Mumbai: India’s second largest commercial vehicle maker by sales volume, Ashok Leyland Ltd, is looking to recoup capital investment of Rs1,100 crore in its Pantnagar plant over four years through savings on excise duty, chief financial officer K. Sridharan said in an interview.
As part of an incentive programme to promote industry in the northern state of Uttarakhand, auto makers that set up manufacturing units there were exempt from 8% Central excise duty for 10 years. They were also offered an income tax holiday for the first five years and a 30% discount for the next five.
Graphic: Paras Jain / Mint
“This (savings) would be from the savings accrued from the excise duty alone,” said Sridharan. The unit will commence commercial production in March this year.
The Pantnagar plant has an annual capacity to turn out 50,000 units, said Sridharan. Net revenue on each vehicle is estimated at Rs10-12 lakh while the net gain per vehicle will be about Rs50,000-60,000.
Ashok Leyland, which currently has truck manufacturing plants only at Hosur, in Tamil Nadu, will also save costs from being closer to markets in northern, eastern and western India.
Some analysts who track the auto sector say Ashok Leyland, which gets two-thirds of its revenue from heavy vehicles, is better poised to gain from a recovery in the auto sector than rivals.
This is owing to the advantage it enjoys over Tata Motors Ltd by virtue of having a manufacturing unit in the excise duty free zone and other factors, said Joseph George, an analyst at BNP Paribas Securities Ltd.
Also, in case of an increase in excise duty, Ashok Leyland would “gain some market share at the cost of Tata Motors,” said George.
Market leader Tata Motors is unfazed. R. Ramakrishnan, vice-president (sales and marketing) at Tata Motors, said that because Ashok Leyland’s heavy trucks are priced higher than Tata’s, the excise duty benefit will only reduce the price gap.
Ashok Leyland will likely pass on some of the savings to its consumers in the form of price cuts.
“We are not worried about Ashok Leyland enjoying that advantage in the future,” he said.
From a low of 17.1% in the first quarter of fiscal 2009-10, Ashok Leyland expanded its share of the market for medium and heavy commercial vehicles to 23.1% in the three months ended December. For the December quarter, volumes doubled to 16,127 units, albeit on a low base, while profit grew 455% to Rs104 crore.
A decline in freight movement and slowdown in the implementation of infrastructure projects sliced heavy commercial vehicle sales by almost two-thirds in the second half of 2008. Ashok Leyland, whose portfolio is skewed towards the heavy duty segment and which gets almost 50% of sales from the country’s southern region, saw sales fall 58% in that period from a year ago.
Sridharan said cost controls as well as a change in vendor policy to cash-and-carry instead of credit in May 2009 helped the company reduce receivables by Rs350 crore. Given the cyclical nature of truck sales, most auto makers in India follow a cash-and-carry model; Ramakrishnan of Tata Motors said the company has been following it for years.
Sridharan added that increased sales of heavy trucks will help it increase market share by 5%. “It’s not about snatching share from the competition, but a question of regaining it,” he said.
The benefits from the Pantanagar plant have a catch, said Mahantesh Sabarad, an auto sector analyst at Centrum Broking Pvt. Ltd. It could increase the firm’s overall fixed costs, as other existing units start operating at a much lower capacity utilization level to ensure utilization at the new unit is at its optimum.
Also, the logistics savings would not be substantial, he said, because most of the key suppliers, who are based in southern India, do not have a manufacturing base in or around Uttarakhand. “On an incremental basis, the unit will start making net profit only in the second year after it gets operational,” he said.
Manoj Mohta, head of research at Crisil Research and Information Services Ltd, estimates that the heavy commercial vehicle (HCV) segment would expand 20-25% in fiscal 2010, but growth could slow in fiscal 2011.
“We expect the HCV segment to grow by 15-17% as a lot of these enabling factors, like excise duty benefits, advancement in purchasing decisions because of impending Euro IV norms, among others, are taken away,” he said.
Higher tonnage vehicles from other truck makers such as Volvo Eicher Commercial Vehicles Ltd, Mahindra Navistar, and MAN AG could also affect Ashok Leyland’s market share, said Sabarad.
“The company may not be able to exceed its historical average of 27-28% market share as rising competition from M&M (Mahindra and Mahindra Ltd) and MAN is a cause for concern,” he said.