Financial Daily from THE HINDU group of publications
Thursday, May 05, 2005
`Ashok Leyland `de-risked' from key threats'
Mr R. Seshasayee, MD, Ashok Leyland
Chennai , May 4
DESPITE turning out very good results, Ashok Leyland's Managing Director, Mr R. Seshasayee, says that 2004-05 was a year he would like to forget. The demand in the market was very good but Ashok Leyland's production was constrained by a two-month strike at one of its plants.
Ashok Leyland's story is not what happened last year but what it intends to do in the next few years. On the cards is an expansion programme to take its capacity to 100,000 vehicles a year, without any addition to its 16,000-odd workforce.
In an interview to Business Line, Mr Seshasayee dwelt at length on how the management "de-risked" the company from key threats. Excerpts:
Input costs are going up and the increase in oil prices is expected to have an impact on sales of commercial vehicles. Yet, you have projected a growth rate of 10 per cent?
The commercial vehicles industry has never had a clear sky. There have always been some dark clouds. So long as there is a strong economic growth that leads to movement of goods, so long as there is no threat of that movement being taken away by a major competitor like the Railways, you'll see growth. There is no need to jump into a mood of pessimism.
Regardless of market behaviour, I believe that we must improve competitiveness and profitability. We need to de-risk the business financially, technologically, and in terms of geographical presence. Financially, this company is very de-risked. Ashok Leyland can withstand another bad year if that were to happen.
We have de-risked technologically through the arrangement with Iveco. The import of that arrangement may not be very easily visible, but Iveco has got all the technology that I require for the next decade.
It is a very strong storehouse of technology. And it is for us a very secure and very privileged position to be in to open the store at any time and pick up what we want - a tremendous insurance particularly when getting technology is not going to be easy.
At the same time, it does not stop us from shopping for other appropriate technology. Nor have we lowered our guard in terms of our own effort. In fact, we have intensified our effort. That is technology de-risking.
As regards market de-risking, the product market segment we have today is even more balanced portfolio than in the past. It may appear that we are not a full-range player. But within the medium and heavy duty vehicles area, which is more profitable, we have sufficiently de-risked our geographical position. We have critical mass in all the markets.
And we are growing in overseas markets. In West Asia, we are taking positions in Defence. I can now clearly see that in the next five years we will be a significant player in military equipment.
We are building capabilities to address a large part of the Defence markets. There are large parts of the world where there is no military vehicle making presence. This is the area for competition. And that area is pretty much within our grasp in terms of technology. And military spend happens quite independent of economic situation.
But growth is said to be more in multi-axle vehicles... ?
If the multi-axles segment grows, it is good news for us. We are very strong in that segment and we have winner models. Also, multi-axle vehicles (MAVs) are chosen by fleet operators rather than small operators. As in the stock market, when the industry booms, you've got a lot of single vehicle operators coming in, but when the market goes down, the shocks are passed on to the lowest rung.
It is the single vehicle operator not attached to a fleet who does not get his freight. The fleet owners make sure they have enough load for what they own.
And that ownership is quite often for MAVs and that segment is better disposed to us because they go more by performance rather than by image.
But do you have enough capacity to produce MAVs?
Yes. In the last year and a half, capacity exploitation has not been sufficiently strong. Capacity creation can be done by pumping in more investments or by capacity exploitation.
Of course there has been the issue of getting more out of the assets we have because of the rigid labour arrangement, which had linkage between money paid to workmen and the output. This is what we attempted to change and we have changed.
Will the dynamics of the market change against you when Tata Motors brings Daewoo vehicles to India later this year?
No, not really. Just stop and think. The liberalisation took place at the same time for both cars and commercial vehicles. Customs duties for commercial vehicles is significantly lower compared to cars. Yet when the car market has been completely taken over by global OEMs, why has that not happened in commercial vehicles? Why is that the global players are still left with one per cent market share?
It is not due to lack of liberalisation, or competitive policy. It is because the market or transport economics favour a particular configuration. You can't, therefore, say that whatever vehicles I get from wherever, because they worked in Brazil and Mexico, they will work here. It doesn't. The vehicles coming from developed markets will pose a challenge if we are flat-footed and don't come up with our own solutions. If we do, it is not a challenge.
But Tata Motors is a domestic player that knows the market and can indigenise Daewoo vehicles. It can be a different kind of challenge than, say, a Volvo?
If there is a combination of right kind of technology and a strong Indian presence and that is combined with product solutions to the market place, definitely it is a winning proposition. But that assumes that we would not do so. We can field the products. Iveco has a larger portfolio of products.
Last year, Ashok Leyland was able to drastically cut down on interest costs. Even if you take the net interest earnings from the arbitrage on your FCCN, the reduction is significant. How did it come about?
Look at our debt-equity. Our business is getting increasingly funded by equity. Very little debt. The additional debt is FCCN, which is earning net interest. Average working capital last year was lower than the previous year. Operating cycle has come down.
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