Circa 2005. A newcomer to Mumbai steps out of Chhatrapati Shivaji Airport to be greeted by a vast bank of black-and-yellow taxis. Any thoughts of an easy ride home, though, are quickly dispelled — the drivers refuse to go by the meter, which, in any case, is likely to be rigged. There is little point in rejecting one cabbie and moving on to another: they are part of a cartel that expects compensation for having waited for passengers. With luggage in hand and the clock ticking, the traveller gives in without too much fuss, knowing all the while he’s being taken for a ride — literally.
Fast forward nearly a decade. After collecting your luggage from the carousel, you head to the counters near the departure gate and ask for a car to your destination. Within minutes of stepping out of the terminal, a cab draws up, the driver politely loads your bags into the boot, the air-conditioner is turned on and you get a printed receipt at the end of your GPS-guided journey. Welcome to the world of radio taxis.
This isn’t a new business — call taxis (also called fleet or radio taxis) have been around since the turn of the millennium in southern cities like Chennai, Bengaluru and Hyderabad. But it was Meru, which launched in Mumbai in 2006, that really moved the business into high gear. Now the megapolis alone has approximately 5,000 such cabs from four brands, and similar services have sprung up not only in metros but also in smaller cities such as Lucknow, Ludhiana, Patna and Raipur. Private equity (PE) has already displayed its interest in this growing business and everybody seems to be in expansion mode. Just what is driving this growth?
Revving up
Certainly, the math is in favour of radio taxis. Sample this: the EMI on a sedan can be ₹12,000-15,000, a driver’s salary is upward of ₹10,000 a month, while petrol costs for a 40-km commute is upward of ₹250 daily. That’s about ₹30,000 a month and it doesn’t include parking and vehicle maintenance charges. A 40-km trip in a radio taxi, in contrast, costs about ₹800 (most operators across cities charge a uniform ₹20 per km after the first km of travel), which works out to just ₹16,000 a month. Sure, conditions apply — bookings need to be made in advance and last-minute cancellations aren’t unheard-of. But all the evidence points to a growing demand for these services. The market is estimated at just over ₹2,500 crore, growing at 15% a year. Of the 480,000 taxis on Indian roads, only 15,000 are radio cabs — and estimates suggest that even 30,000 fleet taxis will be barely enough.
Currently, the numbers are nowhere close to that. Meru, Mumbai’s first radio taxi service, started with just 45 cars and now operates 5,600 cars across four cities (Delhi, Mumbai, Bengaluru and Hyderabad). Mega Cabs, which has operations in seven cities, has 2,800 cars, while Easy Cab runs 3,000 radio taxis in four cities. Newcomer Tab Cab has 2,800 taxis in Mumbai, while smaller players such as Priyadarshini and Viira collectively account for just over 60 cars in the city. Flash Cabs in Lucknow runs 20 cars while Pune’s Wings Radio Cabs has a fleet of 50 cabs.
Those numbers are set to grow. Kunal Lalani, chairman of Mega Cabs, says the company will have 4,500 vehicles by end-June while Jagdish Purohit, managing director of Tab Cab, declares his fleet will grow to 4,000 cabs by December after which the company will launch services in Delhi and Bengaluru. Meru, meanwhile, will add another 1,000 vehicles to take the total to 6,600 (see: In high gear). And Shashank Agarwal, CEO of Flash Cabs, which rolled out services in Lucknow in November 2012, is already talking of doubling fleet size to 40 by end-April. “There is lack of awareness but the number of transactions is increasing rapidly, indicating the possibility of fast growth going forward,” he predicts.
In high gear
All radio cab operators are expanding their fleet
Indeed, increasingly, tier 2 cities are also showing up on the radar of radio taxis. Carzonrent founder Rajiv K Vij, whose company runs Easy Cabs, points out that there is potential for significant growth in cities such as Chandigarh, Jaipur, Ahmedabad, Visakhapatnam, Bhubaneswar and Ranchi, among others. “There is financial prosperity, high usage of automobiles and many premium hotels are opening up in these places. Moreover, corporate customers are moving to these cities, airports are being renovated and these will become important points for car rental services,” he lists.
Lalani of Mega Cabs agrees. “The ailments of metros plague smaller cities too. There are traffic nightmares, it is not easy to get drivers and cost-benefit analysis favours renting a car over owning one,” he points out.
Limited partnership
How does the fleet taxi business work? In Delhi, operators can get a permit for by paying just ₹4,000. Those permits are hard to come by in Mumbai — issue of new permits was halted in 1997, citing the large number of taxis already on the roads. However, operators such as Meru, Mega and Easy Cabs have grown their fleets in the city either by persuading black-and-yellow cabbies to switch to radio cabs or taking their permits on lease for 15-20 years. The payments made range from In ₹1 lakh to over ₹2 lakh. In contrast, Tab Cab (promoted by the Nagpur-based SMS Infrastructure) started off with a bang by buying 4,000 permits during a rare auction by the Maharashtra state transport department, paying a staggering ₹2.61 lakh per permit. (Auctions of permits aren’t a regular event; even now, the department is learnt to be sitting on 12,000 permits that it is yet to auction.) Other cities don’t have the legacy of a robust taxi culture, resulting in permits being available easily at much lower prices.
Even if permit prices vary widely, most operators follow a similar business model where they share revenue with drivers. “Drivers are our business partners; they pay us a fixed amount every day. They are not our employees or wagers,” points out Purohit. Typically, a vehicle starts making profits after four years. Here’s the math. All fleet owners buy vehicles on loans; for an ₹8.5-lakh sedan, the annual repayment is close to ₹2 lakh. Assuming the car runs for 300 days in a year, it earns a rental of ₹3.6 lakh annually, from which insurance, maintenance and repairs can take up to ₹1 lakh. That leaves the operator only around ₹60,000 per vehicle per year.
For drivers, being part of a radio taxi fleet works out very well. Not only are they assured business, all they have to pay for is the daily rental and fuel — all income after these deductions belongs to them. In addition, some fleets such as Tab Cab offer additional benefits, such as medical claims and monthly offs. Purohit adds that if a Tab Cab driver earns under ₹12,000 a month, the company makes up the shortfall. That’s an unlikely scenario. Most drivers do daily runs of 100 km, which earns them ₹2,000 a day. CNG costs about ₹ 2.6 a km, which means a daily outgo of ₹260; after paying that and the ₹1,200 rental, the driver is still left with about ₹540 every day. Which explains why about half the radio taxi drivers in Mumbai are switchovers from regular cabs.
Hailing investors
Not surprisingly, PE investors have already displayed their interest in the sector. The ₹300-crore Carzonrent India, which operates Easy Cabs, received its first round of PE funding from Sidbi Ventures in 2005 — ₹6 crore for a 10% stake. Subsequently, Sequoia Capital pumped in $6 million in 2006 and in 2011, the company raised ₹36 crore in a third round of PE funding from BTS Investment Advisors. Today, PE firms hold more than 30% in the company. And Vij continues to be upbeat on the potential. “The model is very scalable. We will add 15,000 more radio taxis by FY16,” he says. “There is scope for much more.”
That’s a thought echoed by Pramod Kabra, partner at India Value Fund (IVF), which invested ₹50 crore in Meru Cabs in December 2006 and an undisclosed sum (said to be ₹160 crore) after that. IVF now owns 85% of the company. “We like to invest in companies or segments where leaders have not yet emerged and the growth potential is huge. What has happened in London and Singapore [the development of a robust radio taxi system] can happen here too and we believe Meru is well placed to capture the market,” he points out. Without sharing exact numbers, he adds that Meru will have made a net profit on a topline of ₹180 crore in FY13 — the first year it will show a profit. “Three cities [barring Mumbai] give us 20% return on capital employed,” he says, referring to the operator’s presence in Delhi, Bengaluru and Hyderabad.
That’s a telling exclusion. Without exception, all operators believe the radio taxi business has scope for great growth. “Mumbai has a taxi culture, unlike Delhi or Bengaluru where autos are preferred. We have the advantage of positive legacy here and the numbers will continue to grow,” says IVF’s Kabra. Right now, though, the numbers for Mumbai — the biggest market for taxis, given its role as the financial capital of the country as well as regulations that restrict autorickshaws to the suburbs — are hardly encouraging.
Potholes in Mumbai
No radio taxi player is making money in Mumbai, the city with the highest number of radio taxis and trips — nearly 18,000 a day. “Mumbai has been giving us negative return on capital employed for the past five years,” admits Siddharth Pahwa, CEO of Meru Cabs. Radio taxi owners point out three factors behind the lack of profitability in Mumbai.
First, until September 2010, the radio taxi fare as set by the state government was a low ₹15 per km even though it was ₹20 in other cities; the rate in Mumbai was hiked to ₹20 only in November 2012. Second, the airport in Mumbai is in the middle of the city, so travel from the suburbs to the airport doesn’t really run up the meter as much as it does in Delhi or Bengaluru, where the airport is still in the outskirts. Third, poor road conditions and high corrosion levels increase repair costs and, therefore, operating costs in Mumbai.
There’s also a political angle, although no one talks about it on record. Some radio taxi businesses are backed by politicians and are seen as exempt from the woes afflicting other players. Meanwhile, there’s a new regulation according to which an individual has to be a resident of Maharashtra for at least 15 years to be eligible for a cab driving permit. It’s a vote bank-pleasing move that effectively bars all recent immigrants, who have so far been making up the bulk of taxi drivers in the city. Which means there’s now an acute shortage of fleet taxi drivers in Mumbai.
Operators have also, at various points in time, faced opposition from regular taxi drivers’ unions, which have seen their numbers reducing as drivers opted for radio cabs. While all operators have disallowed the forming of unions in their companies, Meru has been plagued by frequent strikes by drivers since its inception. The last strike at the company lasted 18 days in February, and saw the company addressing customers through print and social media, alleging it was the victim of a ploy to lure away its drivers. “We have never recognised or derecognised any union. But people can bring any organisation to a standstill,” says Pahwa.
As it is, the consensus is that in the long run, not more than two or three large operators will survive in the radio taxi market. “This is an operationally challenging and capex-heavy business,” says Pahwa. “Over time, large players are able to build network efficiencies while small players get left out. And that is when consolidation starts.”
But that’s still some time away. Right now, fleet cabs are still the most practical and economical for many corporates and professionals in big cities — and increasingly, in small towns as well. In the past one year alone, radio taxi services have been launched in Raipur (Eco Cabs), Lucknow (Flash Cabs), Nagpur (Wings Radio Cabs) and Patna (Mauryan Cabs). Looks like nobody will be lifting their foot off the accelerator any time soon.
