Dasari's sudden exit from Ashok Leyland may cause some short-term concerns

Nothing to worry, avers outgoing CEO, pointing to the financial results; professionals will continue in driving seat, says chairman

Ashok Leyland's share price fell 10.5 per cent on Wednesday to close at Rs 106.60 on the BSE, their lowest in a little over a month.

The market was partly reacting to the announcement that Vinod K Dasari, managing director and chief executive officer (MD & CEO), would resign after 14 years with the commercial vehicle (CV) and defence equipment maker.

The company's September quarter results having missed analysts' estimates was also responsible for the stock's fall.

Dasari's decision not only shocked the market but even the company's chairman, Dheeraj Hinduja, who said he was "surprised" and that it was "unexpected". Dasari had said, "It is not a knee-jerk reaction to any issue, but an amicable separation. I have decided to pursue other interests."

Brokerage houses were divided on the development. Nomura maintained a 'neutral' rating on the stock, while stating Dasari's resignation might cause some short-term concerns. Chirag Shah of Edelweiss Research recommended a 'buy', stating that institutionalisation of solid business practices over the years would contain the impact, if any, of the change of guard.

CLSA recommended a 'sell', stating it was concerned at CV demand. Competitive intensity is likely to rise, which would have an impact on margins.

For the quarter, Leyland posted a lower than expected 37.5 per cent rise in net profit on Tuesday. It cited higher raw material cost, a challenging market scenario and aggressive competition. There was a 10.6 per cent margin in the earnings before interest, taxes, depreciation and amortisation (Ebitda), as compared to 10.1 per cent in the same period last year. The margins were also lower than the expectations of analysts.

"Leyland has posted consistent operating margins, despite market volatility, with double-digit Ebitda margins in 14 of the past 15 quarters," said Dasari.

CEO's contribution

The aggressive production expansion, marketing initiatives and dealership expansion under Dasari has led the company to be a strong pan-India player. Today, the north and east are its fastest growing markets and half of Chennai-based Leyland's production capacity is in the north. He also embraced technology and design, to compete with global giants in the domestic and international markets. The market share in India is 35 per cent.

Besides building the core business (medium and heavy CVs), Dasari had built the adjacent areas -- light CVs, spares, defence equipment and others -- as part of a de-risking strategy. Today, the M&HCV contribution is less than 60 per cent, as compared to 80 per cent a few years earlier, the other businesses have increased. 

"There will not be any vacuum. We will find the right person. It will be business as usual," said Hinduja, who will oversee day-to-day activities as executive vice-chairman till a new CEO is found. Dasari will continue till March 2019.

"We believe companies need to run by professionals. The family (the company is part of the Hinduja-run group) never gets into the operational side -- it's our policy that the best talents should run," said Hinduja. He said there would be no change in the vision or in strategy.

Leyland expects the financial year's second half to see a flat rise in growth and 2018-19 to end with industry volumes growing 12-15 per cent (earlier estimate 10-12 per cent).

Over the next six months, elections are scheduled and there could be some challenges but beyond that, Leyland is well positioned to grow for the next five years, said Hinduja.

"We have laid the platform for future growth. April 2020 onwards, all our products will be complaint with Euro-VI emission norms, left-hand drive-compliant for export markets and also have electric vehicles. Leyland will not buy market share but will focus on profitable growth”, Dasari added.