Mumbai: Ashok Leyland Ltd, India’s second largest truck and bus maker, faces a rough road ahead in its bid to regain lost market share amid intense competition from new entrants and stagnant demand for its products in a slowing economy.
Tata Motors Ltd, the country’s largest truck maker, and Ashok Leyland together had more than 85% share of the heavy truck market in 2010-11, but both global and domestic companies have chipped?away?at their dominance and reduced their share to 82%, according to the Society of Indian Automobile Manufacturers.
Ashok Leyland’s share in medium and heavy commercial vehicles dropped to 20.2% in the last fiscal from 22.2% in 2010-11 while Tata Motors’ share remained stable at 62.3%. That share could drop further with leading global firms vying for a larger share of the Indian truck market, the second largest in the world by volume after China.
The world’s largest truck maker, Daimler AG, expects to roll out its trucks in India in September from a plant in Oragadam near Chennai that has a capacity to manufacture 36,000 units a year. US-based Navistar International Corp. launched its vehicles in India in 2010 in a joint venture with Mahindra and Mahindra Ltd.
Others in the fray are Germany-based Man Se and two Swedish companies, Volvo Trucks and Scania AB.
The truck market is broadly split into light vehicles (less than 7.5 tonnes), medium (7.5-16 tonnes) and heavy (over 16 tonnes). Tata Motors is the leader in all three segments.
The market for medium and heavy trucks increased by more than 15% between 2007 and 2010 while that for light vehicles gained 57%, according to a report by consulting firm KPMG.
Bumpy ride: A file photo of Ashok Leyland’s facility in Hosur, Karnataka. The truck maker’s market share in medium and heavy commercial vehicles dropped to 20.2% in the last fiscal from 22.2% in 2010-11. Rogan Macdonald/Bloomberg
Ashok Leyland is expected to be harder hit by competition than Tata Motors because its strength lies in heavy trucks. It’s a smaller entity in medium vehicles?and?considered?a late entrant in the light vehicles segment.
The firm seems to have missed the LCV (light commercial vehicles) opportunity and let rivals, particularly Tata Motors, dominate the space, said N. Raju, associate director, Fitch Ratings.
Nomura Equity Research in May downgraded its recommendation on Ashok Leyland shares to ‘neutral’ from ‘buy’ and lowered its target price for the stock to?Rs 26 from Rs 34, saying the firm’s business and its market share are unlikely to improve this fiscal.
Ashok Leyland’s shares have dropped 24% from their year’s high of Rs 32.90 reached on 2 May. The stock ended Thursday on BSE at Rs 24.95, up 1.01%%, while the Sensex was up 2.59% at 17,429.98. The firm’s profit fell 10.3% to Rs 566 crore in 2011-12 while revenue grew 15% to Rs 12,842 crore.
Over the past decade, road infrastructure in India has considerably improved with investments in the Golden Quadrilateral highway network and the larger North South East West Corridor, expanding the opportunity for India’s truck market. National highways form about 2% of the road network in India but carry 40% of the total traffic, KPMG said in its report.
But “in the light of increased competition from Mahindra Navistar and Bharat Benz’s new launches in 2012-13,” Nomura estimates Ashok Leyland’s volume to remain unchanged and earnings before deduction of interest, tax and amortization expenses (Ebita) margin at 9.4% this fiscal. Ebita is a measure of efficiency and profitability.
Nomura’s estimates are below Ashok Leyland’s forecast of 15% volume growth and 10% margin. Also, while the firm has said it plans to invest Rs 1,150 crore in capital expenditure and investments, Nomura’s estimate was for Rs 450 crore.
This should lead to higher-than-earlier expected leverage and interest costs.
Overall, the year ahead will be challenging for the heavy vehicles industry with the slowing industrial production likely to hit medium and heavy trucks growth, Nomura said.
The Chennai-based Ashok Leyland has been more a defensive player, trying to protect its turf in the southern markets, barely making the effort until a few years ago to gain customers or dealers in the north, said Umesh Revankar, managing director, Shriram Transport Finance, the largest truck financier in the country.
As a result, the flagship firm of the diversified Hinduja group was never a serious competitor to Tata Motors and has remained a distant second.
The Hinduja group took a stake in Ashok Leyland along with Iveco, the commercial vehicle arm of Italy-based Fiat, in 1987.
With such strong promoters, Ashok Leyland is not constrained by resources to grow nor does it face hurdles in research and development (R&D) or technology, but is most likely to be hit hard by the growing competition as it hasn’t taken advantage of the rising demand in the non-southern markets, said Raju of Fitch Ratings.
Chairman Dheeraj Hinduja defended the firm saying that until 2007 it was dependent on British Leyland and Iveco for technology and so did not build its own R&D capabilities. “When you are with a partner, you work together,” he said.
After the Hinduja group picked up Iveco’s stake to hold a controlling 51% stake in Ashok Leyland in 2006, the firm’s R&D team has been strengthened to 1,100 people from a mere 150 earlier, and with large investments made into it.
“It is not like we are waking up to competition all of sudden. Sesh (R. Seshsayee,the former managing director) and I have been working on this, we have been preparing for the ‘war’ for the last five years,” said Vinod Dasari, managing director.
Ashok Leyland expects to be among the top 10 firms in trucks globally by 2015 and maintain its fourth position in buses, the truck maker announced in a vision document it released in 2009. Over the past three years, it has moved one notch up in trucks from its 17th place earlier.
Ashok Leyland has invested Rs 4,000 crore since 2007 towards improving its reach and business, sinking in more money in the past five-eight years than it did in its first 50, explained the 46-year-old managing director. “We have doubled our network to 400 in the last five years... 90% of the trucks we sell now have been developed in the last two-three years. It is a fresh product range,” he said.
Trucks are an essential earning asset for customers and, therefore, Ashok Leyland has in the past half decade established more maintenance, spares and service points in north India than in the south, said Hinduja.
Maintenance and service will play a critical role in how fast foreign firms can capture market share, said Revankar of Shriram Transport Finance, adding that for fleet operators a vital purchase factor is the response time and effectiveness of service when a truck breaks down in transit.
Dasari wouldn’t spell out Ashok Leyland’s strategy or investment outlays but said the firm was well prepared to meet competition. Ashok Leyland, though, admitted in a conference call with analysts in May that it had lost some market share in heavy trucks in the north and the west, but had stayed robust in south India where it commands a 52% share.
For the first time, Ashok Leyland will face stiff competition in its home ground with Daimler set to roll out trucks from its Oragadam plant, pointed out Revankar. It began to feel the heat as early as two years ago, when Daimler poached employees both from Ashok Leyland and Tata Motors for its new facility in India.
Foreign companies have found the Indian truck market tough to crack and some earlier launches failed as the trucks were not customized to Indian needs and the firms did not source components locally to keep costs low.
But these firms have learnt their lessons and are now localizing components and adapting to driver requirements, said Tarandeep Ghai, a principal tracking the auto sector at Boston Consulting Group.
Ashok Leyland is stepping up its efforts at holding on to its customers—perhaps, the most crucial aspect as the competition heats up.
To improve visibility, it recently roped in Mahendra Singh Dhoni, the captain of the Indian cricket team as well as the Indian Premier League’s Chennai Super Kings, as its brand ambassador, and is improving how its dealers interact with its customers.
“Dealers visit us twice a month now to get our feedback on requirements and services,” said 38-year-old J. Kalpesh, manager of the transportation division at Chakiat Shipping agency, which has a fleet of about 100 Ashok Leyland trucks. “No one would visit for months together three years ago.”
Anupama Chandrasekaran contributed to the story.