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See volumes growing 15-20% in this fiscal year: Ashok Leyland

Ashok Leyland reported a good set of fourth quarter earnings on Wednesday; numbers were majorly in line with street estimates.

Revenue went up 32 percent to Rs 5955.2 crore year-on-year (YoY) and EBITDA increased 64 percent to Rs 752 crore. However, the profits were hit by an exceptional loss of Rs 379 crore due to provisions for impairments of joint ventures (JVs) and overseas subsidiaries.

In an interview with CNBC-TV18, Gopal Mahadevan, CFO of Ashok Leyland, said that the company will not raise any funds in FY17 and will only take enabling resolutions to raise funds.

The company is sufficiently funded and it has a healthy debt-to-equity ratio of 0.24, he said.

Giving an outlook for this fiscal, he said that a volume growth of 15-20 percent is expected in FY17 and there will be no equity dilution this fiscal year.

Below is the transcript of Gopal Mahadevan’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Sonia: The operational pickup is fine, but the street has been worried about the Rs 390 crore write-off that you have taken due to impairments of the joint ventures (JV) and the subsidiaries. Will there be any more in FY17 and if yes, what could be the quantum?

A: We had reviewed the entire portfolio of investments we have and we thought it appropriate that we need to take a net impairment after factoring in certain gains on sale of investment of about Rs 380 crore.

These are predominantly pertaining to the investments that we have done in the light commercial vehicle (LCV) venture, the construction equipment venture and also two subsidiaries outside India, one being Optare which we have provided for almost fully and Albonair in which we have provided about 25 percent.

Having said that, let me tell you we believe that Albonair holds a significant potential as we move forward because Albonair does exhaust emission systems, selective catalytic reduction emission systems which are necessary for being Euro-VI compliant.

And the reason why we believe that this company holds potential is because the government has also advanced the implementation of Euro-VI to 2020. But overall, when we did this, we said that let us look at the portfolio, let us look at what impairments we need to take and more importantly, Ashok Leyland is now focusing more or the core business of medium and heavy commercial vehicles (M&HCV). That was why this was done.

Latha: You referred to your two JVs. You referred to Albonair, but Optare as well. What exactly is the loss in both these JVs and should we expect the losses to continue?

A: We believe those losses will continue. They are not really very significant when you look at the Ashok Leyland revenues and profits.

So, I would say that there is a turnaround strategy that we are looking at for Optare, but we will have to wait and watch. As far as Albonair is concerned, very clearly, once the volumes start to scale up, which will happen we believe in due course of time, over the next three years, we are going to see the company becoming profitable.

Sonia: Just to get more clarity on this, what should the average rate of provisions be that you will make in order to offset these losses?

A: One point that I wanted to share with you is that the impairments that we have done do not have a cash impact. What we have been doping is to evaluate the portfolio of investments that we had and see whether the carrying value of these investments are appropriate.

Why we have also shared in the press release that we may take one more look in the current year is purely on account of transparency and good governance. If we believe that some amount of impairment would need to be done, then we did not want to not share that information in advance.

But at the moment, I have no visibility of whether there would be further impairments. We will have to wait and watch.

Latha: The other worry is fund raising that you had announced. What is the exact amount you will raise and how much equity will you dilute?

A: Our debt equity is at 0.24:1. Even assuming that there are little bit of ups and downs, I do not think debt equity is going to go beyond 0.5:1 or 0.6:1. So, if you ask me, on the funding, we are very comfortably placed. I think we are at an optimal level.

Having said that, the resolution that we have put up to the shareholder for approval is purely an enabling resolution.

This is in consistency with what we have been doing in the past. We have been taking enabling resolutions in past as well. There is no plan to dilute, there is no plan to raise equity at the moment.

But what happens is, in the event there is some window of opportunity or for raising funds, then we thought that we should not, at that point in time, go and look out for a resolution.

That was the only intention for this. In all probability, we will raise no equity in the current year at all because there is no necessity for equity. But this is purely an enabling resolution.

Sonia: Coming back to that point about the fund raising is it safe to assume that there will be no fund raising at all by the company in FY17?

A: Absolutely.

Sonia: You can tell us about the operational performance, the margins have improved quite a bit to 12.6 percent. Given that the commercial vehicle (CV) cycle has turned for the better do you see scope to increase margins further?

A: There are three things that drive margins -one is the revenue growth, the second one is the operating leverage and the third one is the cost efficiencies and operating efficiencies that we can drive. Actually there is fourth one which is the mix of products. We believe that in the current year the industry would grow at about 15-20 percent because things are looking reasonably good.

There is not only the replacement demand; the government has been making announcements of implementing projects on roads and other infrastructure projects. We are also seeing that mining is warming up.

So, all of this is going to put in very favourably for the M&HCV industry. If this does happen then we are also going to grow at the same rate as the industry if not try to better it.

We also had a product launches planned especially on the intermediate commercial vehicle (ICV) segment where we believe that we can increase our market share. We have launched a latest generation school bus as far as the intermediate commercial vehicle.

So as we move into the current year we are optimistic that the industry would grow and so would Ashok Leyland.

Latha: You referred to market share. How much has market share increased and what could the volume growth be for FY17 for Leyland as a whole?

A: As of the end of the year, we are at 32.7 percent. One of the highest market shares that we have had.

As I had mentioned to you earlier, our expectation at this point in time is that the industry would grow at about 15-20 percent.

One more thing that could be a kicker for the growth of the total industry is that the country would be moving to Euro-VI across on April, 2017.

When that is going to happen, we do expect quite a significant amount of pre-buying happening, especially in the fourth quarter.

As far as growth is concerned, we certainly would keep pace with the industry if not try to beat it. And as we see this growth happening, we are also looking forward to our margin improvement.

But I am not able to share anything at the moment, because as a company, we do not give guidance on either growth or margin improvements. All we keep reporting is the progress that we are making each quarter.