Hinduja Foundries merger won't hit Ashok Leyland earnings: CFO

Hinduja Foundries's board on Wednesday approved the company's merger with commercial vehicle maker Ashok Leyland subject to regulatory and shareholders approval of both the companies. In a conference call on Thursday, the Ashok Leyland management said the merger will not be a drag on the automaker's profit and loss statement, adding that Hinduja Foundries will add to the company's bottomline in two to three years.Gopal Mahadevan, Chief Financial Officer at Ashok Leyland said Hinduja Foundries is critical to Ashok Leyland and 36 percent Of Hinduja Foundries' revenue comes from Ashok Leyland. The company sees significant synergetic benefits once Hinduja Foundries comes under Ashok Leyland, he added.There is an opportunity to improve financials of Hinduja Foundries and hence the decision to merge it with Ashok Leyland, he said.Below is the verbatim transcript of Gopal Mahadevan's interview to Jude Sannith on CNBC-TV18.Q: Does the merger of HFC with Ashok Leyland impact Ashok Leyland’s earning?A: There has been quite a bit of turnaround that has happened and in the previous years there were exceptional charges which have been taken. The organisation definitely Hinduja Foundries Limited (HFL) is getting lot leaner. We have had shutdown of the Ductron unit. We have had a VRS coming in so as we speak I have seen a couple of months of performance where the earnings before interest, taxes, depreciation, and amortization (EBITDA) have been positive. In the medium term, as I have shared with the other investors I believe that this acquisition would be accretive to Ashok Leyland.Q: How do you expect Ashok Leyland’s debt to rise once this merger is complete?A: It is not going to be very significant HFL has about Rs 500 crore of debt in its balance sheet as on date, but I think we would also see a certain amount of cash generation happening after the initial possibly 12 months or so and this should petered out shortly. The impact is not very significant on Ashok Leyland.Q: You said over the concall, the next 2-3 years could see HFL being earnings accretive for Ashok Leyland, so could you give us some numbers on that front?A: I will not be able to share numbers, but what I can share is direction. See there are opportunities that we see in foundries operation it is a very good gross margin business and I just wanted to step back and tell you the rationale of this merger as well. We must understand that foundries is a very, very critical supplier to Ashok Leyland almost all its casting requirements comes from foundries.The second one is Ashok Leyland itself has a financial investment in foundries. We have Rs 324 crore of preference capital in sight. The third part of it is that foundries has accumulated losses of more than about Rs 1,000 crore. The fourth one is both the new foundry management and Ashok Leyland believe that there is a smart turnaround that is possible.Now given all of this, the best thing to do is to merge both these operations because we get the benefit of tax losses, HFL shareholder get the benefit of getting into a larger company.Q: Moving on HFL registered a loss of Rs 394 crore over the last year. How much do you see that number falling in the next 2 years maybe?A: Again, what I can just tell you is that when I am sharing with you that it’s going to be expected to accretive to Ashok Leyland obviously all of that Rs 394 crore has to evaporate, so hopefully that should happen over the next 2-3 years.Q: What kind of drop do you foresee as far as Ashok Leyland’s margins are concerned going forward?A: Well, we will have to wait and watch there would be for the initial period there could be a drop in the margins at the profit before tax (PBT) level, but then in the first year we are hopeful that we would get to see some benefits of the tax as well.