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Ashok Leyland had posted a loss of Rs 142 crore from a profit of Rs 67 crore last year as its sales also dropped 25% to 14,900 units.  Photo: Ramesh Pathania/Mint  (Ramesh Pathania/Mint )
Ashok Leyland had posted a loss of Rs 142 crore from a profit of Rs 67 crore last year as its sales also dropped 25% to 14,900 units. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint )

Ashok Leyland to slash investments by one-fourth for FY14

Company cutting investments related to adding capacity or diversification in addition to slashing its capex

Chennai: After swinging to a loss in its first quarter, Ashok Leyland Ltd, the second largest truck maker in India, said it will slash its total investments by almost one-fourth to 400 crore this year to conserve costs.

In a conference call with analysts on Wednesday, the Chennai-based company said it was cutting down all investments related to adding capacity or diversification in addition to cutting down its capital expenditure.

K. Sridharan, the chief financial officer (CFO) of Ashok Leyland, said the company was cutting investments to less than 250 crore from 848 crore last year, and reducing capital expenditure by more than one-third to about 200 crore from 700 crore last year.

“This is a natural move; all companies are doing it. When the economy is not doing well, the cash flows come down and they don’t have the money to invest," said Umesh Karne, analyst at Brics Securities Ltd.

The company also resorted to laying off its temporary workforce last quarter that resulted in 1,300 job cuts in addition to a 5% salary cut for the executive cadre, which resulted in savings of 10 crore.

The company said it was taking these measures to prepare for the worst case scenario if growth does not revive in the next two quarters.

Sridharan said he expects the total industry volume this year to fall 10% compared with last year. Medium and heavy commercial vehicle (MHCV) sales dropped 23% to 2.6 million units, the steepest fall after 2008-09, when the drop was 37%, according to the Society of Indian Automobile Manufacturers.

In the first quarter, the company lost the 3 percentage points market share it had gained last year due to sluggish sales of MHCVs and more aggressive discounting by its competitors. Its market share in MHCV segment was 29% in the first quarter.

While the company had said in May that it would put a lid on discounting, it was forced to continue doing so since as everybody in the market was offering discounts, Sridharan said.

The company’s discounting rose from 65,000 per vehicle a year ago to 1.45 lakh at the end of the first quarter. This had resulted in operating margins dropping to 1% in the quarter. Ashok Leyland MD Vinod Dasari added the competition was giving discounts to the range of 2.5 lakh.

“We expect discounts to remain high till market revives, and this will continue to erode margins," said Karne.

Ashok Leyland had posted a loss of 142 crore from a profit of 67 crore last year as its sales also dropped 25% to 14,900 units.

The company has been hurting due to a segment shift to intermediate commercial vehicles from medium and heavy commercial vehicles, which account for two-thirds of its sales.

“This is one of the longest and sharpest down cycles we have seen. I don’t think it should go down further," said Dasari adding that the company hopes to recover market share once the “madness" of discounting stops.

Dasari said good monsoon, clearance of infrastructure projects market, renewal of mining licences in Goa and Karanataka and the sale of buses under the Jawaharlal Nehru National Urban Renewal Mission scheme may see the market picking up.

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