Home >Markets >Mark To Market >Ashok Leyland’s loans to promoters in focus amid Hinduja family feud

MUMBAI : Analysts have brushed off the Hinduja family feud as inconsequential as far as Ashok Leyland Ltd’s prospects go. The general view among brokerages is that its operations will not be affected by the fight over the promoter group’s $11 billion fortune.

Investors, however, are a bit on the edge, with the company’s shares falling 7.5% in the past three trading sessions. Its better-than-expected March quarter results didn’t lift sentiments either.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

A small detail in Ashok Leyland’s financial statement appears to have irked some investors and analysts. Loans to promoter entities worth 500 crore were outstanding at the end of March, which is a bit of an eyesore, especially since the automaker’s debt numbers shot up last year. So, what should ideally have been used to repay its own debt, was instead used to fund a promoter-group venture.

Investors typically frown at such arrangements. In Leyland’s case, the management told analysts that among other things, it gets to make an arbitrage gain by borrowing cheap and lending it to promoters at rates that are 3-4 percentage points higher.

While this sounds good, prima facie, the moot point is that the investors are looking to ride its fortunes in the auto business, and not quite its prowess in the market for inter-corporate deposits. While Ashok Leyland has a history of giving loans to its promoters, these have been typically short-term loans, and were never outstanding at March-end. In FY19, loans worth 735 crore were given, but were also repaid before the year-end. But in FY20, loans worth 950 crore were advanced, while repayments amounted to only 450 crore.

“The company will be better-off repaying debt in the current uncertain environment, rather than extend loans to promoter group firms," said an analyst at a domestic institutional firm, requesting anonymity.

Back to the results, Leyland reported an operating profit margin of 4.8% last quarter, better than the 3-3.6% margin estimated by Nomura Research and Kotak Institutional Equities. “Ashok Leyland’s performance was ahead of estimates, with improvement in average selling price and gross margin expansion driving the beat," ICICI Direct Research said in a note.

Of course, revenue dropped 56.6%, reflecting a similar fall in sales volumes, and operating earnings slumped 81%, reflecting low volumes and negative leverage.

But, as pointed out earlier, against the backdrop of a sharp drop in volumes, the 1.3% increase in average realisations and the improvement in gross margins were positives.

The company’s commentary suggests things are gradually improving. “Next quarter, we expect to see some movement (improvement in overall sales) and Q3 should be better," the management told analysts.

What investors would also love to hear is that the loans advanced to promoters have been repaid.

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