Ashok Leyland has officially been in the commercial vehicle business for over 61 years now. During this period the management has changed ownership several times. More importantly though, what has the company achieved in this interim period? It notched up a sales turnover of 63,936 truck and bus chassis, and fully built vehicles in the latest financial year end. A decade ago it sold 32,475 vehicles. That works out to a sales increase of 97% over the decade. By any yardstick, the country’s second largest publicly listed commercial vehicle producer has not progressed all that far, especially after factoring in the point that export sales by volume, accounts for 10% of overall sales. The only impressive part of the showing is that the higher production has been achieved on an employee base which is almost unchanged. Employee strength in FY10 stood at 13,662 against employee strength of 13,489 in end FY01.That would imply a massive increase in labour productivity and perhaps even in the level of mechanization, one presumes. There was a major aberration in 2006 and 2007 when the company produced more than 83,000 trucks apiece but the company promptly fell on its stomach the following year.
A look at its innards
The company was, is, and probably will always be in the manufacture of commercial vehicle chassis. Period. The pickings on this count alone accounted for over 84% of all sales in FY10. The sales of ‘spare parts and others’ brought in 10%, with the sales of engines bringing in the balance. But, this is not to infer that the company is not a diversified entity. Spare parts and others are apparently outsourced from group affiliates and then sold. The current set up merely reflects the management’s thinking that all diversions from the main line of business should function under different hats. Different hats there are aplenty - like manufacturing a number of accessories, or, adding to the R&D effort. The list includes a small investment in an aviation company called Ashley Airways! This company by God’s grace is under liquidation.
Ashok Leyland does not believe in the concept of subsidiaries either. Subsidiaries in any case are an eyesore and are incorporated for reasons which are often very difficult to comprehend, and oftentimes have little in common with the core business objectives of the parent. Besides, the accounts of the subsidiaries have to be appended with that of the parent both in consolidated form, and also separately, the profit and loss account and balance sheet in brief of the individual entities. That is when the warts begin to show.
The fine art of incorporating dependents
So Ashok Leyland has very sensibly kept its equity holding in all its ventures at 50%, or just below this level. Even so it has long term ‘trade equity investments’ in 20 companies, 11 of who bear the Ashok Leyland name in some form or the other. Two other companies in this list bear the Hinduja stamp. It has equity stakes in another 9 companies which are labeled as ‘other than trade investments.’ Four of these bear the Ashok Leyland name, and three others in this latter list have the Hinduja implant. This listing excludes preference shares and investments in bonds in group companies. One is subsequently informed about the existence of 3 ‘fellow subsidiary’ companies, 2 of which do not even belong to either of the earlier lists. In any event, Ashok Leyland has not appended the working results of these 3 subsidiaries, hence they probably belong to a new category of subsidiaries whose year-end accounts do not have to be disclosed, or some such.
The book value of its investments in all these companies totes up to a neat Rs 3.3 bn, but do not ask about the dividend returns on its investments. But to be fair, some of the big ticket investments that it has made, such as its stake in three ventures with Nissan, and in John Deere for example, are of recent vintage, and the returns on such investments will take time to materialize.
The many inter-se transactions
But there is plenty of action elsewhere. There are transactions both of the revenue nature and capital nature in abundance with its affiliates and joint venture partners. There are assorted purchases, sales, current account advances, guarantees given, acquisition of investments of Rs 1.5 bn, and advances towards share capital of Rs 134 m. Then there are loans given of Rs 1.3 bn, and outstanding balances on loans and advances of Rs 4.6 bn - the vast bulk of which it appears was showered on overseas corporate bodies. Amazingly enough, the list includes 2 of its holding companies, and also, to ‘other associate companies’, not named. Add to this the outstanding debtor balances of Rs 400 m, financial guarantees of Rs 2.6 bn and, advances to associate companies of Rs 4.2 bn; et all. If I were to list all the inter-se transactions, the reader would probably go nuts. The entire hog of possible transactions has been traversed during the last financial year, it appears.
Gearing up for increased demand
There was quite some capital expenditure too. Of the gross capex of Rs 11 bn incurred during the year, the new plant in Uttarakhand which went on stream swallowed a neat Rs 6.7 bn. The capex means that its installed capacity for manufacture of vehicles has risen to 150,000 units, from 100,000 units in the preceding year— though this is at variance with the directors’ learned statement that the manufacturing capacity has been enhanced by 75,000 vehicles per year. The national highway construction schedule which is gathering steam has obviously emboldened the company to create capacity ahead of the emerging demand, especially for heavy duty trailer trucks.
Given the humungous movement of funds, the company also had to take recourse to a third kind. Bank debt accelerated by Rs 2.5 bn and it even resorted to a ‘strategic sale’ of its holdings in IndusInd bank. The book value of the company’s balance holdings in IndusInd bank -- after the sale of 2 m shares-- was valued at Rs 716 m, against Rs 388 m in the preceding year! On the face of it, this valuation is very perplexing.
The way forward
The company will have to drum up increased sales, sooner than later. It has a very large capital base to service, not including higher interest charges on revenue account and, higher depreciation charges to boot, in the years to come. The large equity investments will take its own time to yield any worthwhile return. As it stands, the year end gross block of Rs 60.2 bn was able to generate a net sales turnover of just Rs 72.4 bn, and not including the substantial sums locked in gross working capital. Besides, the borrowings stand at Rs 22 bn. (Okay, the gross block is inclusive of additions which will bring in revenues in future years).
But then the entire automotive industry is on fire, and hopefully the heavy commercial vehicle sector will get its due share of the action. Increased industrial activity means a higher level of goods transport. The basic infrastructure to help in the speedier and more efficient movement of goods is being rapidly put in place. The company’s productivity too is gaining pace. The new plant at Pantnagar should give a big boost in this direction. The company however needs to exercise greater control over its funds flow, which at present appears to be in full flow in all directions. And, therein hangs a tale.
Disclosure: Please note that I am a shareholder of this company
This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.