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Ashok Leyland looks at pruning to grow bigger

The commercial vehicles maker is selling non-core assets to reduce debt and become a $10-billion company over the next decade

T E Narasimhan  |  Chennai 

Ashok Leyland’s Pantnagar plant in Uttarakhand

Last week, sold a big stake in Hinduja Tech, formerly known as Defiance Technologies, to Nissan International Holdings, the Japanese car maker's global investment arm. By itself the event would have been one of those deals that are regularly signed as part of business give and take. But, the stake divestment was part of a carefully thought-out plan conceived of two years ago to pull India's second-largest company out of

The deal in which sold 38 per cent of shares for an undisclosed amount, follows in the wake of the Rs 670 crore that garnered by diluting its investments, fully or partially, last year. Disposing of the big chunk in Hinduja Tech, which provides engineering, manufacturing, information technology and enterprise services to the automotive and aerospace industries, indicates that the company will continue with the restructuring exercise in the days to come. In fact, Ashok Leyland's 2013-14 annual report lists its associate companies, Albonair GmbH, Albonair India and Avia Ashok Leyland Motors, as open to sale.

"We are not selling all our non-core assets," says Gopal Mahadevan, Ashok Leyland's chief financial officer. "We are selective and we identify assets whose disposal would not affect our capacity and capabilities." Indicating that the strategy has worked, he says that has gone down significantly.

The level has come down from Rs 6,200 crore in August 2013 to around Rs 4,323 crore in September this year. The current debt-to-equity ratio stands at 1.1:1 and is well on track to reach the targeted 1:1.

Mahadevan says that the generation of cash has been achieved through a focus on three financial exercises. These include the reduction of working capital from Rs 1,400 crore to Rs 450 crore, sale of non-core assets/ investments and through qualified institutional placement to the tune of $110 million.

Analysts and investors have given a thumbs up to the company's steps, and cite the precedent of who managed to bring US car maker Ford out of the red by selling non-core assets or brands, including Volvo, Aston Martin and Jaguar-Land Rover. "It's part of the game to acquire a company at one point and sell it later as a non-core asset," says an analyst on Ashok Leyland's strategy. "An acquisition might have been made at a time when it was considered as being strategic for business. When the business scenario changes, the asset can be sold."

In 2013-14, Ashok Leyland made a Rs 301.33-crore profit on the disinvestment of its shares in IndusInd Bank. The sale of US-based Defiance Testing and Engineering Services also returned a profit of Rs 78.30 crore. The net profit on the disposal of tangible assets was Rs 192.94 crore. Diminution in the value of long-term investments was Rs 4.87 crore, which was primarily through AVIA Ashok Leyland Motors, according to the company's annual report.

This year, during the quarter ended September, Ashok Leyland registered a net profit of Rs 120.69 crore, compared with a loss of Rs 25.05 crore it had registered a year ago. Of course, much of it-Rs 108.9 crore - came under the head of "exceptional item" and comprised proceeds from the sale of land, but this was also the first quarter in six that saw the company making an operating profit - of Rs 56.2 crore.

More asset sales
Ashok Leyland has now appointed investment bankers to look for buyers for the Germany-based Albonair, GmbH and the Czech Republic-based Avia. The company had made a strategic investment in Albonair, founded in 2007 for the development of clean and green technologies. Headquartered in Dortmund, it has developed complete solutions for selective catalytic reduction and emission control systems for commercial as well as passenger vehicles. So far Ashok Leyland has invested ^46 million in Albonair.

An analyst who has tracked the company for a decade now says that because the implementation of BS-V and VI emission norms for automobiles in India has been delayed and their notification are not likely anytime soon, Ashok Leyland has rightly decided to capitalise its investment.

When truck company Avia was acquired in 2006, Ashok Leyland felt that this would strengthen its presence in Europe and give it access to technology related to truck cabins. It did not succeed in gaining a foothold in Europe, but Avia technology did help the company come out with a new platform for its intermediate commercial vehicle, the Boss. "If we didn't have Avia, the launch of the Boss would have got delayed and we would have incurred high costs in developing its cabin," says Mahadevan.

Bharat Gianani, research analyst (automobile), Angel Broking, approves of the decision to sell stakes, partially or fully in Albonair and Avia. "As long as the company's purpose has been achieved, why not sell them? If required, the company can go for future stake acquisition," he says.

Certain investments and some subsidiaries, however, will be for the long haul, with the company looking at benefits only in the long term. An example is UK-based bus maker Optare PLC, in which Ashok Leyland bought 25 per cent share in 2010 and subsequently raised its share to 75 per cent in 2012. Though the company is not profitable, Ashok Leyland hopes the British company will help it access future technologies, including in hybridisation.

Ashok Leyland took its market share to 27.1 per cent in the first half of 2014-15 from 25.5 per cent a year-ago on the back of a 5 per cent rise in sales of medium and heavy to 28,290 units in the six-month period. Its market share rose despite industry volume dropping 1.5 per cent during this period.

A number of vehicles, including the Dost, Captain and Boss trucks, the Partner and Mitr buses and the Neptune engine were launched. The sales and service network doubled to over 500 points in the past year, and deeper penetration in all markets also helped in improving the sales and boosting market share.

However, the company is still cautious about growth outlook for the full financial year. This is despite posting strong numbers for the September quarter, when its earnings before income, taxation, depreciation and amortization margin grew to 7.28 per cent from 4.7 per cent a year ago.

"The last two-three years have been exceptionally bad for the industry," concedes Vinod K Dasari, managing director, Ashok Leyland, but adds that the company plans to be in the top 10 spot globally in the commercial vehicles segment and the top 5 in the bus category. He says the aim is to take Ashok Leyland from being a $2 billion company at present to $10 billion over the next decade.

First Published: Mon, December 15 2014. 22:30 IST