Ashok Leyland Finance -- Safe run

Anup Menon

THE fixed deposit programme of Ashok Leyland Finance is a good investment option for a fixed income portfolio with a medium-to-high-risk profile.

The rates on offer are comparable with other options within the same risk category. The company's performance in the near future may come under pressure owing to the trends in the automobile industry.

This is likely to have a direct impact on the operational risk profile by a lowered demand for hire-purchase requirements, and on the financial risk profile because of deteriorating asset quality. However, as of now, the possibility of default looks remote. Therefore, the company is not likely to face any problems in servicing its fixed deposit base. Investors with a penchant for risk can consider investing in the one-year option.

The fixed deposit programme of Ashok Leyland Finance (AFL) is open for investment. The company offers both fixed and cumulative deposit schemes. The former is open for two- and three-year tenors at 11.5 per cent and 12 per cent respectively and the latter for one-, two- and three-year tenors at 11 per cent, 11.50 per cent and 12 per cent (without compounding).

Under the fixed deposit scheme, investors have quarterly or monthly interest payment option. For those choosing the former, the minimum initial investment is Rs 10,000 and for the latter it is Rs 15,000.

Under the cumulative scheme, the minimum investment is Rs 1,000 for all tenors and, thereafter, in multiples of Rs. 1,000. Deposits are accepted at the registered office of the company at Sudarsan Building, 86, Chamiers Road, Chennai-600018

Part of the Ashok Leyland group, AFL provides finance in the form of hire-purchase. The business potential depends to a large extent on the state of the economy. When the economy is on a downtrend, prospective buyers tend to postpone their capital expenditure.

They prefer to use their existing vehicles and wait for conditions to improve before buying new ones. This is bad news for AFL, as disbursements will slow down, and it sits on funds unable to channel them profitably. This may lead to some mismatch between the assets and liabilities and bring pressure on the profitability.

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Another problem for AFL is that a slowdown in the economy leads to increasing problems of collections. Given that the company relies on hire-purchase for much of its revenues, the risk factor on this account has to be noted.

In this backdrop, it may be wise for investors to stick to the lower-end tenors and wait for an improvement in the fundamentals before making a long-term commitment in what is otherwise a fairly sound NBFC.