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Ashok Leyland’s Avia acquisition: Our view - Views on News from Equitymaster
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Ashok Leyland’s Avia acquisition: Our view
Jul 20, 2006

Ashok Leyland, India’s second largest CV (commercial vehicle) manufacturer announced that it has signed a framework agreement to buy the truck unit of Avia AS, a Czech Republic based company. While the financial details of the deal have not been spelled out, let us try and analyze what are the gains, if any, which will accrue to Ashok Leyland, post the acquisition. About Ashok Leyland: Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles (M&HCV) in India. It ended FY06 with a 27% market share in the M&HCV segment (24% in FY05) and a marginal presence in the LCV segment (light commercial vehicles). Apart from CVs, it is also a key player in the passenger bus segment with almost 50% to 55% market share. Land Rover Leyland Investment Holdings (LRLIH) has 51% stake in the company.

About Avia AS: Based in the Czech Republic capital of Prague, Avia manufactures trucks in the 6 tonnes to 9 tonnes GVW (gross vehicle weight) range, which can be classified as medium commercial vehicle as per the classification practice followed by Indian commercial vehicle industry. The company has a capacity of 20,000 vehicles with its own paint shop and R&D facilities. It has marketing presence in Europe with primary markets being the Czech Republic, Hungary, UK, Ireland, Slovakia, Italy and Spain.

As far as its performance is concerned, Avia has been operating only at about 15% capacity utilisation over the past few years but it is expected to rise to 40% this year. Moreover, in June this year, it had to reduce its net worth to US$ 40 m from US$ 227 m owing to losses that it had accumulated from previous years (written-off completely).

Ashok Leyland’s rationale behind acquisition: Ashok Leyland has stated that the Avia acquisition will help the company in gaining a foothold in the European Union and the Eastern European markets. It will also give it a modern, international vehicle for its own light and medium commercial vehicle range in India. Further, Ashok Leyland would help Avia save material costs by outsourcing of low cost components from India and new products from Ashok Leyland would also be inducted into the Avia portfolio.

Our view: We do not view this acquisition as something that will give clear-cut benefits to Ashok Leyland. As indicated in charts below, Indian CV industry has been going through a phase where LCVs (sub 6 tonne GVW vehicles) have been outperforming their M&HCVs counterparts. The absence of such models in Avia’s portfolio is a cause of concern. However, all products of Avia are in the 6 tonne category or higher, which cannot be classified as LCVs. It remains to be seen if Avia could come out with such a product.

Moreover, the acquisition comes at a time when most of the US and European truck makers setting up capacities in the Indian market, given the slower growth in developed nations. In such a scenario, it will become difficult for Avia to grow volumes from the current levels. The capacity utilisation is likely to remain low and thus, would put pressure on margins.

Thus, the initial feelers from this deal have been not very positive. The true picture will only emerge once the acquisition price is made public and the company completes a couple of years of operation under Ashok Leyland. If one were to buy a CV company based on non-India revenues, in our view, Tata Motors is a notch above the rest. We maintain our Sell view on Ashok Leyland.

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