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Raghuvir Srinivasan

ASHOK Leyland has capped an interesting fiscal year 2004-05 with a good performance in the fourth quarter. The turnover and earnings grew 30-35 per cent (net of `other income') respectively as the company ramped up its operations after recovering from a crippling two-month strike at one of its main production units in the third quarter of the fiscal.

Indeed, about 35 per cent of its total turnover of Rs 4,811 crore and half its net profit of Rs 218 crore (excluding `other income') came in the January-March '05 quarter.

Yet, on an overall basis, the company appears to have lost considerably, especially in terms of yielding market space to competition, due to the strike at its unit.

By its own estimation, at least 5,000 more vehicles could have been produced and sold but for the disruption caused by the strike. The 13 per cent growth in Ashok Leyland's sales in 2004-05 compared to the overall sales growth of 22 per cent for the commercial vehicles industry tells the tale succinctly. The loss of production at a time of booming demand hit the company hard but it did well in bouncing back in the fourth quarter making up in a small way for the loss.

Aiding the bottomline in the fourth quarter was an exceptional income of Rs 23 crore being profit from the sale of a part of its holding in IndusInd Bank which accrued to it following the merger of its subsidiary, Ashok Leyland Finance, with the former. Including this one-time income, Ashok Leyland's bottomline shows a 63 per cent growth for the fourth quarter and 40 per cent for 2004-05.

Higher costs of inputs such as steel weighed down on margins; operating margin fell to 8.78 per cent in 2004-05 from 10.04 per cent the previous year.

Good visibility ahead

With its labour troubles behind it, Ashok Leyland now appears well set to ride on the continuing growth in the commercial vehicles industry.

The company has positioned itself well; especially in the fast-growing high horsepower multi-axle vehicles segment. Its `H' series engines (up to 210 horsepower) and `J' series engines (up to 260 horsepower), which are compatible with the latest emission norms, give it an edge in the market of the future.

This segment is set to witness some high quality competition later this year when Tata Motors begins introducing models from the Daewoo stable.

Ashok Leyland is also emerging as a serious player in the defence vehicles segment and has set its eyes on acquiring a global presence in this business which is inured to economic cycles.

In the domestic market, the company is consolidating its position in the north and focussing on the east where it has a minor presence now. Of course, the company conceded some space in its stronghold market of the south.

Meanwhile, it plans to spend about Rs 400 crore this year in capital expenditure to increase its capacity for vehicle assembly, engines and cab production.

Capacity is slated to increase by 10,000 vehicles to 77,000 by the end of this quarter and the company plans to produce 70,000 units in the current fiscal.

Present trends in the market appear favourable and the forecast slowdown in sales, post introduction of new emission norms, does not appear to have happened. April sales have been robust and Ashok Leyland has been operating to capacity. Economic growth is still strong despite the slowdown in agriculture last fiscal.

Of course, there are some worries too. The present upward bias in interest rates, continuation of the rising trend in input costs and the impact of a possible increase in retail fuel prices are some of those. Besides, it is already time to look heavenwards for the next monsoon which will set the trend for the rest of this fiscal. However, what lends confidence is the strength of Ashok Leyland in the three main areas of finance, technology and markets.

The company can boast of a strong balance-sheet with a conservative debt-equity ratio; interest costs may show a small rise this year following the $100 million foreign currency convertible note issue made by the company recently.

The investment in developing latest generation engines and the support from major shareholder, Iveco, lend confidence on the technology front. The company did cede some position in the market last year which it should be able to regain this fiscal. There was also some concern over the plans for a couple of joint ventures between a group company and ONGC and Mangalore Refinery and Petrochemicals on the likely financial burden on Ashok Leyland. The company says that there will be no financial commitment from its side in the two projects.

Shareholders can continue to hold the stock while fresh investment can be considered at minor declines from the current levels. Such investment should be made with a medium-to-long-term perspective.

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