After a dip of 52.3% in net profit during the last financial year, the Chennai-based TVS Motor Company is now focussing on cutting down on transportation costs to improve margins.
With fuel prices expected to surge further in the second half of this fiscal, the company has entered into contract manufacturing, a first of its kind in the two-wheeler industry, with Kolkata-based Mahabharat Motors Manufacturing Company to cater to the eastern part of the country. Mahabharat Motors will set up a plant in Uluberia, 50 kilometres from Kolkata, at an investment of over Rs 450 crore and will roll-out one lakh units of motorcycles in June 2009.
Under the MoU, while Mahabharat Motors will assemble the agreed products as contract manufacturer, TVS Motor Company will introduce their quality control standards and assembly procedures to ensure that the quality is maintained.
According to a Mumbai-based analyst, the rising cost of raw materials, declining sales due to unavailability of finance and TVS Motors’ absence in the largest selling 125cc segment led the two-wheeler major post a sharp decline in revenues and net profit.
“In this fiscal, oil prices are expected to spoil the party further and hence the company is going in for such a tie-up, as it will reduce the transportation cost which will in turn improve its margins,” he said. TVS Motor Company posted a dip of 16.05% in total revenue at Rs 3,291 crore for the year ended March 2008 compared to 3,920 crore during 2006-07. The company’s net profit declined by 52.3% to Rs 31.77 crore, as against Rs 66.60 crore recorded last year.
“In the case of automobiles, the investment cost is huge. Hence, there has been an increasing trend of contact manufacturing and collaborative working between various automotive players to minimise losses if the project fails to pick up within a stipulated period,” adds Abdul Majeed, auto analyst and partner, Price Waterhouse.
The eastern and north-eastern part of India constitutes around 20% of TVS Motors’ revenue. With a manufacturing presence here, this figure is expected to go up to 25% within the next five years.
TVS Motor, India’s third largest three wheeler manufacturer, currently has three manufacturing facilities, one each in Tamilnadu, Karnataka, and Himachal Pradesh.