Ashok Leyland expects good business from infrastructure boom

Ashok Leyland expects good business from infrastructure boom

Chennai: Despite bleak economic conditions in the US and Europe, commercial vehicles manufacturer Ashok Leyland Ltd is banking on an expected infrastructure spend in India of $1 trillion in the next five years to buoy business in its construction equipment joint venture with Deere and Company, makers of construction and agricultural machinery.

“Both of us (Ashok Leyland and John Deere) have seen the huge potential that India offers for this whole area of infrastructure development, construction activity, and are getting accustomed to the short-term ups and downs in the economic outlook," said V. Sumantran, chairman of the joint venture and executive vice-chairman of Hinduja Automotive Ltd.

The country’s 11th five year plan (2007-12) calls for an infrastructure spend of $500 billion, and Prime Minister Manmohan Singh has said that India would need to spend $1 trillion on infrastructure in the five years to 2016-17 for 10% annual economic growth. In the budget for this financial year, infrastructure sector allocation increased 23% to 2.14 trillion.

Road-building activity alone is expected to triple in the next three years, which would create a high demand for the kind of equipment that the joint venture plans to produce, said Douglas Meyer, director of engineering in the construction equipment division of John Deere. The company’s Indian arm earns about $1 billion in annual revenue, primarily from agricultural equipment.

“There is so much happening as a result of urbanization," said Rakesh Batra, national leader for the automotive practice at Ernst & Young. With plans for highways, roads, power plants, bridges and projects like the ($90 billion) Delhi-Mumbai industrial corridor, the substantial growth in infrastructure spending augurs well for the construction equipment business, he said.

Interest rate increases by the Reserve Bank of India—13 times since March 2010—would not affect the prospects for the construction equipment business and the long-term trend of the second-biggest Indian commercial vehicle manufacturer, Ashok Leyland Ltd, Sumantran said.

“(O)ver the next decade or the next couple of decades, the ascendancy of markets in countries like India and China are going to dominate global demand," he said. “That is not to say we will not see temporary blips. Whether it is passenger cars or commercial vehicles over the last five years, we have seen the overall growth trend punctuated by temporal dips or peaks. While rising interest rates and constrained availability of capital are important issues, the overwhelming population, the demographics, the growth in India is not a story that people feel has derailed."

The backhoe loader—a tractor fitted with a shovel or bucket in the front and a digger at the back—priced at 23.59 lakh in Chennai, is being manufactured near Chennai in the joint venture’s plant, which will have a production capacity of 10,000 units by 2016, according to P. Ravishankar, chief executive officer of the joint venture.

The joint venture’s second product, a wheel loader, will be in the market by the first quarter of 2013, Sumantran said.

Currently, about 20,000 backhoe loaders a year are sold in India, 75% of them by the Indian arm of UK-based construction, demolition and agricultural equipment maker JCB. The market has grown by 35-40% per year in the last few years, according to Ravishankar. Other players include Telco Construction Equipment Company, Caterpillar, Inc. and Komatsu India Pvt. Ltd.

The joint venture—which has invested about Rs200 crore on the backhoe loader so far—would not disclose sales estimates of the product for this year or the next, Sumantran said, as it was just ramping up production.