Volvo, Eicher reassurance on joint venture

Former's stake sale won't change commitment to venture or plans to strengthen it, say both

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A day before Volvo, the Swedish truck maker, was to partly sell its stake in Eicher Motors, investors dumped the latter's shares, forcing the stock down a little over three per cent on the BSE.

After clarification that Volvo would remain committed to its India operations, which it runs jointly with Eicher, the Delhi-based company's shares closed with a gain of one per cent on Wednesday.

Volvo bought 8.4 per cent stake in Eicher after the two companies announced a joint venture programme for setting up a new company, VE Commercial Vehicles (VECV). Eicher has 54.4 per cent of the equity and the rest is with Volvo.

Eicher's hold on VECV is important to the company as this JV generates 67 per cent of its consolidated revenue, according to its latest annual report. Royal Enfield, the premium motorcycle brand owned by Eicher, contributes 24 per cent.

Since the commencement of VECV in 2008, the two companies had invested Rs 1,800 crore in it and this was set to cumulate to Rs 2,500 crore by the end of 2014. Through the years, VECV has climbed to the third spot in the medium and heavy commercial vehicle segment (M&HCV). A series of launches in the truck and bus segments, with improvement in retail reach, has pushed its share to 11.05 per cent from the 8.6 per cent recorded before commencement of the JV operations, according to data from the Society of Indian Automobile Manufacturers. Volvo is keen to push forward this JV, to improve its footing in the Indian CV market, 82 per cent of which is with Mumbai-based Tata Motors and Chennai-based Ashok Leyland. Newcomers such as Daimler, MAN and Scania have not made significant headway.

"The Volvo Group has sold 1,270,000 shares in Eicher Motors for an amount totalling approximately SEK (Swedish kroner) 2.5 billion. The divestment of shares has no effect on ownership or the development of the longstanding joint venture, VE Commercial Vehicles," went a Volvo statement.

After the nearly Rs 1,900 crore sell-off, Volvo will retain 3.7 per cent in Eicher Motors. Reportedly, Volvo will invest the sales proceeds into strengthening its core business of heavy trucks and to further build its expansion plans in important markets, especially China.

"The share disposal will have no impact on the ownership or control of the truck and bus manufacturer, VECV in India. In recent years, VECV has made a number of major investments in product development and production, for example, a new plant for medium duty engines, a new bus plant and a new paint facility. In early 2014, Pro, a new series of Eicher trucks and buses, was introduced, adapted for the market in India and other emerging markets. India is a key market and the Volvo Group will continue to focus on developing and strengthening VECV as part of the Group’s strategy to expand in Asia and in other emerging markets," the statement added.

After being in a prolonged downcycle, the CV sector, specially the M&HCV segment, is showing signs of an upswing. Makers say discounts have moderated and enquiry levels have risen significantly since October.

Fleet owners have begun to replace their vehicles, which they have been postponing for two years.

"VECV has a unique business model that ensured that it was the only CV player in India to have remained profitable through the prolonged downturn. Both the joint venture partners are committed to nurture this further in the exciting period that lies ahead, as the CV industry looks to revive after a long downturn," stated Eicher Motors.

THE IMPORTANCE OF BEING EARNEST

• Volvo is keen to push forward this JV, to improve its footing in the Indian commercial vehicle (CV) market
• 82% of the CV market is with Mumbai-based Tata Motors and Chennai-based Ashok Leyland