For more funding, it is also looking at an initial public offering in 2015-16. According to ICRA, the second round of PE infusion of Rs 194 crore has improved its capital structure. The funds will be used for its large inorganic growth plans.

"We will make two more acquisitions (by end March) and this will be in Asia," says Dinesh. Its acquisitions targets are mostly promoter-led companies with a favourable customer profile and know-how, but which are struggling for funds.

Dinesh says all his acquisitions so far are profitable. The company has been growing ahead of the industry with 10 to 15 per cent growth year- on-year. The industry has reported only around 2 per cent growth.

However, going forward there might be some headwinds for the company. According to an ICRA report, heavy concentration on the automotive segment exposes the company to industry cyclicality. Dinesh says the company did not grow to the extent it wanted to due to the slowdown in the sector in 2011-12, but in the future the effects will be cushioned by its diversified portfolio.

ICRA also says geographically dispersed operations might present synergistic challenges. The report also flags modest margins, low accruals and low return indicators owing to its large investment portfolio, which is yet to yield results, as concerns. Also, funding its inorganic growth plans through debt could stretch its balance sheet in the future. Dinesh, however, says the biggest challenge for is that of human resources. "Developing talented people at the executive level is a challenge."