Ashok Leyland, Hinduja Foundries merger: why analysts are miffed

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26 Aug, 2025 12:21

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Moneycontrol BureauAshok Leyland's plans to merge with its affliate Hinduja Foundries is likely to raise investor concerns as it will result in a 3 percent equity dilution for Ashok Leyland, which may lead to a potential 7-13 percent dilution in its earnings per share (EPS), based on the first quarter FY17 performance of Hinduja, as per a report filed by CLSA.Hinduja Foundries has declined around 37.45 percent to Rs 34.40 per share (closing price as of Tuesday) since the announcement of the merger.

Hinduja Foundries, which constitutes about a third of Ashok Leyland's revenues, is an auto-component company engaged in the manufacture of castings. It is a promoter-owned company which has been in a loss for a while. For the last fiscal year, Hinduja posted a loss of Rs 394 crore, with debt of around Rs 460 crore. It has accumulated losses of about Rs 1,000 crore. Since 2012, its losses have widened on a yearly basis although it saw a good revival in its commercial vehicle sales. It has had negative EBITDA margins of 8 percent to 6 percent over the last two fiscal years.

"The merger aims at achieving a turnaround of Hinduja Foundries under Ashok Leyland’s stewardship, which cannot be ruled out, but requires a leap of faith. We expect this development to weigh on Ashok Leyland’s valuation multiples. SELL stays." said the CLSA report released on September 16.

The burden on Ashok Leyalnd's EPS and valuation will be felt by minor investors post this merger as short-term gains are nowhere to be seen.

"While management expects the merger to turn EPS-accretive over the next 2-3 years, we think this is a steep target. We see no major benefit from this accruing to Ashok Leyland shareholders, unless it is done to mitigate risks to supplies," brokerage firm Nomura said.Why the merger is bad newsAshok Leyland has made no secret of its intentions to focus on its core business - trucks,  buses, defence, after-market and power solutions. To that end, over the last three years, it has shed its non-core businesses and loss-making enterprises. Taking on Hinduja will be a drain on Ashok Leyland's cash flows, as it will have to finance future losses and chart out capex for Hinduja Foundries.A Silver LiningSome say the merger isn't a bad call on the part of Ashok Leyland. Thanks to this move, Ashok Leyland will be able to get back the investment it made of Rs 320 crore. Besides, it could also make sure that its supplier doesn’t bite the dust.Other costs incurred on account of procurement and bank loans will also come down, thanks to this merger, say a few analysts. For now, tough, the markets have given this marriage a thumbs-down.