XLRI 

BM 2007‐09 
BFA Assignment 
 
 
Analysis of Annual Report 
 

Ashok Leyland Ltd. 
(Medium & Heavy Commercial Vehicles Sector)

Group G

Akhil Jose Mathew (6)

Akshay Rajagopal (7)
Amit Sinha (8)
Chintan Agarwal (18)
Jeevan Kumar (24)
Gunjan Mittal (31)

Report dated August 29, 2007

 The Medium & Heavy Commercial Vehicles Sector
Commercial Vehicles (CV) broadly fall into two categories-- light segment (LCV- less than 7
tonnes weight) and medium and heavy segment (M&HCV- over 7 tonnes). M&HCVs are
used for long distance transportation of people, agriculture produce, capital equipment and
some industrial raw materials. Growth in this sector is dependent on the general economic
trend, development of infrastructure projects, transport economics, availability of freight,
replacement period of vehicles, availability of credit and favourable government policies.

Since the industry competes with the railways for several categories of cargo, railway
performance is an important determinant of commercial vehicle sales. Historically, demand
in the Rs. 27000cr M&HCV industry has been cyclical, 3-4 years of growth followed by 2-3
years of stagnant sales and recession, with around 6% CAGR over the last decade.

In recent years, the Government’s thrust on infrastructure and Supreme Court’s ban on
overloading of trucks have been the growth impetus for the CV industry. In 2006-07, the
M&HCV segment clocked sales of 294,266 vehicles, a strong growth of 34% YoY. The
export market contributed 22% to these numbers.
M&HCVs Production Trends (no. of vehicles)
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
96752 120502 166123 214807 219295 294266

The market shares (as of March 2007) of dominant players in the M&HCV sector are:
M&HCV Passenger Carrier Segment M&HCV Goods Carrier Segment
Swaraj Mazda Volvo India Sw araj Mazda
Eicher Motors
5% 1% 2%
7%
Eicher Motors
Tata Motors
6% Ashok Leyland 65%
Tata Motors 26%
47%
Ashok Leyland
41%

In May 2007, M&HCV passenger carrier segment registered strong 40% growth in sales
YOY. However, the M&HCV goods carrier segment registered a sharp 14.2% decline. This
segment is very sensitive to interest rates as more than 95% vehicles are financed. Interest
rates have almost doubled to 13-14% from 7.5-8% last year. There are continuing concerns
on input cost increases due to commodity price movements, together with cost increases
due to improvements in product designs and upgradation to meet emission norms.

In the near future, competition in this sector is likely to intensify with the entry of more
multinationals. Development of new infrastructure projects, coupled with movement of
construction material in the upcoming mega SEZs , enforcement of rated payload regime
and with stricter emission norms, will keep the growth in demand intact. The potential of
demand for replacements is high as well, with over 35% of existing fleet over 10 years old.

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Ashok Leyland
Ashok Leyland (ALL), a flagship company of the Hinduja group, is India's second-largest
commercial vehicle manufacturer, with 26% market share in M&HCVs. The company also
manufactures vehicles for defense & special applications and engines for industrial use;
genset, marine requirements and automobile spare parts. It also makes double-decker buses
in India. The major part of the revenues comes from the M&HCV segment. The company is
systematically de-risking from the domestic trucks industry through aggressive exports,
defence supplies, engines and castings have helped to build a robust business, with a more
than five decade unbroken dividend record. However, its labour force has been a cause for
concern, as management tries to negotiate higher productivity levels to reduce the costs-sales
ratio.

The Present
ALL has a total market share of 27.9% in the M&HCV segment. For FY07, ALL reported
robust volume growth of 35% YoY to 83,101 vehicles. Sales rose 37% YoY in FY07 and
profits grew 35% YoY. Exports grew by 23.5% over 05-06 sales with a sale of 6,025
vehicles. Ashok Leyland was late in implementing vehicle price increases, as industry leader
Tata Motors shied away from hiking prices. As a result, Ashok Leyland, in spite of gaining
market share in domestic M&HCVs by 0.8% in FY07, saw its margins reduce. The
ambitious capex programme of Rs 35bn over the next four years, the largest ever by Ashok
Leyland, has come at a time of weak demand and rising interest rates and this might affect
the profitability next year.

The Future
With a strong GDP numbers for next few quarters and NHAI road development programs,
commercial vehicles sector in India is poised for strong growth in the years to come. Along
with this, Supreme Court order on overloading of trucks will also fuel demand for loading
commercial vehicles in the country even though rising interest cost would impact sales
volume in the short term. To take advantage of the market growth, ALL is setting up two
manufacturing units at a cost of Rs 250 crore. One will make engines for heavy commercial
vehicles and the other Gearboxes. It is also introducing a VRS to cut down the work force at
its plant at Ennore in Tamil Nadu from 5,000 to 4,250. The company is also planning to
make the H-series engines at the Ennore plant with a total planned capacity of 40,000
engines at a cost of Rs.150 cr. and the commercial production will start by 2007. ALL is
expanding its CV facilities and is setting up a new facility in Uttaranchal to avail tax benefits.
Increased competition from the entry of foreign truck majors like Man, Navistar and Isuzu
may impact its market share and demand high investment in technology. On long-term
basis, ALL is implementing de-risking strategies whereby one-third of its sales would accrue
from non-cyclical businesses; these include defence, exports and auto engine and spare parts.
This success of this strategy would stabilize the company’s topline.

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Analysis of Information provided in Annual Report
Our qualitative and quantitative analysis of Ashok Leyland’s published accounts resulted in
the following conclusions:
• Sales of the company have increased by 37.2 % over the last year whereas profit has
increased by 33.65 %.
• The Company is regular in depositing undisputed statutory dues including provident
fund, investor education and protection fund, employees’ state insurance, income tax,
sales tax, wealth tax, service tax, customs duty, excise duty, cess and other material
statutory dues as applicable with the appropriate authorities during the year.
• There are no dues of income tax / wealth-tax, service tax, customs duty, which have not
been deposited on account of any dispute. Details of dues towards sales tax, excise duty
and cess that have not been deposited on account of dispute are as stated below.

Nature of Dues Forum where the dispute is Amount stayed not

Dues (Rs. pending included in dues
Millions) (Rs. Millions)
Appellate Tax Deputy/
Sales Tax 25.04 122.57
Additional Commissioner
Tribunal 14.83
Excise duty Commissioner of Central Excise
0.89 -
and Cess (Appeals)

• Extraordinary Items: Voluntary retirement scheme compensation of Rs. 330.37 Millions

has been paid. Due to amortization, Rs. 130.76 Million has been considered today.
• Excess provision written back dividend Rs. 25.98 Million.
• The company raised US$ 100 million (Notes of US $ 1000 each) during April 2004 by
way of Foreign Currency Convertible Notes (FCCN) bearing interest rate of 0.5% per
annum. During the year 02,283,541 Equity shares (2006: 32,292,576) were allotted
consequent to conversion of 71,900 (2006: 2,700) FCCN aggregating to US$ 71.90
million (2006: US$ 22.70 million). Upon declaration of interim dividend on March 21,
2007 the conversion price has been reset at Rs. 30.00. Note holders have an option to
convert each note into 1470 shares of Re.1 each or such number of shares of Re.1 each
as per terms of issue. The balance notes unless previously converted, redeemed or
repurchased and cancelled will be redeemed on April 30, 2009 at 100% of their principal
value.

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Loan funds
• Secured Loans have doubled from 1,846.91 to 3,602.16
• Unsecured loans have decreased from 5,072.37 to 2,801.82

• Team of young employees was empowered to extend beyond their functional roles and
formulate a business plan for 2007-08 for Ashok Leyland
• In the current phase of accelerated emission regulations, migration of vehicles to the
subsequent – and more stringent – norms has been undertaken. The result is an engine
on the popular H platform, meeting the BS II norms with an in-line pump. Considerably
less expensive, it is highly fuel-efficient, less sensitive to fuel quality and costing less to
maintain. A good bundle of customer benefits in the wake of regulatory compliance
• In October 2006, Ashok Leyland signed an agreement with the Ras Al Khaimah
Investment Authority (RAKIA) for setting up a bus assembly unit in Ras Al Khaimah.
• Ashok Leyland acquired the Truck Business Unit of Prague-based AVIA a.s. in October
2006 and the newly acquired company has been renamed AVIA Ashok Leyland Motors
s.r.o.
• The Company is building up Ashley Design and Engineering Services (ADES), a division
focused on provision of design and engineering services to the automobile, power
engineering and aerospace sectors.
• The Company has signed a Share Purchase Agreement on April 27/28, 2007 to acquire
the entire equity capital of Defiance Testing and Engineering Services, Inc, Michigan,
USA. This acquisition is expected to provide significant synergy to the existing business
activities of Ashley Design and Engineering Services (ADES) Division of Ashok
Leyland.
• The Foreign Currency Convertible Notes (FCCNs) for USD 100 million issued in April
2004 are convertible into shares of the Company (Fixed Exchange Rate USD 1 =
Rs.44.10). The conversion price was reset in 2005 to Rs.31/- per share of face value
Re.1/- each.
• Total R & D Expenditure as % of total turnover was 1.9%
• CRISIL has given "AA / Stable" rating for the Company’s long-term borrowings. Fitch
has given the Company ratings at "AA (IND) / stable". On commercial paper
programme (short term borrowing), CRISIL maintained the earlier rating of P1+. The
Company believes that it has sufficient liquidity to meet its working capital requirements
and other anticipated cash outflows.

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Analysis of Financial Statements
Strengths

• The working capital forms 34.48% of the total assets of the Company, which is sufficient for
maintaining the company's efficiency and its short-term financial health.

• Return on Net worth is 45.13% which has increased from previous year of 41.53% which
implies that in spite of competition in the M&HCV Sector, the company is able to provide more
returns to its investors.

• The earning per share is more than three times the issue price of the shares which reflects that
the company is able to earn high returns on equity.

• The PE ratio of the company is around 13 which reflects investors’ confidence in the
company.

• The debtors’ turnover ratio is around 18 which is strong signal that the company is able to
recover its funds soon from it debtors.

• The Company has high operating and low financial leverage. It implies that the management
is careful. As business risk is high, they have kept interest burden at low level.

• The proprietary ratio is 0.61 has increased from previous year of 0.52 which is near to ideal
ratio of a manufacturing unit.

• Derived from European-style designs, Ashok Leyland's products enjoy the image of better
quality in the Indian market. With the help of a strong market share in buses, HCV trucks and
defence supplies, its exposure to the highly-cyclical MCV trucks segment has fallen.

Weaknesses

• Higher the current ratio, greater is the margin available and lesser are the chances of the firm’s
failure in meeting its commitments. The CR is 1.63 which has fallen down from previous year of
1.95 which was like of industry standards of 2:1.

• The Debt Equity ratio of the company is 0.34, which has fallen down from previous year of
0.49 which was already very low compare to industry average..

• The dividend payout ratio of the company is 45.5% which implies that the company can retain a
major part of the profit for its future growth prospects but the company is not doing so.

• The Debt Equity ratio of the company is 0.34 which has fallen from last year of 0.49, which
implies that the Company is in a position to take further loans but its taking more equity and
not taking advantage of trading on equity.

• Creditor turnover is 6.65 and the Company takes 55 days to pay off its creditors. This reflects
that the firm does not have good credit management and it can have negative affect on the
goodwill and creditworthiness of the Company.

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• Capital turnover ratio is has increased to 3.28 from previous year but Fixed asset turnover
ratio has decreased to 5.38 from previous year which implies the company is not utilizing its
capital to the optimum.

• Cash conversion cycle illustrates how quickly a company can convert its products into cash
through sales. Since the Company has a cash conversion cycle of 165 days, this shows that a lot
of funds of the company are blocked in form of Working Capital.

• In spite of gross profit ratio increasing the net profit ratio is decreasing which shows that the
company has not been able to control its costs.

• Current Assets of the company are more than the Fixed assets which is opposite of what it
should be for a manufacturing company.

• The company has relatively weak sales and distribution channel in north India and a weak
product profile in low tonnage CVs. Repeated labour unrest and capacity constraints have
limited its participation in industry volume expansion.

• The company is earning very low interest rate on its investments through which the company
can invest more in their own business.

Remedial Measures

• The Company should reduce its creditor’s payment period. This will increase the confidence
of the suppliers and increase its creditworthiness in the industry. The firm should also find out
whether there is a scope of receiving cash discount from the suppliers for making prompt
payment. This will facilitate further savings of the funds of the company.

• The Company has huge reserves and surpluses available at its discourse which restricts the
capital employed turnover ratio to a mere 3.28. Hence it can go for further expansion of its
business ensuring optimum utilization of its resources and resulting in an increase in sales.

• To improve the current asset and fixed asset proportion the company should adopt a credit
management policy in which the collection period as well as the payment period is kept
under check. This will facilitate the company in running its day to day activities with a lower
amount of working capital. The funds that become available can be utilized towards fixed assets
which are essential for the growth of a manufacturing company like Ashok Leyland.

• To improve the total asset turnover ratio the company should go for capacity expansion of
its plants and ensure that plant capacity is utilized to the maximum possible level. For this
company should implement effective operations management and there should be a check at
every stage of the manufacturing process.

• A structural shift in demand for heavy trucks and buses will benefit Ashok Leyland, given its
relative strength in the region. Furthermore, its planned expansion into exports of vehicles and
components could open up a new revenue source.

• Increased competition from the entry of foreign truck majors like Man, Navistar and Isuzu may
impact its market share and demand high investment in technology. So the company must be
ready for significant investments in technology.

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Computations
(All in Rs. Millions)

Cash Conversion Cycle

1. Average Raw Material = (3853.39+2728.32) / 2
= 7886.24
2. Average WIP = (1095.07+1437.3) / 2
= 9338.84
3. Average Finished Goods = (5325.7+4493.67) / 2
= 12910.17
4. Raw Material Cost = 53696.04
5. Cost of goods sold = (9025.61+57779.7-10703.21)
=56102.1
6. Raw Material Holding = (7886.24 / 53696.04) * 365
= 54 days
7. WIP Holding = (9338.84 / 56102.1) *365
= 61 days
8. Finished Good Holding = (12910.17 / 56102.1) *365
= 84 days
9. Debtors Velocity
Average Debtor = (5228.75 + 4243.37) / 2
= 4736.06
Sales = 83047.17
Debtor Period = (Average Debtor / Sales) *365
=21 days
10. Creditor Velocity
Average Creditor = (9789.33+6362.01) / 2
= 8075.67
Purchases =53696.04
Creditor Period =(Average Creditor/Purchase)*365
= 55 days
11. Raw Material Collection period 54
Add: WIP 61
Finished Good 84
________
Inventory Conversion Period 199 days
Debtors 21
Les Creditor 55
________
Cash Conversion Cycle 165days

Ratios for the FY 2006-07

1. Liquidity/Solvency Ratios

• Current Ratio = CA / CL
= 26977.14 / 16516.25
= 1.63

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 • Debt Equity = Debt/Equity
= 6403.98 / 18945.68
= 0.34
• Proprietary Ratio = Fixed Asset / Capital Employed
= 15445.24 / (18945.68+6403.98)
= 0.61

2. Turnover/Activity Ratios

• Inventory Turnover = COGS / Average Stock

• Debtor Turnover
• Creditor Turnover
• Capital Turnover
• Fixed Asset Turnover
= 56102.1 / 9864.41
= 5.69
= Sales / Average Debtor
= 83047.17 / 4736.06
= 17.54
= Cr Purchase / Average Creditor
= 53696.04 / 8075.67
= 6.65
= Sales / Capital Employed
= 83047.17 / (18945.68+6403.98)
= 3.28
= Sales / FA
= 83047.17 / 15445.24
= 5.38

3. Profitability Ratios

• GPR = GP / Sales
=26945.07 /83047.17
= 32.45%
• N.P Ratio = NP / Sales
= (4,412.86) / 83,047.17 * 100
= 5.31%
• Return on Assets = PAT / Total Assets
= (4412.86 / 42422.38) * 100
= 10.4%
• Return on CE = PAT / CE
= (4412.86 / (25349.56) * 100
= 17.40%
• Return on Net Worth = PAT / Net Worth
= (4412.86 / 9778.88) * 100
= 45.13%
• Net Worth = Equity share Cap +General Reserves + P/L A/C
= Rs. 9778.88 millions
• EPS = PAT / No of Equity Shares
= (4412.86 / 1324)
= Rs 3.33
• Dividend per Share = (1985.81/1324)
= Rs 1.5
• Dividend Payout Ratio = DPS / EPS
= 1.5/3.3
= 45.45%
• Earning Yield = EPS / Market Price(avg. of last 3 months)
i. For BSE = 3.33 /43.27
= 7.7%
ii. For NSE = 3.33 /43.00
= 7.74%

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 • P/E Ratio = Market Price/EPS
i. For BSE = 43.27 / 3.33
= 12.99
ii. For NSE = 43.00 / 3.33
= 12.91

Comparative Ratio Analysis

Ratio Formula Year 05-06 Year 06-07
Current Ratio CA / CL 1.95 1.63
Debt Equity Debt/Equity 0.49 0.34
Proprietary Ratio Fixed Asset / 0.52 0.61
Capital Employed
Capital Turnover Sales / Capital 2.8 3.28
Ratio Employed
Fixed Asset Sales / FA 5.58 5.38
Turnover Ratio
Gross Profit Ratio GP / Sales 30.48% 32.45%
Net Profit Ratio PAT / Sales 5.41% 5.31%
Return on Assets PAT / Total Assets 9.87% 10.4%
Return on CE PAT / CE 15.55% 17.40%
Return on Net PAT / Net Worth 41.53% 45.13%
Worth
EPS PAT / No of Equity 2.68 3.33
Shares
Dividend per Share Dividend / No of 1.31 1.5
Equity Shares
Dividend Payout DPS / EPS 48.8% 45.45%
Ratio

Du-Pont Chart for year 06-07

Return on Investment
10.4 %

Productivity of Sales (%) Asset Utilization

5.31% 1.9576

Net Profit Sales Sales Total Assets

4412.86 83047.17 83047.17 42,422.38

Gross Profit All Other

26945.07 Expenses

Sales Cost of Goods Sold Fixed Assets Current Assets

83047.17 56102.1 15,445.24 26,977.14

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