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Ashok Leyland to hive-off engine unit - Views on News from Equitymaster
Ashok Leyland has chalked out plans to hive off its engine unit into a separate joint venture.
Ashok Leyland Limited (ALL) is the second largest manufacturer of medium/heavy commercial vehicles (M/HCVs) with nearly 35% market share in December 1999.
ALL is currently valuing its engine unit. Post hive-off, Iveco (of the Fiat group) will hold 51% stake in the venture. At present, Iveco is the largest shareholder in ALL.
According to a report carried by a leading financial daily, ALL managing director R Seshasayee revealed that the engine unit spin-off will ease ALL's cash flow position considerably. He also said that there was the likelihood of Iveco shifting production of a certain engine to this unit to meet its global requirements.
The capacity of the unit currently stands at 30,000 units p.a. which will be enhanced to 45,000 p.a.
The hive-off will free the company's resources for its main business - CVs. At the same time, the engine unit will get regular technical inputs from Iveco. The inputs will increase as and when Iveco begins manufacturing more and more engines at the Indian unit to meet its global requirements. Demand for the engines is expected to be strong as even New Holland (an Iveco associate) will source its engines from this unit.
However, ALL will have to buy its engines from this unit at a higher price, which will increase its cost of production, as compared to before when it used to manufacture these engines in-house. So essentially it is a trade-off for the company between hiving off the engine unit and buying from the outside, as compared to manufacturing it in-house.
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