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Rediff.com  » Business » Here's how Ashok Leyland turned two loss-making subsidiaries around

Here's how Ashok Leyland turned two loss-making subsidiaries around

July 25, 2018 17:15 IST

Nissan' exit from the light commercial vehicle joint venture has helped speed up consolidation and growth for the company

In recent years, commercial vehicle maker Ashok Leyland has demonstrated its knack for turning adversity into advantage more than once.

 

After it broke up with Japanese partner Nissan in 2016 over management and funding differences, it showed it could not just survive but thrive alone.

The company bought out Nissan’s stake in the light commercial vehicle joint venture and turned the loss-making subsidiary around within a year, riding on just two products.

Then, it scripted a similar story at Hinduja Foundries.

Investors baulked at the plans to merge its affiliate Hinduja Foundries with itself, as it ran counter to the company’s long-running strategy of exiting loss-making ventures.

Today, however, Hinduja Foundries is well on the way to recovery, turning EBITDA (earnings before interest, taxation, depreciation and amortisation) positive in 2017-18.

Ashok Leyland itself is on a growth path as well.

On Tuesday, it announced a three-fold jump in standalone net profit at  Rs 370 crore in the first quarter ended 30 June, beating analysts’ expectations.

With its strategy reaping success, the company now wants to merge the LCV business with itself.

Ashok Leyland believes the move will help it to widen market reach and product segments.

While Ashok Leyland continues to do well in the domestic truck business, it is keen to have a stronger footing in other areas such as defence and after-market so that it can reduce its reliance on the truck business, where the demand is highly cyclical in nature.

So how did the company turn the two subsidiaries around?

Ashok Leyland’s CFO Gopal Mahadevan credits Hinduja Foundries’ recent growth to the focus on product quality, reduced rejection levels, operation costs and overheads, besides some action on the pricing and dealership front.

For Ashok Leyland, Hinduja Foundries is the beating heart of its entire operations, supplying over 90 per cent of its demand for cylinder blocks.

The company could come to a standstill if this supply is disrupted. Mahadevan says the merger of Hinduja Foundries has also resulted in financial synergies.

The company will get tax benefit from Hinduja Foundries’s accumulated loss of around  Rs 1,100 crore when the merger is complete.

Ashok Leyland deployed a multi-pronged strategy at Hinduja Foundries that saw rejection levels reduce from double digits to single digit and productivity increase by 15 per cent to 97,126 million tonnes.

According to Ashok Leyland’s 2017-18 annual report, it has repaid long-term loans of  Rs 1,055 crore from internal generation (Rs 662 crore by Ashok Leyland and  Rs 393 crore by the Foundries division).

The focus in future, says Mahadevan, will not be on adding new customers, but rather on putting the foundry business on an even firmer ground.

Last year, Ashok Leyland’s capital expenditure was at  Rs 625 crore, of which around  Rs 55 crore was spent on the foundry business.

It is a similar strategy of driving synergies that Ashok Leyland wants to implement at the LCV business as well.

An overhaul of the LCV business strategy was undertaken after Nissan exited the venture in 2016.

Nitin Seth, president-LCV, Ashok Leyland, says the decision-making was streamlined, the business structure was rationalised, and new variants were launched on the existing platform.

In addition to launching  a variant of its best-selling truck DOST+, the company also brought back Partner and MiTR, and the efforts have had visible impact on sales.

It increased 37 per cent to 43,441 units in 2017-18 from 31,770 units in 2016-17, garnering 16 per cent share of the market.

What’s noteworthy is that Ashok Leyland has only three products to take on 38 products currently vying for customer attention in the market.

Ashok Leyland Vehicles Limited, formerly known as Ashok Leyland Nissan Vehicles, reported a profit of  Rs 134 crore in 2017-18. In the previous year it had run up a loss of  Rs 2.49 crore.

Other subsidiaries from the Nissan partnership, too, are on the growth path. Ashley Powertrain, earlier know as Nissan Ashok Leyland Powertrain, which is engaged in making power train, reported a profit of  Rs 85.9 lakh in 2017-18, as against  Rs 1500,000 in 2016-17.

Turnover rose to  Rs 361 crore from  Rs 65.98 crore during the period.

Similarly, Ashok Leyland Technologies, earlier known as Nissan Ashok Leyland Technologies, recorded a profit of  Rs 20.96 crore in 2017-18, against  Rs 4.09 crore in 2016-17, while its turnover rose to  Rs 60.09 crore from  Rs 15.32 crore.

Post acquisition, the LCV business has been able to generate cash and total debt in the LCV subsidiaries has reduced from  Rs 510 crore in March 2015 to  Rs 177 crore in March 2018.

The profitability of the business has also been significantly enhanced and the gross margins are on a par, if not better, than the group's other businesses.

Mahadevan says the goal is to take the share of the LCV unit in overall business to 12-14 per cent from 7 per cent currently in five years.

Big plans are already afoot to meet this target.

Seth says Ashok Leyland has set aside around Rs 400 crore to introduce five to six new products and build a new platform for the LCV business in the next 12 to 24 months.

The new products will come with both a right-hand drive and a left-hand drive variant for local and international markets.

“Ashok Leyland’s products costs around five per cent more compared to competition, but it gives 18 per cent extra value and this is what makes Dost stand out in the crowd,” says Seth.

Analysts have given their thumbs-up to the strategy.

“We expect the company’s total sales (domestic+export) from LCV segment to  rise to Rs 55,000 units in FY20E from 31,774 units in FY17.

"LCV sales in FY18 stood at Rs 38,000 units, a growth of 34 per cent over FY17,” say analysts from NirmalBang.

With the investments into the LCV business already amortised, analysts also expect the merger to result in tax benefits.

However, Ashok Leyland may face short-term headwinds because of the foundry business.

“The merger of Hinduja Foundries has impacted the company’s EBIDTA margin, which has reflected in its profit and loss account.

"The impact is expected to continue for another four to five quarters, till the foundries business turns profitable,” says another analyst.

Photograph: PTI Photo

T E Narasimhan in Chennai
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