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Ashok Leyland: Not efficiently managed - Outside View by Luke Verghese

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Ashok Leyland: Not efficiently managed
Sep 3, 2013

Rushing pell mell into assorted new vistas without any proper financial planning is not the way to go


Investments of every hue

Ashok Leyland is rushing pell mell ahead with investments of every hue in its efforts to keep up with and possibly even best the competition. And, the company is not necessarily getting it all right in the process. At least this is the picture that emerges from an examination of the summary 10 year financials that the company has appended to the annual report and accounts. Some of the financials provide only an indication of the real state of affairs. The company has also sought to give some special classifications to some of the more germane figures in the summary sheet. For example, the gross block is inclusive of a large 'revaluation' exercise that the company charted some years ago. (Revaluations per-se is a pointless exercise except for the sole purpose of tying up additional funding from sympathetic lending agencies). The exact extent of the revaluation is not known but the reserves and surplus hosts a net revaluation figure (net of write downs) amounting to Rs 13 bn approx at the latest year end. Further, the borrowings figure (long term and short term) also does not reflect the true extent of the repayable debt. The two dues that are shown separately but it excludes 'current maturities of long term debt' which is a fairly substantial figure. The figure for 2012-13 year end is Rs 8.5 bn against Rs 7 bn previously.

The other moot point is that the company has chosen to give the 'net fixed assets' figure for each year end---this is however inclusive of both tangible and intangible assets, and capital work in progress. The point is that it is the gross fixed assets that drive the manufacturing capacities as depreciation is only a notional accounting entry -- where the asset is written down based on the basis of percentage slab rates fixed by the government. But, nevertheless, one can look at the data on hand.

Spending big but not very logically

As I stated earlier the company is spending big and not very logically. Hence, the borrowings are touching new highs. Between 2003-04 and the latest year the net fixed assets rose from Rs 9.2 bn to Rs 59.7 bn. Non-current investments rose from Rs 1.5 bn to Rs 23.3 bn. The long term loans and advances rose from Rs 285 m and after peaking at Rs 6.1 bn in 2011-12 closed at Rs 4.8 bn in the latest year. The short term loans and advances rose from Rs 1.97 bn to Rs 8.9 bn. The borrowings -- comprising of long term and short term (but excluding repayables over the next 12 months) rose from Rs 3.8 bn to Rs 35 bn. (In reality the total repayable borrowings at end 2012-13 amounted to Rs 43.5 bn). The share capital base in the meanwhile rose from a measly Rs 1.18 bn to an equally measly Rs 2.66 bn. The reserves and surplus with a healthy helping of revaluation reserves (I presume) rose from Rs 9.3 bn to Rs 41.9 bn. The silver lining here is that while the trade receivables rose from Rs 4 bn to Rs 14.2 bn, the trade payables rose more favourably from Rs 6 bn to Rs 24.8 bn-- and showing its clout in the market in the process.

I must also add here that the volume sales of vehicles (including traded sales) rose from 48,654 to 1, 14,611, while the sales of engines rose from 5,085 to 21,757. The sale of spare parts and others rose from Rs 4.46 bn to Rs 18.1 bn. It must be noted here that the inter-se transactions with group companies on revenue account for purchases and sales is substantial and shows the dependence of group companies on one another for their succour. The purchase of raw materials, components and traded goods from group companies amounted to Rs 12.25 bn against Rs 6.5 bn previously. Similarly, the sales to group companies amounted to Rs 7.9 bn against Rs 11.6 bn previously. Then there is the receipt of other operating income of Rs 1.5 bn--mostly from joint ventures. Juxtapose these inter-se transactions and receipts with gross sales which rose from Rs 39.2 bn to Rs 133 bn over the period. The pre-tax profit was however off on a jolly roller coaster ride over the ten year period from Rs 2.86 bn in 2003-04 to Rs 6.38 bn in 2007-08, to a high of Rs 8 bn in 2010-11 before closing at Rs 4.7 bn in the latest year.

Margins yo - yo

The reasons for the haphazard movement in the 'margin' segment lies in the inability of the company to generate more bang for the buck. The revenues per-se is a hotch potch mix of income receipts. It includes receipts from sale of manufactured commercial vehicles of Rs 103.1 bn, traded commercial vehicles of Rs 9.15 bn, engine and gensets of Rs 4.8 bn and spare parts of Rs 18.1 bn. Thus cumulatively, the figure amounts to Rs 135.3 bn. Then there is the 'revenue from services' of Rs 1.38 bn and 'other operating revenues' of Rs 2.78 bn. The latter receipt is a masala mix of contract manufacturing, export incentives; scrap sales, and, others. Thus the total revenues amount to Rs 139.48 bn. From this figure one has to reduce expenses on account of commission, rebate and discounts of Rs 6.5 bn against Rs 4.75 bn previously. This figure is not loose cash by any stretch of imagination. The latter three sums of Rs 1.38 bn, Rs 2.78 bn and Rs 6.5 bn are inestimable and subjective entries, and add or deduct at some length from the top-line.

The top-line gets a further boost through 'other income'. It does not amount to much and this is the crux of the problem-but every little bit helps out. Other income (interest income, dividend income and other non operating income) toted up to Rs 623 m against Rs 403 m previously. As if this is not enough there is another head of income called 'Exceptional items'. The net addition to the top-line from this head is Rs 2.9 bn (against Rs 16 m previously) and it is the net effect of the profit on sale of investments, loss on sale of investments, and diminution in the value of long term investments. The sale of investments appears to have been resorted to only to shore up the cash flow and the margin segment. All in all, it would tantamount to a jumble of entries so to speak.

Where the glitches lie

It is however in the gross block and in the investment schedule where the glitches may lie. The gross block at year end amounted to Rs 73.5 bn. I am not aware of the extent of revaluation amount in this gross block figure, but the revaluation reserves-net of write downs-amounts to Rs 12.96 bn. Thus, the net gross block can be taken as Rs 60.5 bn though it is probably a lower figure than this. The exact sales figure of non manufactured goods is not known. But the revenues net of excise, and net of traded goods sales of Rs 9.1 bn, and spare parts sales of Rs 18.1 bn amounts to Rs 97.6 bn. In other words the gross block to manufactured goods sales works out to a ratio of 1:1.6. The inability of the company to generate higher revenues from manufactured sales stems from the manner in which the gross block is loaded. Of the total gross block of Rs 73.5 bn the value of land amounts to Rs 11.9 bn, and the value of buildings amounts to another Rs 14.3 bn. Thus close to 36% of the gross block constituent is accounted for by these two classifications. That is a hefty bill for the company to shoulder in a manner of speaking. The land and the buildings per se do not add to the production clout of the company. But this is the reality of the matter.

Cut to the investment schedule. It is a bizarre portfolio make up. The total book value of its portfolio categorised under 'non-current investments' amounted to Rs 23.37 bn. (On the flip side is the debt overhang of Rs 43.5 bn at year end). This is a big bucks investment portfolio. The portfolio consists of a triumvirate of equity capital, preference capital, and debt capital. The breakup of the portfolio shows an equity investment of Rs 19.83 bn, preference capital investment of Rs 3.21 bn, and debt capital of Rs 320 m. It does not boast of a single sibling. For the matter of record the revenue receipts from dividend income amounted to Rs 75 m, and the interest receipts from debt instruments toted up to Rs 1.5 m! This ROI should definitely make its way into the Guinness Book of World Records. The investment schedule is categorised under 'trade investments' and 'other investments'. The trade investments have a book value of Rs 10.70 bn and the other investments of a book value of Rs 12.67 bn. As stated earlier no sibling but it has a fellow subsidiary in Hinduja Foundries. People with a longer acquaintance will recall that this company was formerly known as Ennore Foundries. The single biggest outlays are in Ashley Holdings and Ashley Investments of a similar book value of Rs 4.87 bn each. (In all probability these two investment vehicles are the dumping ground of other Hinduja holdings). Next in line is the investment in Hinduja Foundries with a book value of Rs 3.45 bn-including preference capital. Ashok Leyland Nissan Vehicles with a book investment of Rs 2.53 bn takes the next spot, with Hinduja Energy with a book investment of Rs 1.87 bn at the fifth spot. These five investments together accounted for almost 74% of all investments. Then there is the conky investment in Optare plc value at Rs 584 m.

Given the pattern in which Ashok Leyland holds on to the investments in other group companies, it does not have to publish the brief profile of the year end financials of these investee companies. It is all well planned out down to the letter T. That is about as good as it can get. Ashok Leyland has three fellow subsidiaries, 18 associate companies and six joint ventures as per a separate schedule.

The cash flow statement

The cash flow statement shows up the difficulty that the company is having in generating and financing its activities. The net cash flow from operations was barely sufficient to pay for the fixed assets expansion. Then there was the net investment in long term investments of Rs 9.28 bn. To fund a part of this investment in group companies, Ashok Leyland even had to sell 35% of its holding in group company Indusind, and 46% of its holding in Hinduja Leyland Finance. The group sales etc fetched up Rs 4.1 bn to the company. But given other exigencies like interest payment on debt and the compulsory dividend payment of Rs 3.1 bn the company had to perforce resort to additional borrowings just to remain extant.

This is definitely not a company for the discerning investor to sink his savings into.

Disclosure: I hold 334 shares in this company

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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