Ashok Leyland: Shifting into overdrive mode - Outside View by Luke Verghese

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Ashok Leyland: Shifting into overdrive mode
Aug 19, 2011

As Ashok Leyland shifts to overdrive mode after years of somnolescence, the company has its work cut out for it. It will have to dovetail the myriad investments that it has made in associate companies to complement its own production base. How the company intends to do so will be known soon enough. The production from its Pantnagar plant will also have to profitably marketed. Fortunately it has belatedly wised up to the need to incorporate an in-house financing company to help in the sales effort.

Going all out in the trucking sector

From the 10 year historical perspective that the company has provided in the annual report and accounts, it is quite evident that it has initiated the first step in its great leap forward in the financial year 2006-07. In this year the net fixed assets rose over 42% to Rs 15.4 bn from Rs 10.8 bn in 2005-06. The total value of all assets as measured by this statistical profile grew 19% to Rs 27 bn from Rs 22.7 bn previously. Revenues too grew to Rs 83 bn from Rs 61 bn. Barring a severe blip in 2008-09 when sales and profits declined, the company has shifted gears and how!

In the financial year financial year March 2001-12, sales toted up to Rs 121 bn. The net fixed assets had accelerated to Rs 50 bn, while the book value of investments had rocketed to Rs 12.3 bn from Rs 3.7 bn in 2005-06. The total value of all assets has taken on a humungous value of Rs 70.6 bn. And, what was the modicum employed to achieve this feat of engineering? The debt that it has contracted over this period rose 271% to Rs 25.6 bn from Rs 6.9 bn in end 2005-06. It would appear that the accumulation of debt had a significant role to play in the asset side creation.

Dependence on debt capital

The principal reason for the over dependence on debt is that the production of commercial vehicles is not keeping pace with the addition to fixed assets. The breakup of the overall revenues shows that the rupee sales of vehicles accounted for over 88% of all rupee sales in 2010-11 against 84% previously. The sales of engines and spare parts brought in the balance moolah. The volume production of vehicles averaged 0.56 nos in 2005-06 against Rs 100,000 of net fixed assets in 2005-06. This ratio slumped sharply to 0.1 by 2008-09 but improved marginally to 0.2 by 2010-11. This anomaly to some extent occasioned by the spending on the new unit at Pantnagar in Uttarakhand. (The company has spent Rs 10.5 bn on gross block addition in the last two years). The company has started production at this state of the art facility to cater to the growing demand in the Northern and Eastern regions of India. But the fact of the matter is that the asset creation is accelerating at a faster clip than the revenue generated from the asset - at least for the time being.

Higher level of automation

But to be fair there is also a beneficial flip side to this declining usage of the fixed asset base. The manufacturing plants are becoming more automated, and who knows probably the employees are also becoming more productive simultaneously - though this aspect cannot be vouched for from the financials in the annual report. In 2001-02 the company produced 29,673 vehicles with an employee base of 13,218 members at year end. Thus, on a very rough reckoning, it would work out to a production of 2.2 vehicles per employee per year. By 2010-11 the number of vehicles produced had leapfrogged so to speak to 94,106 - but the employee base had only marginally increased to 15,812. Out of this increase in employee strength, 1500 members actually pertain to the Pantnagar plant whose unit has just commenced operations. (This unit will probably have the honors of producing what the company refers to as the future ready U Truck platform). The production per employee had accelerated to 6 vehicles even after factoring in the employee strength of the Pantnagar plant. But one may add here that even this increased production per employee appears to be way off the mark compared to international standards.

Splurge in its investment portfolio

The bigger issue is the moneys that are being splurged into its investment portfolio. These investments are unlikely to bring in any direct revenue gains in the near future. The company has gone full tilt in promoting a slew of ventures in the automobile industry, the direct beneficial effect of which if any will be forthcoming only at some point of time in the future. The book value of its investment portfolio accelerated from Rs 3.3 bn in end 2009-10 to Rs 12.3 bn by end 2010-11. It has three concurrent ventures going with Nissan Motors involving a combined equity outlay of Rs 2.5 bn for example. These ventures straddle the worlds of vehicles, power trains, and a company called Nissan Ashok Leyland Technologies Ltd. Then it has invested in the manufacture of defense vehicles, as is the current norm among all the established commercial vehicle manufacturers. This business in all probability will morph into a big ticket item in the future as the company seeks foreign tie ups to make a host of defense related vehicles including artillery and combat systems. It has a venture going with John Deere for excavation equipment, and has belatedly incorporated a vehicle finance company to fund the buyers of its trucks.

Being a holding company of sorts of the Hinduja operations in India it has also very necessarily dipped its hands into the till to take a stake in other Hinduja ventures which are extant in India. So it has a holding in Hinduja Foundries (formerly called Ennore Foundries and is characterized as a fellow subsidiary) and in Indusind Bank. The group has also thought it wise to invest in a few investment companies to shore up its interests in corporates. There are two prominent companies in this segment - Ashley Holdings and Ashley Investments - in which it holds both equity and preference capital.

Looking Westward

It has an ongoing business based out of the Czech Republic sporting the name Aviva Ashok Leyland in which it has a 48.3% stake. Apparently the concept of joint stock companies is still not extant in this erstwhile communist state. The management states that it is banking on the strengths of Aviva to revamp the range of intermediate commercial vehicles. To add to this cornucopia of collaborations in the vehicles segment it has also acquired a 26% stake in an English company going by the name of Optare, which the management says is a contemporary manufacturer of rear engine city buses, and is a leader in green technology, and will add to the company's design technologies. And in an effort to add some marketing muscle to its vehicle exports it has incorporated two companies - one in Sri Lanka and the other in the UAE - to help push vehicle sales abroad.

To the company's credit there was a sharp boost in its out of India sales. The value of turnover rocketed 84% to Rs 11 bn from Rs 6 bn previously - though the commission on export sales increased only 35% to Rs 861 m. (From the wording in the annual report, the UAE company appears to have been incorporated primarily to push the sales of its Czech acquisition rather than in flogging what the Indian company makes. Is one to assume therefore that the vehicles made by the Czech company are superior to that made by Ashok Leyland?). What is however quite unknown is the contribution of export sales to the bottom-line, as there is no separate reporting format for export sales. But, presumably, such sales contributed their mite.

Need to make its investments click

It would appear that Ashok Leyland has signed all the required back to back collaboration agreements with commercial vehicle manufacturers. Now all it has to do is to make these investments tick. That may take some doing. It has provided a very brief peak at the performance statistics of six of its investments. (The percentage holding in its other myriad investments, especially in its investment companies, or their financial health, is unknown). These six ventures in turn are classified as jointly controlled entities and hence the magnanimity of the management in sharing a few niggardly tidbits about their financials. It has a 50% stake in three of them - the tie up with John Deere, with Ashley Alteams which makes die castings, and in Automotive Infrotonics which makes digital electronic products. The other three are with Nissan in which it holds a minority stake. In other words the management of Nissan holds the umbrella in these three ventures. The three collaborations with Nissan are yet to go on stream as is the venture with John Deere. Of the two which have kick started their commercial operations - Ashley Alteams and Automotive Infrotonics - the company's share of income and expenses of the former for the financial year ended March 2011 was Rs 469 m and Rs 559 m respectively, while of the latter it was Rs 32 m and Rs 81 m.

Outlay wise its biggest investment is in Ashok Leyland Nissan Vehicles with an investment value of Rs 1.7 bn, followed in close succession by its investment in its two investment holding companies, Ashley Investments (Rs 1.5 bn) and Ashley Holdings (Rs 1.4 bn). It also has preference share outlays in the above two amounting to Rs 150 m each. The other big ticket investments are Avia Ashok Leyland Motors (Rs 1.3 bn) Hinduja Leyland Finance (Rs 1.1 bn), Indusind Bank (Rs 920 m), Albonair GmbH (Rs 586 m), Nissan Ashok Leyland Powertrain (Rs 544 m), Optare Plc (Rs 502 m) and Ashok Leyland John Deere (Rs 423 m).There are numerous other investments too, but they do not appear to be very material as compared to the meatier investments made by the company.

The curious case of Optare

The investment in Optare is a curious one and appears to be an odd ball of sorts. Ashok Leyland has only a 26% stake in this, but claims that it will have the benefits of the acquired unit's technology to manufacture buses and so on and so forth. Elsewhere in the report the management has also stated that it has acquired a 26% controlling interest in this company. This is a strange manner in which to go about acquiring a controlling interest, but let that be. According to the tidbits of information that it has provided, Optare is a leading bus maker in the UK, implying perhaps that its financials are also top grade. It has acquired 195.5 m shares in Optare at Rs 2.5 per share on a face value of 5 pence each. And 100 pennies make for a pound sterling. At the present conversion value, 5 pence would work out to Rs 3.6. Is one to understand that it acquired its controlling stake in Optare for a song? It appears to have acquired these shares at a discount to the face value, or is that I have not got all the facts right here?

Juxtapose this with its acquisition of a stake in Defiance Testing and Engineering Services, a USA based affiliate. What exactly this company does to earn its bread is not immediately fathomable from its name plate Ashok Leyland has a lilliput investment of Rs 69 m in this company, but its percentage stake in this affiliate is unknown. The shares in this company were acquired at an average price of Rs 1.4 m per share on a face value of US$ 0.01 each (1 cent). The premium paid, on the face of it, appears preposterous by any yardstick. (What in heaven's name does this company make do? Developing sci-fi technology perhaps?) The valuations of the two companies are at the two opposite ends of the spectrum. But I guess the management is presumably wised up on how best to traverse the beaten path.

For the matter of record the company rustled up a dividend income of Rs 83 m in 2010-11. Probably as a means of generating some income by some deft investment of surplus funds, the company resorted to buying and selling some Rs 125 bn worth of mutual fund debt securities to generate some additional cash flow. Well if this exercise led to any such inflow, it is not visible in the other income schedule. Besides, this purchase/ sale of securities are not properly documented in the funds flow schedule appended to the balance sheet.

The inter-se transactions

Though the fixed assets and the investments that it has affected upfront are yet to turn a significant leaf, Ashok Leyland does have several inter-se transactions going with group companies. (These transactions will accelerate once the investments that it has etched out, click into place). As to the exact value of the inter-se transactions, it depends on which schedule of the annual report one is looking at. One schedule says that the transactions on account of purchase of raw materials and components with related parties toted up to Rs 1.9 bn, while a more exhaustive schedule says the value of these transactions is Rs 4.2 bn. There is a similar anomaly in the information disclosed on the Sales and Services front. One schedule says the value adds up to Rs 6.5 bn while another schedule says the value is Rs 6.8 bn. The error is less glaring here. It also infers that both the schedules may be giving the wrong data, as both the schedules cannot be giving the correct set of figures for the same year. There are similar errors in other expense and balance sheet data in the two schedules. The wonder is that no one deems it fit to point out such errors - or have we reached an advanced state of apathy here?

The vast bulk of the company's production and sales consisted of truck chassis, whether of the heavy vehicles, medium heavy or light commercial vehicle classification. In 2010-11 it sold 83,098 vehicles in the domestic market - 75% were truck chassis, while the balance 25% was bus chassis. This roughly corresponds with the industry statistics that the company has put out. In the heavy and medium commercial vehicles segment, truck volumes accounted for 85% of the domestic market and in the light commercial segment truck volumes accounted for an even higher 88%.The production volumes at the new plant may also be skewed in favor of truck chassis. It will be nice to know which production line is more profitable - truck chassis of bus chassis. Then there is also the urgent need to get a return on its humungous investments at some point of time.

The new management has its work more than cut out for it.

Disclosure: I hold 167 shares in Ashok Leyland

This column Cool Hand Luke is written by . 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.


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1 Responses to "Ashok Leyland: Shifting into overdrive mode"

Borkar M.R.

Aug 25, 2011

Very informative article. I was amused by the productivity of employees i.e. p.employee to vehicles ratio. It wud b very useful if the writer has similar figures for Maruti/Tata motors/Mahindra/Kirloskar-Toyota. This may help us (1) for proper evaluation of these cos. n (2) Indian workers' productivity capacity vis a vis other international mfrs. (to set right the myth of productivity of Indian workers with foreign workers often labled as Indian workers are lazy/inefficient).

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