Ashok Leyland, the country’s second largest commercial vehicle (CV) manufacturer, had to resort to tough measures in recent times such as lay-offs, cuts in capex and overheadsa and sale of subsidiaries, among others, to ride over the poor market conditions.
But the Hinduja flagship is coming out strongly now, and the man who has been driving the transformation is Vinod K. Dasari, Managing Director of the company. Under his leadership, AL has graduated from being a South-focused player to a pan-India firm. Mr. Dasari spoke to The Hindu about the market and company in detail. Excerpts.
So, has the excess capacity in truck industry been absorbed?
No, not yet. We are far from that. Remember, just two years ago this market was 3.5 lakh units a year. Last year, it was two lakh. Now, we are up 10 per cent. Total volumes in the first 10 months of this fiscal were up 13 per cent. Of course, Ashok Leyland was up about 23 per cent. It’s still a long way to even reach our previous peak.
There is a thumb rule markets follow in other parts of the globe. For every million population, the annual industry volume for medium and heavy commercial vehicle is about 1,000 units.
It’s true in China, the U.S. and Brazil, among others. In India, for a population of 1.2 billion, we should have 1.2 million annual consumption. But it is just a two lakh-unit industry. So the gap is huge, it can’t grow just like that. It is going to take series of road constructions and infrastructure projects and that will come.
Our industry runs on three things. First, general economy, which is coming back. Second, construction or infrastructure sector, where the government has promised stronger push after the budget and the third is mining, where some improvements are seen. Unfortunately, all three things were negative in the past 2-3 years. Now all these three are looking up. I am now very bullish.
There were retrenchments, sale of some businesses and restructuring. Have you come out of the downturn phase that hit you badly?
Yeah, it was painful. We cut manpower cost that was very painful to do. We cut not just number of people, but everybody took a five per cent pay cut. Of course, now that the market is back, for the balance six months, we gave 10 per cent hike at the junior level. It offsets everything. They all sacrificed for the company. We cut the variable pay of everybody and that was obvious as we didn’t perform well. Manpower is only 10 per cent of our total cost. So, we looked at all our overheads. We actually reduced out power costs while the power bill was going up. Travel costs, sales overheads etc everything we brought it down. Of course, we sold off non-core assets, we shut down some warehouses. But, we had said we were not going to be cutting costs, but also transforming the company. Every so often a downturn is good. So we did lot of things structurally. As you can see in the last couple of quarters, despite the volume being lower, we started to make money. We have brought down the debt: equity from 2.2:1 to 1:1 now. We have cut our debt by more than Rs.2,000 crore, and will cut it further. Financially, we are now showing operating margins that are better than ever. We are paying back some of lost salaries to employees. Hopefully the market will come back even stronger. We figured out how to make money at this level. So when it comes back we will make more money.
You also took up some transformation exercise along with restructuring. What have been the results?
So, we didn’t just focus on cutting costs, but also worked on building and transforming the company. We invested in network. The fastest expansion of our network happened in the last 3-4 years. Probably, the highest level product launches during this downturn. While we took up several initiatives to improve sales and marketing, we also did a lot of other things. The initiatives have been rewarding. We have gained market share. We are performing financially better than others and the stock market is rewarding us for that. It gives confidence to the team here. We can set our tasks higher. In the last one or two years, we have transformed Ashok Leyland from what was historically a functional organization into six business units measured on profits.
Will there be any significant change in your business focus going forward?
First and foremost, I would like to make sure that the truck business is not more than half of our business. It doesn’t mean that I slow down the growth of trucks. We will defend our market share and grow it. But other businesses have to grow faster. Because the cyclicality happens only in trucks. If I build a great company, I should have a shock-proof model. By the way, if I say I will build a great company, it doesn’t mean that I will suddenly change our focus. Our vision as set by the chairman, promoters and the board is to stay strong in trucks and buses. We are not going off from that. So to prepare ourself for the next down cycle, we want trucks should be only 50 per cent of our business. Secondly, the cyclicality comes only from the India trucks. So how do I remove the Indian portion being 90 per cent of sales? We pushed a lot in the past couple of years in the export market. This year, our exports are growing at 40 per cent. We want to make sure at least a third of our sales come from outside the country. Thirdly, we want to ensure that we bring down out debt as well as increase our EBITDA. So to get my EBITDA to be higher I should make sure that my margins are better and overheads are controlled, my products are something that customers are willing to pay the right amount. We have put in basics that are necessary for all of these.
So, non-truck business will also get an aggressive push?
We are Rs.12,000-15,000 crore now. I want every Rs.1,000 crore segment to become a business on its own. For eg, our defence business is only Rs.600 crore. We are challenging the team and they are coming up with a plan to grow that into a Rs.6,000 crore business in the next 5-8 years. That is the target. Similarly, in power business, we don’t want to remain in Rs.500 crore level; next step should be to reach Rs.5,000 crore in 3-5 years.
Recent years also saw AL giving strong focus on R&D. What have been the key outcomes and would you continue to increase R&D spend?
We will focus ourselves to ensure that we do continuous R & D on things that make customers more profitable. If that means making the vehicle lighter, and making the engine more powerful or more fuel-efficient, we will stay focused. But what is required for me is to innovate for India’s market. I sell a 40-tonne tractor-trailer at one-fourth a cost of a light-to-light HP 40-tonne tractor-trailer in Europe. And I meet all the emission norms that are required for this country. We will continue to improve as per the regulations, yet we can still be cost-competitive. Isn’t that innovation? I want to tell this story. We had a 30 year old engine line in Hosur 1 unit that used to make only A-platform engines. But, If BS4 comes, A-platform can’t go there. It needs B-platform, which is wider. But none of the machines in the line could do B-platform engine. We figured out that it would require Rs.60 crore of investments to upgrade the line. I said we can’t make such investment during the downturn and I challenged the team to come with a plan. I said I will give only Rs.2 crore and can you do this? They took four months and only a couple of weeks ago I inaugurated the upgraded line. The team did it themselves. This is frugal engineering. Imagine a 30-year old line has been rebuilt, that is, 73 machines were completely repainted, rewired etc and given a new life — may be for another 10 years. What does that do? My capital investments is lower, keeps process cost down. I get a lot more flexibility andnow I have three plants to make engines. This is innovation. Our JanBus is also a result of a great R&D. We would like to maintain an R&D spend of 2-3 per cent of our revenues going forward.
balachandar.g@thehindu.co.in
