Automobiles Check 1

Tata Motors’ likely acquisition of Swaraj Mazda
will be a win-win for both the companies. While Tata Motors will, in one shot, become a dominant
player in the intermediate commercial vehicles (ICVs) segment that straddles between the medium and heavy commercial segment and LCVs, Swaraj Mazda will have access to one of the best management and vendor pools in the automobile industry.

Chandigarh-based Swaraj Mazda is India’s leading manufacturer of commercial vehicles in the 5.5-10.5-tonne category. The company is also India’s largest supplier of customised buses and trucks, with nearly 95 models and variants on offer. With a major presence in the national capital region (NCR), Swaraj Mazda also has one of the widest portfolios of CNG power buses and trucks used on intra-city routes.

Tata Motors, on the other hand, is a market leader in all segments of CVs except ICVs. However, given its huge volumes and multiple manufacturing units, the company is a mass manufacturer of standard models with little customisation. The acquisition of Swaraj Mazda will prove handy in tapping the market for customised vehicles, which despite offering higher margins are best handled by a small company rather than a monolith like Tata Motors.

Swaraj Mazda’s operational expertise is, however, undone by its poor quality of management. This is visible in its inadequate operating cash flows and working capital woes. It takes nearly four months for the company to get payments from its dealers and customers, but it has to make payments to vendors and suppliers in around two-and-a-half months on an average.

This creates cash flow problems for the company and forces it to make short-term borrowings to sustain operations. Industry observers attribute it to the repeated change in the company’s top management in the past few years.

Tata Motors runs one of the most lean operations in the industry, with negative working capital and strong operating cash flows. The company can easily transplant its best practices in Swaraj Mazda, and make its operations equally efficient. According to ET Intelligence Group estimates, bringing Swaraj Mazda operations at par with Tata Motors will generate annual operating cash flows of Rs 100 crore, besides savings on interest cost, as Swaraj Mazda will no longer need to raise short-term loans.

Given the complementarity between the product portfolio of the two companies, the acquisition will make Tata Motors an even bigger player in the domestic market and improve its pricing power. This is significant, as the commercial vehicle market is set to get crowded with most international commercial vehicle majors in various stages of launching their products in India. This includes Navistar, USA, Hino, Japan, Volkswagen, General Motors and Hyundai. Besides, global truck majors such as Mercedes, Volvo and MAN, Germany have already launched their products in India.