Ashok Leyland is clearly feeling the effects of the slowing economy. Its sales of commercial vehicles are down and its workers are faced with shorter working weeks and lower pay. In May, the company laid off about 1,300 temporary workers and effected a 5 per cent cut in salaries across the board to rationalise costs. Its debt too soared to Rs 5,500 crore in the June quarter from Rs 4,300 crore at the end of the March quarter. The company reported a net loss too for the quarter of Rs 141. 25 crore.
However, there is little worry in the offices of Ashok Leyland as the company is thinking of the long term. It knows selling heavy commercial vehicles is a cyclical business that is affected by the uncertainty that has hit the economy. So, it will have to adjust its production to match demand.
V Sumantran, vice-chairman, Ashok Leyland, therefore, has a more immediate concern: to ensure the company's diversification plans are not hurt. In the last few years, Ashok Leyland has invested over Rs 4,000 crore in areas where the future seems not only bright, but where the potential for profit margins are also high.
It has built upon its core-medium and heavy commercial vehicles-to enter areas such as engines, gensets and critical aggregates like transmission and defence and light commercial vehicles. The objective has been to look for integration and value addition which will help the company overcome the fluctuations in its core trucking business.
"There is a pattern to our madness; diversifications are related to our business, and if we master this (the new businesses), we will be on top. We will be the best automobile company," Sumantran says.
No other commercial manufacturer can offer so much variety across the pyramid, adds Dheeraj G Hinduja, chairman, Ashok Leyland. Hinduja says the company has been through the capital expenditure phase and is now ready with all its new products.
Ashok Leyland has committed an investment of Rs 2,500 crore in the light commercial vehicle (LCV) business along with Japanese auto major Nissan. It is already off to a good start.
The company's first product in this segment-Dost-which was launched in 2011 sold 35,000 units in the first year of the business alone. The company says Dost now has a 19 per cent market share in its category in the country. Four more products are in the pipeline and their launch is expected to boost the segment's market share further. Recently, the company also launched a new multi-purpose vehicle called Stile and is gearing up for a pan-India launch of Dost. The vehicle has been launched in only 11 states for lack of production capacity. A green-field plant has been planned at Pillaipakkam, in Chennai, for Dost's production.
Ashok Leyland is also gradually gaining a strong foothold in the backhoe-loader segment, or diggers in layman's term, which came from its construction equipment joint venture with Illinois-based John Deere. In some markets, the company says, it already is the No. 2 player by sales. The joint venture attracted investment to the tune of Rs 250 crore.
On the technology and engineering front, the company has invested in two companies: Albonair, a German subsidiary which works on reducing vehicle emissions; and Defiance Technologies, which provides engineering, manufacturing and enterprise (EME) services and solutions for automotive clients. Defiance Technologies is already working with Nissan to help develop a small car. "Defiance is opening our eyes," says Sumantran.
Albonair, in which Ashok Leyland has invested ^40 million (Rs 330 crore), according to Sumantran, is helping the company develop affordable technologies to reduce emissions for both Indian and global markets.
The investment in these two companies was part of Ashok Leyland's futuristic strategy. Early in 2006, Ashok Leyland could see that the demand for vehicles complying with stringent Bharat Stage IV pollution standards was going to rise in the future. "In 2006, we were worried how to develop an affordable technology, since the company could not afford the expensive European systems; that is when this company was born to help control the cost," says Sumantran. He expects to capture 24 per cent of the European market in emission-control systems by 2017.
"If you see our diversification, you will see a pattern. They are not only related to our core business and strength, but are also high-margin businesses. For instance, construction equipment has got better margins compared to two-wheelers or passenger cars. Our approach is right and we are investing in the right areas," says Sumantran.
Ashok Leyland has also taken a long call on the defence sector as this is immune to recession. Its Stallion, a truck, is among the most popular vehicles used by the armed forces. Besides, the company also is the largest private supplier of defence- logistics vehicles.
To strengthen this business, Ashok Leyland has invested in a separate entity, Ashok Leyland Defence Systems, which has a collaboration with German defence equipment manufacturer KMW, a leader in highly-protected, armoured, wheeled and tracked vehicles. Ashok Leyland has also partnered with L&T to manufacture future infantry combat vehicles with a 40-tonne payload. The company has five tenders at various stages of bidding in the sector. Sumantaran says most of Ashok Leyland's projects are intended to be long term and volumes will appear only after 2020. Meanwhile, the company has developed a new Super Stallion with a 350-360 HP engine. The existing Stallion engine is rated at 200-300 HP. "This increase will fulfill the role played by Tatra models and these vehicles will help us get entry into this segment," says Sumantran. The company is also a part of various other defence projects such as the 150mm mounted -gun system on a truck.
While the defence business was impacted in 2012-13 by the government's budgetary cuts, the company says the prospects are bright, especially in light of the government's decision to relax the foreign direct investment norms in the sector.
Explaining that foreign companies don't want to part with their technologies for 26 per cent stake because they know that others can easily replicate them in the future, Sumantran says, "In that context, I think opening up foreign direct Investment in defence is a very wise move. I think that this will not only benefit the armed forces but also Indian companies. In terms of impacting Ashok Leyland, I think it's a major positive for us. We have been exploring this, but we've been waiting for the right policies to come in."
However, these bets on the businesses of the future have come at a cost for Ashok Leyland. Massive capital expenditure over the years has inflated its debt burden several times. Last month, it announced a cutback in its capex plans for 2013-14 to improve cash flows and rein in debt. In the current fiscal, the company will only spend Rs 450 crore compared to Rs 1,545 in 2012-13.
Debt reduction will be its major target in 2013-14. Steps taken in May this year-salary cuts and lay offs- have resulted in savings of Rs 10 crore.
Ashok Leyland's wage bill in 2012-13 stood at Rs 1,076 crore, compared with Rs 1,020 crore the year before. This was largely achieved by reducing its employee strength to 14,668 in 2012-13 from 15,734 in 2011-12. These measures have led to Rs 125-130 crore savings in 2012-2013.
However, the measures may not be enough to change things at the company any time soon. An ICICI Direct report says weak macros have had a severe impact on Ashok Leyland's earnings as it remains highly leveraged in terms of operating performance. "Financial recovery is on an unsure footing. We feel margin recovery for the company will take three quarters," the report adds.
Yaresh Kothari, research analyst, Angel Broking, says the outcome of the company's diversifications will depend on how the company is going to scale up. While agreeing that the diversification would help in terms of addressing cyclical issues, he says the results so far have not been very heartening. For instance, the company's light commercial vehicle business contributed only seven per cent to total volume in 2011-12.
While Hinduja agrees the company needs to optimise cash and delay implementing capex until a revival in commercial vehicle demand, there is no stopping the company from its diversification plans. "Fortunately, critical investments were made in the last four years. If critical investments are needed, we will not shy away," says Hinduja.