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Business News/ Companies / The motive behind Hinduja Foundries Ltd’s Ashok Leyland merger
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The motive behind Hinduja Foundries Ltd’s Ashok Leyland merger

Hinduja Foundries Ltd's survival is vital for Ashok Leyland, which had invested Rs320 crore in the firm

Hinduja Foundries makes castings, cylinder blocks and heads and other critical parts, and counts Ashok Leyland among its key customers. Ramesh Pathania/MintPremium
Hinduja Foundries makes castings, cylinder blocks and heads and other critical parts, and counts Ashok Leyland among its key customers. Ramesh Pathania/Mint

Investors of Ashok Leyland Ltd have baulked at the company’s plan to merge with affiliate Hinduja Foundries Ltd.

Gopal Mahadevan, chief financial officer at Hinduja Group flagship Ashok Leyland, defended the move, saying the intent was to bail out one of its key suppliers, which has been mired in operational inefficiency and other challenges. Also, this should be viewed as a “one-off" and Ashok Leyland “has no plans to bankroll" its subsidiaries or make any further acquisitions.

The company, Mahadevan said, will remain steadfast to its core business even as it expects the contribution from its truck business to come down to 40-45% in the next three to five years from 60-65% now because of the cyclical nature of the truck market. But Mahadevan has not been able to calm frayed investor nerves. Ashok Leyland has declined 4.26% to Rs80.75 since the announcement of the merger. The decline has been far steeper at Hinduja Foundries.

The merger, said analysts, is earnings dilutive for Ashok Leyland and run counter to the strategy the company has been pursuing over the past three years of exiting non-core businesses and loss-making subsidiaries as it sharpens focus on its core business, which includes trucks and buses, defence, after-market and power solutions.

In a research note on 16 September, brokerage CLSA said this merger will raise investor concerns. “Even assuming that the intention is to achieve a turnaround of HF (Hinduja Foundries), we wonder if this could have been achieved without an actual merger into AL (Ashok Leyland)." It said even as the brokerage has been impressed by AL’s turnaround in the past three years and a repeat of the same in HF under AL’s ownership cannot be ruled out, “but still requires a leap of faith". This event, together with the recent weakness in truck demand, could keep AL’s valuation multiples under pressure. CLSA has a ‘sell’ rating on the stock.

The merger will lead to dilution of 11% in the earnings per share. Of this, while 3% would be on account of equity, remaining 8% would be the impact of losses at Hinduja Foundries, said an analyst at a domestic brokerage, declining to be identified. Hinduja Foundries has accumulated losses of Rs1,000 crore.

“Ashok Leyland will have to fund future losses and capex of Hinduja Foundries, which will be a drain on its cash-flows," the analyst said.

Hinduja Foundries makes castings, cylinder blocks and heads and other critical parts, and counts Ashok Leyland among its key customers, accounting for more than a third of its revenues. The component firm makes one of the finest products but needs to be a lot more efficient operationally, said Mahadevan.

The merger, he explained, is a logical step as Ashok Leyland had to recoup the investment of Rs320 crore it has done and ensure the supplier doesn’t go bust.

“If I want to turn it around, it has to become a part of AL as HFL is not a subsidiary but an associate of AL. It has got a reasonably different style of operation," Mahadevan said.

The merger will help in bringing down procurement costs and bank loan and become a more stable supplier. “There are huge upsides to it," Mahadevan said.

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Published: 18 Sep 2016, 11:06 PM IST
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