‘Ashok Leyland is ready to launch its 1.5 tonne LCV through Nissan JV’

Ashok Leyland is evolving from a conservative commercial vehicle manufacturer to a more aggressive player by expanding its operations in the competitive light commercial vehicle space. The company has already acquired land in Chennai to commence the second phase of its joint venture with Nissan and is in the process of ramping up capacity at its Pantnagar plant, which will help the company maintain its margin guidance of 10.5%. In an interview with DNA, K Sridharan, chief financial officer, confirms that the company is not talking to Nissan for a small car below Micra; however, it is open to working in the area of commercial vehicles. Excerpts:

Several employees have been moving from Tata Motors to Ashok Leyland. Could you give us a sense of this change?
We are not focussing on getting people from Tata Motors; we are trying to strengthen our human resources to meet our growth. The people, who have come from Tata Motors, are across the board and are executing projects and business expansion plans undertaken by us. These areas specifically are construction equipment, power solutions and light commercial vehicles. All these people are very experienced. We are becoming a complex organisation and hence want seasoned employees.

Could you elaborate on the recent news of Ashok Leyland undergoing a name change to Hinduja Leyland?
There is no truth in this; it is a figment of someone’s imagination. We are in the midst of a brand study by Wolff Olims. We are evolving and so there are several brand challenges, so we are studying them. We still don’t know if there will be any change in the logo.

We see a lot of demand emerging either in heavy commercial vehicles or light commercial vehicles (LCVs). When do you think there will be traction in the medium and intermediate commercial vehicle (ICV) space?
The ICV and LCV segment is very much a part of the hub-and-spoke model. The commercial vehicle market is a sunrise sector and having said that  customers are experimenting to find out what is the ideal tonnage they can carry. In the Indian context, where the geography is vast we will have a lot of such new transportation models coming up.

We are launching our LCV through the joint venture (JV) with Nissan, which has a payload capacity of 1.5 tonne and a gross vehicle weight of 3 tonne, we believe we will be creating a niche market as neither will it be a 4 tonner nor a 0.5 tonner Ace type of a thing.  The demand will emerge from  obscure quarters of the economies- for example- the special economic zones are situated in remote areas, where railway connectivity is not possible and the only connection is through roads and you never know which payload segment will be useful then. Through the Nissan JV, we have 3 to 4 models of LCVs coming out the first of which will be a 1.5 tonner and then a mini bus for commercial application.

Right now things look quite good with the commercial vehicle segment, but what challenges in the coming months may depress this pace?
There are three positives and three negatives. First the positives:  the freight generating sectors of the economy are likely to show significant jump, for example agriculture, which has clocked in a record growth, the ports- the kind of traffic they are handling has gone up substantially.  The second most important factor is road building activity, the fund allocation for road construction is growing and road building is the backbone for the commercial vehicle industry. The third positive is the availability of finance for truck operators. People talk of liquidity crunch and interest rates hardening, but despite that the finance availability has been smooth.

Among the negatives are, first up, the dark clouds looming over the diesel prices, it is like a time bomb ticking. How long can the government not increase the price of diesel when the price of crude is rising? All the attractive politics will give way to economics and you will see some increase in prices. What normally happens is that the price hike was immediately passed on by fleet operators to customers and that is the pain area. In the bargain if the sentiments change, then it is a problem. The second negative is the rising cost of commodity prices and we, as manufacturers, are faced with this problem constantly. Our margins are eroding each year, by 150 basis points, and it is coming down only because we cannot increase the price beyond the material cost increase, thus reducing my profitability while I am passing down the cost, I am not able to make profits. This also means that the capital cost of acquiring a vehicle has gone up significantly over the years. We hope the government will remove some of the inbuilt cost inefficiencies, for example the implementation of goods and services tax (GST).

How has your financial arm been performing?
It has not only made finances easily available, it has also increased my ability to reach remote pockets of the country. Our finance company is helping us a lot in the eastern and central market. The finance company has a corpus close to Rs1000 crore and we are hopeful of shortly crossing 5000 vehicle sale. They have funds tied up for another few hundred crore.

There are complaints from various states about the delay in delivering buses under the Jawaharlal Nehru National Urban Renewal Mission scheme. How do you justify that?
We thought we would be catering to three broad categories under this scheme, namely, the luxury, medium and low-end category, but it turned out that each state had different requirements. For example, Mumbai wants the buses to have aluminium body, whereas Tamil Nadu says that it cannot afford aluminium body buses. Delhi, being the capital, wants the ultra low-floor buses, which are 40-50% more expensive than the normal buses, whereas Madhya Pradesh says it cannot afford the low-floor buses. It would have been better if there was a central agency that could have standardised the requirements. We also made representations to the surface transport ministry, but beyond a point they cannot do anything, as it falls in the state domain. Not having clarity on the specifications has resulted in our inability to deliver on time. We refused to quote for a few states, as we wouldn’t have been able to meet their requirements.

What is the update on Optare, in which you have acquired a 26% stake? Would you be looking at bringing in their bus portfolio into the Indian market?
Our focus would be to first adapt the design for cost-sensitive international markets such as Middle East, Africa and Latin America. We have a facility in Middle East, which will be used as an export hub. When the scales pick up, for such low-cost high-end buses, we will bring them to India as well.

How is your Czech subsidiary Avia performing?
It was affected by the global crisis. While the world has started recovering, Europe is still lagging behind. We have shifted the cab tool from Prague to our Indian facility in Hosur, Bangalore. The process of integrating the cab, into the regular Indian vehicle, is in process and in the next few months we will stabilise on production. These vehicles will be up to 12 tonne.

Are you also looking at acquisition in the Latin American market?
Yes. The acquisition will mainly be in the after-chassis products such as bus, tipper and tractor trailers.

What have you learnt from Tata Motors world truck, as you are in the similar space too?
The first learning was not to go for any world truck, but a ‘U truck’. We have made trucks with essential features by which the vehicles wherewithal is prolonged. We have worked on a method to improvise the maintenance of vehicles and bring down its operational cost. In terms of volumes, it has been well received in the southern markets. We will expand to multi-axles, which is the largest selling segment.