Mumbai: With state governments winning access to a Centrally administered urban funding programme to bolster road transport networks, bus makers can expect increased demand to replace ageing public bus fleets. But a more profitable opportunity resides in multi-year contracts to maintain the new vehicles.
Since last month, Delhi Transport Corporation, better known as DTC, has placed orders for 1,625 buses with Tata Motors Ltd and 875 buses with Ashok Leyland Ltd. The purchases were worth Rs2,200 crore and Rs1,180 crore, respectively, for India’s biggest bus makers.
In the yard: DTC buses lined up for repairs and maintenance at the Hasanpur depot in Uttar Pradesh. Sanjeev Verma / Hindustan Times
For the first time on such a scale, the order included contracts of Rs1,300 crore and Rs700 crore, respectively, for the two firms to maintain the low-floor buses bought by DTC and the upkeep of some of its depots.
DTC didn’t dip into the Centre’s Jawaharlal Nehru National Urban Renewal Mission, or JNNURM, for the purchases, but says it expects to soon buy 2,000 more buses, funded by the programme. Both Tata Motors and Ashok Leyland declined specific comments on the profitability of such hardware service contracts. “The objective is simply to support the vehicle owner and thereby ensure that the vehicles indeed perform as per their standards and not create a revenue stream,” a Tata Motors spokesman said.
Analysts tracking the firms and the commercial vehicles business say maintenance contracts could help boost what otherwise can be wafer-thin margins. Mahantesh Sabarad, a research analyst at Centrum Broking Ltd estimates that both Tata Motors and Ashok Leyland’s margins on maintenance are likely to be 30-35% for the 12 years of the DTC contract.
Without the maintenance contract in the DTC deal, Tata Motors’ operating margin on the bus sales would be 7-8%, says Mitul Shah, an analyst at First Global Research.
“I have a massive (team) of 4,000 people working. Frankly speaking, this (dealing with them) hasn’t been very healthy. On top of it, you are taking all kinds of risks pertaining to delays in availability of spares, servicing and upkeep of buses,” says R.K. Verma, DTC chairman.
Outsourcing maintenance would be a cheaper option for public bus transporters, which are making losses, said S. Ramnath, vice-president at IDFC-SSKI Securities Ltd.
With an increase in the electronic content in buses and higher sophistication of tools needed, it is becoming increasingly difficult for state public transporters to maintain the vehicles on their own, says Balraj Bhanot, a former director of the Automotive Research Association of India.
Still, not all state transport corporations say they will outsource maintenance. “Why should we outsource when we have a strong network of 24 service depots?” says Uttam Khobragade, general manager of Brihanmumbai Electricity and State Transportation, or BEST, which runs public bus transport services in Mumbai and it suburbs.
Andhra Pradesh has to decide on pricing of services, an executive at the state transport utility said. “We shall do it ourselves if it works out cheaper,” said Jayashankar Prasad, executive director, asset management, Andhra Pradesh State Transport Corporation, Hyderabad city zone.