 "Sales slowdown a blessing in disguise for Ashok Leyland")
The company's stock rose to a 52-week high of Rs 32.30 on BSE last month after the announcement of the fourth quarter results, even as the 143 per cent quarter-on-quarter jump in profit to Rs 363 crore came largely from sale of non-core assets. It sold its stake in IndusInd Bank and Hinduja Leyland Finance, among others.
What really is giving investors reason for optimism is the Hinduja group company's efforts to transform itself into a nimble and more efficient company in order to better prepare itself to cope with the recession.
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Over the past two years, the company has been making changes in everything from its organisational structure and workforce to sales and distribution. "Rather than sit back and cry about problems that were created by external factors, we decided to use the downturn as an opportunity to fix ourself," says Vinod K Dasari, managing director, Ashok Leyland.
Fixing the company involved simplifying the organisational structure in order to bring greater accountability to each of its businesses-bus, truck and power solutions. It also meant slashing the workforce by introducing a voluntary retirement scheme as sales slumped over 20 per cent for two years in a row, the worst for the industry ever.
With sales drying up in its traditional strongholds (most parts of south India), the company shifted its focus to areas where it did not have much of a presence. As a result, it managed to cushion the impact of the slowdown to a large extent. For instance, in the medium heavy commercial vehicle category, Ashok Leyland lost market share in the south due to heavy discounting by competition, but it made up for the drop by increasing sales in northern markets (from 43.9 per cent in 2012-13 to 46.4 per cent in 2013-14). The expansion required opening of new stores in areas where it did not operate earlier and shutting down of stores that had become unviable. In all, the company added 200 new outlets last year, taking its total sales points to 639, while closing down 60 outlets. The results were quickly visible. The company not only managed to retain its market share in certain categories but even increased it in several regions in 2013-14.
In addition to driving sales, efforts were also undertaken to push efficiency. Over the past two years, the company has reduced its overall fixed cost by 9 per cent, production overheads by 33 per cent and manpower cost by 7 per cent. Several steps, including the introduction of a voluntary retirement scheme and cutbacks in top executive pay, were introduced to meet the target. On the working capital front, the company reached its lowest level in five years at Rs 780 crore in 2013-14. Part of the about turn was due to the reduction in days of sale, or the number of days taken to sell a vehicle, from 22 to 8.
Buoyed by the success, Ashok Leyland CFO Gopal Mahadevan says the drive to cut costs will continue until March 2015. He hopes the efforts will also help the company lower its debt, which stood at Rs 4,690 crore as of March 2014.
The focus on efficiency and productivity has not come at the cost of capital expenditure. The company plans to invest Rs 200-250 crore this financial year to develop new products, among which are a new model of its light commercial vehicle, Dost, and a four-tyre version of its light commercial vehicle truck, Partner, which at present is only available in a six-tyre configuration. "We have only stopped capacity expansion investment plans, while product growth will continue," says Dasari.
At the same time, beefing up after-sales service has become important for the company. It recently launched a mobile service to provide breakdown assistance in remote areas such as mining zones and distant project sites where the bulk of Ashok Leyland trucks are in operation. It has also introduced a "tatkal service" that promises to put a stalling truck back on the road in less than 48 hours.
Given all the changes sweeping through the company, analysts are upbeat about Ashok Leyland's prospects. Yaresh Kothari, research analyst (auto), Angel Broking, says: "The company reported better-than-expected results during the fourth quarter as the operating performance witnessed a turnaround led by superior product-mix and cost control initiatives."
The optimism is echoed by the company. "Sentiment is better. Our industry largely runs on sentiment and economic viability. With the new government in place, there is renewed hope about economic revival. By the second half of the financial year, we will see substantial improvement," says Dasari.
While demand is likely to grow in the later half of 2014-15, the optimistic outlook is also because of the lower penetration of trucks in the country compared to other developing economies, which means a lot of room for growth for the manufacturers.
"I expect 8-10 per cent improvement in demand for trucks and 8-10 per cent increase in the demand for buses," says Dasari. He hopes the government's city modernisation programme, the Jawaharlal Nehru National Urban Renewal Mission, will help boost demand further. Based on the LOAs (letters of acceptance) issued, he expects a demand for 3,000 vehicles this year for the company.
In addition to sales within the country, exports are becoming important in the company's plans. It has developed exclusive clusters to focus on the SAARC region, Latin America, ASEAN, Commonwealth of Independent States, Africa and the Middle East. At present, exports contribute 10-15 per cent of its sales. It plans to increase that share to 20-25 per cent.
However, while looking inwards, the company is not losing sight of what its competitors are doing. Dasari says the immediate threat is from Germany's Daimler, which is known for its Bharat Benz range of trucks, and from new entrants, such as Maruti, in the light commercial vehicle category. But it is not losing sleep over them because Bharat Benz is still a small player with only a 3-5 per cent market share.