Chennai-based Ashok Leyland, India’s third largest commercial vehicle maker, is using the slowdown to go aggressively after cost cutting. It is also recalibrating its capital expenditure for FY21.
The maker of heavy duty trucks has already managed to reduce capital expenditure for the present financial year by 40 percent. This will help it to close the year with a capital expenditure of Rs 1,200 crore, as against the earlier Rs 2,000 crore announced at the start of the fiscal.
For the coming financial years, Ashok Leyland is going back to cost structures that were in place three years ago. And, not just that, the company plans to further reduce expenditure from those levels, a top company official recently told analysts.
This is relevant as the auto industry, which had a dismal 2019, is facing further challenges due to the COVID-19 breakout. Manufacturing at all of Ashok Leyland plants, like every automaker, has been on a standstill since the start of the week following the call for a nation-wide shutdown by Prime Minister Narendra Modi.
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Gopal Mahadevan - the chief financial officer and whole-time director - Ashok Leyland, said, “So what I told the management was, let us go back to when we were Rs 18,000 crore last, let us look at what were the resources we are deploying and let us take a 20 percent cut on that. So that has set the organization thinking completely differently, why not we resize the organization to the level it was, say, possibly 3 years ago.”
In FY20, the company recorded a revenue of nearly Rs 30,000 crore.
Mahadevan's address to analysts took place just before the outbreak of COVID-19.
Relook at capex
Going forward, the company will set aside a much smaller capex which will be mostly on the light commercial vehicle business. This capex will not exceed the given band of Rs 400 to Rs 500 crore for each of the next four to five years, the official informed.
“We have been really looking at how to get capex down over the last few months that we have been able to achieve that. We have just finished our strategic planning process now. We have said that we need to get this business into high ROC. Next year the second quarter is not going to be really great, but we are going to use this opportunity even to scale down the operations of the company even further,” Mahadevan added.
FY20 has seen Ashok Leyland’s domestic sales cripple by 30 percent to 1.14 lakh units till February. The fall was much higher than the industry which recorded a drop of 22 percent during the same 11 month period, as per data shared by the Society of Indian Automobile Manufacturers (SIAM).
With exports taking a hit in the present financial year, the company has moved the senior team focusing on exports, moved back to Chennai and reduced its level of activity in Dubai, which has been a hub for the company for past several years.
The coming on board of a new chief executive officer and two chief operating officers has expedited the revival process under Chairman Dheeraj Hinduja. While Vipin Sondhi is the CEO and MD, Anuj Kathuria and Nitin Seth are the new COOs.
“We are making the company very asset-light. We are looking at our entire manufacturing strategy. Again, we possibly will shift some manufacturing and rebalance the whole manufacturing. That has been happening ever since Dheeraj started. So his focus was on long-term sustainability, and we are looking at that, and we hope to achieve that over the next couple of years,” added Mahadevan.
He added that the company also wanted to reduce the break-even period for new projects, but did not provide additional details.
The area which will continue to attract attention for Ashok Leyland is the light commercial vehicle business. Despite the challenging environment, the LCV business of Ashok Leyland did better than the industry and recorded a fall of 8 percent to 44,623 units till February compared to the same period in 2019.
Industry volumes in the LCv segment were down by 12 percent during the same year at 5.51 lakh units, as per SIAM data.
“Our plan for next year is going to be extremely aggressive, even though it is not easy to achieve. Some of these goals are so aggressive that we do not know, it requires a Rambo to deliver them, but I am sure that we will get there. We have said that we want to be in the global top 10 in commercial vehicles over the next few years, maybe 6 years, 7 years, depending on how the economy pans out. If that has to happen, believe me 50 percent of our volumes will have to come from LCV, which means we need to have LCV volumes clocking somewhere around 150000 to 180000 or 200000 units. So LCV investments will happen,” said Mahadevan.
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