Making of an Indian MNC

By the end of the current fiscal (2009-10) its revenues would have grown six times—from Rs 168.60 crore in 2005-06 to Rs 956.40 crore—a compounded annual growth rate of 41per cent over the last five years. In the same period it has forged four joint ventures (JVs) and an acquisition abroad. This is in addition to two JVs at home. Today, it has operations in the US, UK, Spain, Germany and Thailand, besides India. Over the next two years, it expects to become a truly global logistics service provider in the auto vertical with revenues topping Rs 2,000 crore. Yet, to describe all this as a dream run would be an understatement for TVS Logistics Services Ltd. (TVSL ), a new kid on the logistics block.

Hived off as a separate company in 2004 (it was earlier a division of TVS and Sons, the parent company of the $3.6-billion TVS Group), TVSL's rapid growth is due to its unique business model which has turned existing practices in the logistics industry on its head. To begin with, it decided to focus only on one vertical, the auto industry, despite the fact that the sector is a logistical nightmare—it requires handling inventories of hundreds of non-uniform components and offers the lowest possible yield per kg. There are several reasons behind this decision.

The TVS Group is a pioneer in auto component manufacturing, and over the years its operations have grown to include manufacture of two-and-three wheelers, distribution and sourcing of components and transportation. "In a way, the domain knowledge was available in-house. We understood the auto industry very well and were best positioned to offer innovative and tailor-made solutions," says R. Dinesh, Managing Director, TVSL.

The Model...

Focus on just the auto sector. Opt for a non-asset model. The company does not own a single truck or a warehouse. Offer plug and play solutions. Aggressive global forays through joint ventures and acquisitions.

...And its Advantages

Strong in-house domain knowledge enabled TVSL to offer innovative solutions to global auto majors. The non-asset model helped TVSL scale up fast across the world, which would otherwise have been slower. It ramped up client acquisition by offering clients the option to choose the services they wanted. Its faster global rollout gave it an edge at a time when India is becoming the sourcing hub for auto majors.

Also, the fast-growing auto industry presented a huge potential— India is the largest three-wheeler and tractor producer, second-largest twowheeler manufacturer, fourth-largest manufacturer of commercial vehicles and ninth-largest car market. Exports of auto components have crossed $4 billion in 2009 and is set to touch $25 billion by 2016 as India becomes the global sourcing hub for components.

Most important, about 4-7 per cent of the auto industry's turnover is spent on logistics services. "We believed that there was enough wastage in the system. By working towards removing the wastage, we were sure that we could offer cost-effective solutions to our clients," says S. Ravichandran, President, TVSL.

One such innovative solution endeared the company to car manufacturers in India and abroad. Typically, 150-200 consignments are required for a day's production of cars. This would mean 200 bills a day and 5,000 a month. TVSL devised a system whereby it could deliver all the parts that a car requires and bill the manufacturer on a "per car basis". This simplified billing: One monthly bill instead of 5,000. which resulted in significant savings in the manufacturers' back-end operations.

"Most important, this process converted logistics expense from being a fixed cost, as was the case earlier, to a variable cost," points out Ravichandran. Today, TVSL's clients include global majors such as Cummins, JCB, Caterpillar, Ford, John Deere and New Holland, apart from Indian companies such as Tata Motors, Mahindra  and Mahindra, Ashok Leyland, Eicher and L andT Komatsu. The share of other TVS Group businesses has been dropping steadily from 55 per cent in 2004-05 and is expected to be just 15 per cent by the end of the 2009-10 financial year.

Non-Asset Model
TVSL decided to reap the full benefit of being a late starter by opting for a non-asset model—the only logistics company in India to do so. Typically, logistics players own 20-30 per cent of the assets, be it trucks or warehouses. TVSL runs 250 trucks at any given time of the day and maintains over 8.58 lakh square feet of warehouses across the country, but does not own any of these. "If the company owns an asset, it needs to be utilised fully. At the same time, the asset that it deploys should add value to the customer. These two factors, at most times, are mutually exclusive.

By not owning any asset, TVSL creates an infrastructure that best suits the clients. There is no pressure to use up our asset," explains Ravichandran. According to the company, the non-asset model helps it to offer the best solution to its clients. It also enables a faster scale up as it speeds up customer acquisition and is less capital intensive. For instance, Transport Corporation of India (TCI), a clear market leader in the Indian logistics industry, took more than 50 years to achieve a turnover of Rs 1,300 crore with its "light to medium asset base".

Its investment in fixed assets stood at Rs 413 crore in 2008-09 against a turnover of Rs 1,304 crore. In comparison, TVSL'S investment will be Rs 85 crore against a projected revenue of Rs 956 crore in 2009-10 . Margins, though, are definitely lower in a non-asset model. "When you offer the best solutions and generate significant value to your customers, they are more than happy to allow us to charge a premium and that way we make up for not owning any assets," says Dinesh.

TVSL has also structured its end-toend solutions into a bouquet of services, taking into account the industry reality. The Indian logistics sector, estimated to be worth $125 billion (Rs 5.75 lakh crore), is still in its infancy. Whereas a good chunk of transportation and warehousing needs are outsourced, value-added services such as inventory management are rarely contracted out.

"Every customer has a perception of the supply chain. Some want to outsource the entire chain but many prefer to retain aspects that they consider are an important part of their supply chain. By offering a bouquet of services the clients get to choose what they want. Once they are satisfied with our services, they get enough confidence to outsource more services," explains Ravichandran. This model has helped TVSL to open up new clients and then expand the services by delivering value for money.

Expansion via JVs
While most other industry players have opened offices in various countries and outsourced the operations there, TVSL has taken the route of JVs and acquisitions for overseas expansion. This enabled a faster rollout of operations due to readymade infrastructure, customer access and management bandwidth.

The company has set up operations in the US, UK, Spain, Germany and Thailand through JVs. Last year, the company made its first big acquisition— Multipart Holding Limited, UK, an after-market logistics service provider with a strong client base in automotive and defence sectors and revenues of Rs 475 crore—for an undisclosed amount. Multipart has 300 employees and 6 lakh square feet of warehouse space across four locations in the UK.

In a way, TVSL's approach to business so far has been different not only from other industry players but also from the other TVS Group companies. TVS Group, as is well known, prefers a measured and sustained pace of growth. TVSL, on the other hand, has been on a fast-paced growth aided by a JV/acquisition blitzkrieg. To fund TVSL's rapid growth Rs 100 crore was raised from Goldman Sachs in 2008—the first ever private equity investment in a TVS Group company. "The business demands that we grow at a fairly aggressive pace. We thus equated our approach not only with the multinational companies in the logistics industry but also with TVS' unique way of doing business," explains Dinesh.

In fact, sticking to its core competence, a strong customer focus and continuous improvements are some of the TVS values in TVSL, which, the company claims, has ensured that it did not lose a single customer since inception. "The uniqueness of TVSL lies in its ability to scale up rapidly and garner large businesses without having to employ large capital. The JV model catapulted the company into the global scene quite rapidly. Its ability to offer flexible solutions and span significant areas internationally have been the key to growth," sums up Suresh Krishna, Chairman, TVSL.

The Path Ahead
Whether TVSL should continue its focus on the auto vertical and expand further overseas or diversify its services for other industries in India was a dilemma that had been occupying the minds of the TVSL brass for many months. "We will do a bit of both," reveals Dinesh. TVSL hopes to become a global player in the auto vertical by expanding its operations into Brazil, Indonesia and China. "We are still small in every country we are in. We are looking for more acquisitions in Europe and the US, as well as at home. Besides, we want to leverage the UK acquisition and grow faster in Europe," he adds.

In India, TVSL plans to expand its services to sectors that have discreet component manufacturing such as telecom, engineering products, etc. "We are talking to a few clients and testing waters," says Dinesh. For him the biggest challenge at home is to continuously improve the quality levels as competition gets fierce with the entry of MNCs such as DHL, TNT and Schenker. He is confident that TVSL can maintain its growth rates. In fact, the company is readying for an IPO. Says Dinesh, "It will be anytime after 2011. It is too tempting to delay it past 2012. That will be the best period for TVSL."