All The Right Moves

In July 2017 Ashok Leyland, the second largest commercial vehicles manufacturer in the country, ended up with a market share of 34.7% - its highest ever since inception. It was the culmination of a lot of things that the company did right over the past four years and the lessons they learnt from their mistakes in the past, as they came back from the brink. 

From a low of Rs.10,560 crore in FY14, the revenue has grown at an average of 24% to touch over Rs.20,000 crore in FY17, with the company recording its highest sales volume of 145,066 vehicles. But the battle is only half won for Ashok Leyland. While the going has certainly been good, the company is getting ready for yet another transformation. This time, a more challenging one, that calls for a realignment of its business model. The company is working towards moving away from product-centric to a solutions-led business and diversifying its revenue stream cyclicality. 

Double trouble
Rewind to 2013, Ashok Leyland was imploding from all sides. Demand had fallen on an average by 25% for two continuous years and entry of new players meant excessive discounting. If that wasn’t enough, the company was saddled with excess capacity and was reeling under a huge debt burden thanks to a five-year investment binge from 2008-2013. Revenue and profitability took a significant hit. Predictably, the stock hit an all-time low of Rs.11 per share. 

In the midst of all this, Vinod Dasari, CEO, Ashok Leyland took a trip to London to meet the Hindujas, the promoters of the company in 2013. He remembers the conversation, “I told them that just cutting costs at the fringes is not going to save the company. We need to make some tough decisions that may not exactly be popular. At the same time, we need to use the downturn to invest in technology, new products and expand our network to build a more resilient company.” It is not always easy to balance restructuring with investments for growth. But Dasari knew in an industry as cyclical as the commercial vehicles industry, the window of opportunity to realign the business is always short. Luckily for him, the promoters were willing to back him all the way. 

So, the company embarked on a massive fixed cost production called the K54. At that time the break-even was at 8,500 vehicles and the objective was to reduce the break-even point to 54,000 vehicles (4,500 vehicles per month). With the industry shrinking and supply being 5x the demand, Ashok Leyland’s only alternative was to bring down the overheads, which would lower the break-even. So it brought down the temporary workforce at its factories from 16,000 to 10,000, shut down sub-optimal factory and work spaces, pruned its product portfolio and brought down 70% of the operating working capital from Rs.1,400 crore to Rs.223 crore.  

Ashok Leyland also had to deal with a huge debt pile up of around Rs.6,500 crore. From 2008 to 2013 it invested not only in its enhancing capacity, but also in a series of joint ventures (John Deere, Avia etc) and subsidiaries (Hinduja Finance) that did not exactly pay off. In fact, the company invested nearly Rs.100 crore a month during that period, nearly one and a half times more than it had invested in the first 60 years. Since almost all of it was funded by debt, Ashok Leyland felt the pain of not only the market crash, but also that of a burgeoning debt burden. In FY14, revenue fell by 21%, operating margins were at an all-time low of 1.7% and profit declined over 90%. To ease the debt burden, the company sold some non-core assets including real estate and its stake in IndusInd Bank. It also raised Rs.667 crore through a QIP in July 2014, to repay some of its high-cost debt. In all, it sold non-core assets worth nearly Rs.1,620 crore by the end of March 2016 to bring down the debt levels to Rs.2,000 crore.  

Expanding its reach
While the company was pruning down its costs, it consciously worked on filling the gaps in the product portfolio by launching new products across categories — Boss, Captain, Sunshine, Oyster, Guru ICV, multi-axle vehicles and tractor trailers — that helped gain market share. In 2013, it started facing constraints in terms of a limited network with about 557 dealerships and touch points across the country. “We were predominantly south-based with a limited network. While we got good feedback on our products, the common refrain was that there weren’t enough service centres or spare parts readily available. So we kept expanding our network even in a challenging cost structure but the learning was to do it in a frugal way and get it right the first time,” says Anuj Kathuria, president, Global Trucks, Ashok Leyland. So, it was quick to expand and now has about 2,678 dealerships and touch points. 

While it is still the market leader in the south, the network expansion gave them strong market share gains in traditionally weaker markets like the north and east. Over the past four years, the company’s market share climbed from 22.5% in FY13 to its highest ever share of 37.4% in July 2017. “ Ashok Leyland’s pace of network expansion has been much higher than the market leader Tata Motors which has led to market share gains. We expect this momentum to sustain on improving brand equity,” says Chirag Shah, associate director, Edelweiss Securities.

As demand and capacity utilisation improved, revenue growth was back on track in FY15 with the company posting an average growth of 25% in sales volumes over the next two years. “When the market recovered, we grew much faster than the market and there was no looking back,” says Gopal Mahadevan, CFO, Ashok Leyland. Strong revenue growth and improving price realisations led to margins improving to 11% in March 2017. Working capital cycle came down from 44 days in September 2013 to around ten days currently. The company’s financial discipline and increasing operating efficiency meant that it enjoys one of the highest return on capital employed at 25%. “Ashok Leyland strengthened their core trucks business by expanding its network and investing in technology. Shifting capital to its core business from the non-core businesses helped the company in achieving key benefits, like economies of scale,” says Manisha Girotra, CEO, Moelis India and Ashok Leyland board member. The company also cleaned up its balance sheet either writing off the losses in its subsidiaries or exiting the unprofitable ventures. “Their approach was not to be everything to everybody. Historically, there were joint ventures they entered and acquisitions they made that did not really pay off which the company rightly exited,” says Girotra.  

Ashok Leyland has been constantly investing in R&D to improve the overall efficiency of their trucks and buses “We are the only commercial vehicle manufacturer to design and manufacture their own engines,” says a proud Dasari. The company indigenously developed ‘iEGR’, a derivative of the conventional EGR (Engine Gas Recirculation) system, which according to the company is best suited for Indian conditions. The technology allows engines to be replaced, which means BS-IV engines can be retrofitted into BS-III vehicles proving to be a more cost-effective option for customers. World over, EGR is being used for vehicles up to 180HP. Beyond that vehicles use SCR and Ashok Leyland has decided to use the iEGR technology for its entire range (up to 400HP trucks). The industry remains divided on which technology is better but Ashok Leyland remains confident that iGER is better suited for Indian conditions. Next on the agenda is to develop battery-swapping technology for electrical vehicles for which the company has tied up with SUN mobility to develop the interchange battery stations.

Getting future ready
The company is not resting on its laurels and is preparing for its next transformation. “I strongly believe that the company will falter if we don’t undergo yet another transformation. There is no escaping the cyclicality in our business. We have to transform the company when it is stronger. So we are doing things to stay ahead of the curve,” says Dasari.

As a first step towards de-risking its business model, majorly dependant on the domestic truck business — which makes up more than 62% of its revenue — the company is looking to scale up revenue from its other businesses.The plan is get one-third of its revenue from exports and one-third from light commercial vehicles (LCVs), spare parts and the defence business. Currently exports make up around eight per cent of the company’s overall revenue. The company is betting on the new products and having a local presence to drive up export sales. Ashok Leyland is setting up two assembly plants in Ivory Coast and Kenya to cater to the African market. It already has an assembly plant in Bangladesh where it sold over 5,000 vehicles in FY17 compared to 1,000 vehicles in FY16. The company is focusing on five to six products (Falcon, Oyster, Partner, Boss, Partner bus) to further expand its presence in the Middle East and African market. 

The LCV business is less volatile and counter cyclical to the medium and heavy commercial vehicles  business, making immense sense for Ashok Leyland to expand its presence in this space. World over, the LCVs make up 75-80% of the commercial vehicles industry and in India, they still make up only 60% of the market. The company was a late entrant, into the LCV business with a joint venture with Nissan in 2008. Early disagreements with its joint venture partner on market approach meant limited product introductions in the LCV business giving the company a 15% market share. In FY17, Ashok Leyland bought out Nissan in all its three ventures to gain full control of the LCV business, which will expedite the product development process. “We are going to continue to invest in the LCV business and are looking to launch at least one new product every quarter,” says Nitin Seth, president, LCV, Ashok Leyland. Both Nissan and Ashok Leyland will continue to work together on technology for the existing Dost Partner and Mitr models. Riding on the new launches lined up, the company expects the LCV volumes to increase from nearly 32,000 vehicles to 100,000 vehicles by 2020.

Ashok Leyland is also looking to grow its defence business by 8-10x to Rs.5,000 crore in a few years. The defence business while being a long gestation business is highly sticky thereby increasing its long-term revenue stability. The good news is that its success rate is only improving with the company winning 19 of the last 22 tenders it participated in. Ashok Leyland, offers specialised trucks, armoured vehicles and truck platforms to defence forces. 

World over, nearly a one-fourth of the revenue for commercial vehicle manufacturers is brought in by spare part sales, but for Ashok Leyland it is only five per cent (Rs.1,000 crore). In a bid to get a larger share of the customer’s wallet, the company is looking to ramp up its spare parts business. It recently launched a digital platform with four solutions — iAlert that provides real-time information on the vehicle’s condition and alerts the driver if it needs attention, ServiceMandi which connects customers to around 3,000 trained mechanics, E-diagnostics that provides quicker diagnosis and repair information and finally Leykart which ensures speedy delivery of spare parts at your doorstep. It already has a service that promises to reach truck drivers within four hours of a breakdown and have the vehicle up and running within 48 hours, beyond which the company will absorb loss due to the downtime. With these offerings, the company is hoping to grow its spare parts business to around Rs.4,000 crore in the next three to five years.

The commercial vehicles industry is going through a transformation where the demand is shifting to higher tonnage vehicles due to better road conditions, ban on overloading and efficiency of vehicles. The industry is expected to grow by 8-10% in the coming year.  The latest entrant in the commercial vehicles space, Daimler India has sold around 50,000 vehicles in the past five years. “We are seeing very good customer response across the board for rigid trucks, tractors, construction and mining - particularly for our new-generation heavy-duty trucks that we launched earlier this year. Old-tech cowl trucks which still account for the larger portion of the market must and will disappear,” says Erich Nesselhauf, CEO, Daimler India Commercial Vehicles. The move to higher tonnage vehicles works to Ashok Leyland’s advantage, since it does have a strong presence in higher tonnage trucks. With its new product offerings and improving brand equity, Ashok Leyland is likely to continue its outperformance in the near term. The bigger challenge for the company would be to balance growth and its investments for the future.  “The challenge when you are scaling up is the allocation of capital and management bandwidth. You have to be judicious when you have limited capital and bet on the right growth opportunities,” says Mahadven. It is these bets that will that help Ashok Leyland make the transformation from a product centric business to a technology-led solutions business. And for now it definitely looks like Dasari and his team are making all the right moves.