Mumbai: India’s second largest commercial vehicle maker by volume, Ashok Leyland Ltd, has put on hold its plans for a new factory near Chennai because of a contraction in demand.
The facility was to be used for manufacturing light commercial vehicles (LCVs) such as pickup trucks and vans for its joint venture with Japan’s Nissan Motor Co.
Ashok Leyland will now use its facility in Hosur, near Bangalore, for manufacturing these vehicles. “The plan is to utilize the existing capacity of Ashok Leyland’s unit in Hosur for producing some of these LCVs,” said chief financial officer K. Sridharan.
The Hosur facility, currently used for its range of medium- and heavy-duty vehicles, has the capacity to produce 60,000-65,000 vehicles a year.
Going slow: Ashok Leyland facility in Hosur, Bangalore. This unit is used for its range of medium- and heavy-duty vehicles and has the capacity to produce 60,000-65,000 units a year. Rogan Macdonald / Bloomberg
In October 2007, the Hinduja Group-owned company had signed three joint ventures with Nissan. The partners had pledged around Rs2,300 crore for the three ventures—a light commercial vehicle manufacturing company, an engine manufacturing company and a technology development business.
In 2008, Nissan said the joint ventures would be delayed by about six months to September 2011 due to the depressed demand for trucks in India.
Earlier this year, Ashok Leyland said that owing to the adverse market conditions, the partners were reworking details of the deals.
The firms are not scouting for a greenfield facility now because both Nissan and Ashok Leyland have sufficient spare capacity, Sridharan said.
Ashok Leyland is saddled with a large stock of unsold trucks and its domestic sales plummeted 67% to 1,697 units in May from a year ago.
As of end-May, Ashok Leyland had an inventory of 8,200 trucks, a stock of about a month and a half. Typically, commercial vehicle makers hold 15-20 days’ inventory.
The firm has reduced production to four days a week starting this month, and will continue the schedule till stock levels are corrected.
It also lost market share in medium- and heavy-duty vehicles by 4% to rival Tata Motors Ltd in fiscal 2009. Ashok Leyland claims a 20% market share in the segment, and Tata Motors 66%.
In the first five months of this year, Ashok Leyland sold 12,448 vehicles in the domestic market against Tata Motors’ 100,414 units.
Sridharan said Ashok Leyland’s efforts to liquidate its inventory should result in improved sales in June. The company expects to halve its inventory to 4,000 units by September.
Analysts say the company was hit harder by the downturn than Tata Motors because of its limited geographical presence and its focus on medium and heavy-duty vehicles such as tippers and tractor-trailers.
“What has worked against Ashok Leyland is its geographical presence, which is largely confined to the southern zone, a region where the decline has been steepest and recovery has yet to set in,” said Chetan Vohra, an analyst at Bric Securities Ltd. “Absence in the LCVs has added to lower volumes.”
Tata Motors commands two-thirds of the domestic commercial vehicle market and draws 40% of its sales from medium- and heavy-duty vehicles, while Ashok Leyland has 99.99% of its sales coming from the segment.
“Chennai is a big market for iron ore and textile exports but owing to the sluggishness in these sectors, demand for tractor-trailers and tippers has collapsed in the region,” said Ramnath S., an analyst at Mumbai-based IDFC-SSKI Securities Ltd.
Sridharan, however, attributes the decline in sales only to high inventory levels.
Low industrial output in the past few months, reduced mining and construction activities, and high borrowing costs had all taken their toll on demand for medium and heavy commercial vehicles.
Sales of such vehicles contracted 33% in fiscal 2009, dragging down overall commercial vehicle sales by 22% to 384,122 units.
With improving economic fundamentals and the government stimulus packages announced earlier this year, sales at many commercial vehicle makers have started recovering month on month.
Both Tata Motors and Eicher Motors Ltd, for instance, are keeping stock for 15 days, spokespersons at these companies said. “A full-year recovery is expected only in the second half of the current fiscal,” said Vohra of Brics Securities.
Meanwhile, Sridharan said, Ashok Leyland will start a captive commercial vehicle finance arm in the next two months. In India, at least 90% of truck and bus purchases are financed by loans. Having its own financing arm will help Ashok Leyland push sales aggressively, said Ramnath of IDFC.