How Ashok Leyland got back on track

A lot has changed for the embattled truck maker in the last one year—a fact that is reflected in the near 190% surge in the stock

Workers at an Ashok Leyland factory in Hosur. Sales of medium and heavy duty trucks have been rising since June, after dropping for more than two years. Photo: Bloomberg
Workers at an Ashok Leyland factory in Hosur. Sales of medium and heavy duty trucks have been rising since June, after dropping for more than two years. Photo: Bloomberg

Mumbai: When Vinod Dasari, managing director of Ashok Leyland Ltd, travelled to London in June 2013, he went there with a sense of trepidation. A weak economy had led to a near collapse in the truck market, capacities were sitting idle, unsold stock was building, investors were cashing out and rumours started to do the rounds of an impending exit by promoters Hindujas.

Everything that could go wrong, seemed to have gone wrong.

Trouble had started because of a slowdown in infrastructure sectors such as mining, which led to a significant contraction in demand for trucks. Sales averaging 345,000 units in 2011-12 had fallen to 200,000 in 2012-13. Ashok Leyland by itself had the capacity to make 150,000 trucks, while the total utilization rate across the industry had almost halved.

As capacity utilization fell and unsold stocks rose, most manufacturers, including market leader Tata Motors Ltd, Eicher Motors Ltd and others, started to offer heavy discounts. The impact on profitability was for all to see: for the quarter to June 2013, Ashok Leyland reported a loss of Rs.141 crore—the steepest in many years—and net sales were down 14% to Rs.2,498 crore.

Around the same time, Bharat Benz, the truck and bus making arm of Daimler Commercial Vehicles Ltd, which had been watching from the sidelines, had started to feed the market with its range of made-in-India trucks, challenging the over-six-decade-long duopoly of Tata Motors and Ashok Leyland.

Together, all this meant a turnaround plan that Dasari had presented in April no longer seemed enough to change the fortunes of the 65-year-old truck maker.

“I might have to take some tough actions which might bring a bad name to the company,” Dasari told the Hinduja brothers at the meeting in London. But with few other options on the horizon, Dasari convinced the promoters to go along with his plan.

Dheeraj G. Hinduja, chairman, Ashok Leyland, concedes that one of the reasons the company had to take drastic steps during this slowdown was its diversification into several non-core businesses. “We now plan to stay sharply focused on our core truck and bus business,” he said in a phone interview.

Eighteen months on, a lot has changed, within the company and in the economy—a fact reflected in the near 189.68% surge in the stock in the last 12 months. For the quarter ended September 2014, the firm reported a profit of Rs.120 crore after six successive quarters of losses. More than 20 brokerages have upgraded the stock since then. Sales of medium and heavy duty trucks across the industry have rebounded to 11% to 116,483, while Ashok Leyland’s sales have risen 35% to 29,447 units in the first eight months of the year till November, over a year ago.

“It’s just the beginning of a story,” said an analyst at a global consulting firm, requesting anonymity. “With the market recovering, the real challenge for the company would be to sustain the lead. The impact of newer entrants is likely to be more pronounced now than ever before,” the analyst cautioned.

A prolonged slowdown

While this wasn’t the first time the firm had faced a slowdown, the prolonged downturn which has translated into two years of declining sales, had weakened the company’s balance sheet.

Working capital requirements had burgeoned to Rs.1,400 crore, while overall debt had hit a record Rs.6,280 crore when Gopal Mahadevan took charge as chief financial officer after the superannuation of K. Sridharan in September 2013.

“When I joined, I knew a lot of things had to be done on the financial front itself, even as my colleagues in the business side were going ahead with new product launches and were persisting with the strategy of growing the marketshare meaningfully,” said Mahadevan.

In response, the management started by trimming costs, including employee costs.

In January, for the first time in its history, the firm announced a voluntary retirement scheme, and close to 500 people in executive jobs opted for the scheme.

A slew of other initiatives followed to help deleverage the balance sheet.

A sale of non-core assets, which included the sale of a residential property in Chennai and a stake sale in IndusInd Bank Ltd among other things, yielded Rs.670 crore. A qualified institutional placement (QIP) helped raise another Rs.666 crore. Simultaneously, restructuring the loan book to replace short-term loans with long-term ones helped cut monthly interest payments, freeing up cash flow. It also put Albonair GmbH, the German arm which works on reducing vehicle emissions, and Czech Republic-based Avia, up for sale.

By the end of March 2014, working capital needs were down 80% to Rs.250 crore from Rs.1,080 crore at the end of September 2013, and debt was cut by Rs.1,700 crore to Rs.4300 crore at the end of September 2014.

“With a stronger balance sheet and improving margins, Ashok Leyland is ready to ride the upside,” said Mahadevan.

The attempts to strengthen the balance sheet came alongside a bid to restructure the organization.

A horizontal structure which had all the functions including production, planning and marketing, reporting to the managing director, gave way to a verticals structure made up of six strategic business units—trucks and buses, light commercial vehicles (LCVs), engines and power solutions, defence, construction equipment and spare parts.

At the same time, recognizing the need to shed the image of a provincial “South Indian company”, Ashok Leyland embarked on an aggressive expansion of its sales, service and spare parts network. Over the last 18 months, the company’s network has grown 30% and currently stands at 520.

From placing containerized or mobile workshops in remote locations to opening company-owned spare parts stores, over the last one-and-a-half-years, the company has done everything to come closer to its customers, said Dasari.

“Till three years ago, they were competing on the basis of demand, now they are doing it basis service and products,” said S.P. Singh, senior fellow at the Indian Foundation of Transport Research and Training (IFTRT), adding that the company’s response time to customers has improved over the last couple of years.

It’s also taking on rival Tata Motors head on, even in the North, which has been a stronghold of Tata Motors for long, says Singh.

In the eight months to November, the market share of medium and heavy duty trucks of Ashok Leyland rose to 25.28% from 20% a year ago. In the same period, market leader Tata Motors saw a marginal decline in its market share to 59% from 58% a year ago, while the market share of Volvo Eicher Commercial Vehicles Ltd—the third largest in the pecking order—fell 11.30% from 13.19% a year ago, according to lobby Society of Indian Automobile Manufacturers (Siam).

De-risking the business

In a bid to reduce the influence of domestic demand cycles on the firm, the management is focusing on markets outside India and is also looking to grow its non-truck business faster.

“The market that is cyclical is the Indian truck market. If I can decyclicalize (de-risk) from India and trucks, I should be okay,” says Dasari, adding that he is pushing growth in five business units other than trucks—defence, engines and power solutions, LCVs, spares and construction equipment.

“...The idea is to reach a stage when the truck business accounts for only half of the total sales revenue,” he added.

Meanwhile, with the recovery of the LCV market still out of sight, plans to set up a new factory with partner Nissan Motor Co. have been shelved. The venture produces the Dost and Partner mini trucks.

An overseas expansion strategy is also starting to take shape with the company looking to diversify into geographies beyond South Asia, to include countries in the Middle East, Africa, South-East Asia, Latin America and the Commonwealth of Independent States (Russia, Ukraine, Belarus and others).

Among these, Ashok Leyland already has a presence in Ras al-Khaimah, in the UAE, where it makes buses. It also has a presence in Russia and Ukraine. Besides expanding in these regions, the company plans to set up facilities in Africa and appoint a dealer partner in South-East Asia. As part of the larger de-risking strategy the company is targeting one-third of its sales to come from outside India over the next three to five years, said Dasari.

Not everyone is convinced the strategy will work.

“It would be tough for the company to break into markets like Russia and Ukraine, where local manufacturers have a strong presence,” said V.G Ramakrishnan, managing director at Frost and Sullivan, a consultancy. Besides, a number of these markets, such as those in the Middle East and Russia, are facing concerns emerging from a recent steep fall in oil prices.

Waiting for economy to turn

To be sure, truck sales remain highly correlated with the economy, and a sustained momentum in economic growth will remain crucial to the company’s turnaround plans. “It’s critical that the upcycle in the medium and heavy duty trucks market continues for the company to move ahead on the path to recovery,” said Joseph George, analyst at IIFL Ltd. Maintaining the current cost structure will be yet another important factor, he said. “In the past, too, they have tightened costs during a downturn, but have got back to accumulating flab during the subsequent upcycle.”

Even as a broad-based economic recovery is still some distance away, some pick-up in core sector activity, an attempt to kick-start stalled projects and slowing inflation have led to some improvement.

Sales of medium and heavy duty trucks have been rising since June, after dropping for more than two years. Sales of such vehicles rose 11% to 138,228 units in the eight months ended November over the same period last year, according to Siam.

Analysts believe a low base effect and positive momentum in the economy will provide headroom for commercial vehicle sales to expand. The recovery, among other factors, will be led by an improvement in real gross domestic product (GDP) growth back to over 6% from sub-5% levels in FY14.

“We expect volume CAGR (compound annual growth rate) of 26% in the goods medium and heavy CV (M&HCV) segment over FY15-17e,” wrote Basudeb Banerjee, an analyst at Antique Stock Broking Ltd in an 8 December report.

The sales will be catalyzed by factors like softer inflation and lower interest rates, a gradual opening up of mining operations in South India post a prolonged ban, pro-active attitude of the new central government towards road infrastructure development, a cash for clunkers programme to motivate scrappage of old commercial vehicles, and better profitability of fleet owners led by falling fuel costs, wrote Banerjee.

Hinduja said Ashok Leyland plans to be one among the top 10 truck makers globally over the next five years, adding the firm is encouraged by the growing acceptance of its new truck models in the overseas markets.

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