"From a functional organisation, we are now a matrix organisation, with independent verticals for each of our businesses" —Vinod Dasari, Managing director, Ashok Leyland
Feature
Truck-maker Ashok Leyland has battled the headwinds from two separate slowdowns and a crippling dip in demand to emerge lighter and stronger. Here’s how.

Talk about tough assignments. If you thought your job was tough, spare a thought for Vinod Dasari, who took over the reins of heavy vehicle major Ashok Leyland in April 2011, just after the last few tremors of the 2008 credit crisis had been felt and just ahead of the slowdown in the auto industry in 2012. Dasari took over as managing director of India’s second largest truck company at a time when the most brutal slowdown to have hit the Indian commercial vehicle industry in over three decades was creeping up on the company. Emerging from the debris of the 2008 crisis, during which it saw its inventory pile up due to a fall in demand for trucks and its production schedule trimmed to three days a week, Hinduja flagship company Ashok Leyland was headed towards another tumultuous period under a new leadership

 
 
Despite high debt and declining sales, Leyland invested in new products. It even announced a new truck line-up in May 2013
 
 
. For Dasari and his team, who survived this period and steered the company out of its rough patch, this challenging phase will remain forever etched in their minds. “We used to call it the perfect storm because we felt surrounded from all sides — the market was down, breakeven point was high, debt was very high and product pricing was dismal,” says Dasari. “However, I could sense that the employees were eager to take on these challenges. This gave us the courage to take tough decisions and make structural changes to transform the company,” he adds.

Though it was not easy, under Dasari’s leadership, the company took some hard calls — it cut costs drastically but sustainably while investing in new products and ramping up service outlets and branding

 
 
"We had decided to consider this not as a cost-cutting exercise but as a transformational experience"
 
 
. “The support from the board and promoters provided us the necessary cover while we were weathering the storm on the ground,” says Dasari. The company even managed to trim its bloated employee count from 15,734 at the end of FY12 to about 11,552 by the end of FY14. And while the commercial vehicle industry is still reeling under the pressures of the ongoing slowdown, Ashok Leyland has shown signs of a recovery, the first of the lot to do so. Dasari, however, is not surprised. Right at the centre of the company’s perfect storm, Dasari, with his Kellogg School of Management background and years of industry experience, had learnt that the company only stood a chance if decisions were taken — and implemented — as a team, thus ensuring that the company fought as a whole
 
 
"The entire management rallied around to reduce working capital by nearly 80% in just seven months"
 
 
. As is obvious by now, Dasari managed to put in motion a full-fledged transformation that not just sought to win back customers but was product-, employee- and process-led.

Innovation In Tough Times

But the going was not all smooth. Dasari still remembers how both employee and dealer sentiment was down in the dumps when he took over. “We were just recovering from a terrible slowdown. There was not much mutual trust between employees and dealers. We had a lot of hard work to do,” he says. Despite high debt and declining sales, Ashok Leyland chose to not stop investing in new products. With good products under its umbrella — the truck-maker launched Boss, Captain, Partner, JanBus and a few other models over the past three years — Dasari knew Ashok Leyland held an edge over its rivals. In fact, the company even announced a new truck line-up in May 2013, at a time when the market was not too promising

 
 
Plans are afoot to scale up Leyland’s market share in international markets from 15% of total volumes now to over 30% by 2020
 
 
. In the pipeline were plans to introduce the much-awaited multi-purpose heavy vehicle Stile, followed by the launch of Partner in the 5-6 tonne light commercial vehicle (LCV) segment and the Boss range in the 8-16 tonne intermediate commercial vehicle (ICV) segment. A month later, the company launched the Neptune engine — designed and developed in-house — for premium trucks.

While the Boss launch was a low-key affair in early 2013 at the company’s 192-acre Pantnagar facility, it was a big moment nonetheless for the truck-maker. The company introduced two variants of the fully localised Boss truck — the LX and LE — to start with, promising buyers 5-7% more mileage than competitors. In the premium variant LE, Ashok Leyland equipped the vehicle with automated manual transmission — an industry first — and an A/C cabin with a 36-month no-rust warranty. Apart from bolstering its product mix, Ashok Leyland — which is known to have a strong foothold in south India — stepped out of its comfort zone to more than double its MHCV network and quadruple its overall retail strength over the past three years. The company’s southern presence today contributes about 30% to its overall national revenue, from under 10% five years ago.

“Our new products enabled us to win — rather than buy — back our market share. Boss sales have crossed the 2,500 mark and are helping us establish our leadership in the premium ICV segment. The Captain model is generating a massive pull in the market and we are ramping up production in order to meet this demand,” says Dasari. To boost morale internally and on the dealer and operator fronts, Ashok Leyland ramped up its network from its 350-odd outlets catering only to the medium and heavy vehicle (MHCV) segments across India five years ago. Today, the company has nearly 1,300 touchpoints across the country, spanning MHCVs, LCVs and power solutions businesses; Ashok Leyland’s MHCV business alone has over 800 touchpoints. The company claims that it has a touchpoint every 45 km in the golden quadrilateral and north-south-east-west corridors and one every 25 km on key corridors such as the Delhi-Mumbai one.

“We have outlets in the remotest corners of the country, be it at the Bangladesh border in Meghalaya, at Attari near Wagah or deep in the coal mining belt at Singrauli. This was made possible through our innovations at our outlets — we have developed frugal and comfortable formats that our channel partners can set up at low cost,” says Dasari. Ashok Leyland furthered this support to its partners by helping its dealer network remain profitable throughout its lean patch. The company controlled its own inventory as well as that of its dealers, setting a target of no more than three weeks of stock with them, compared with a two-month period in the past. Dealers usually have to factor in a lot of things — including margins, logistic charges, credit interest and target incentives — while stocking inventory. During slowdowns, they can’t afford to stock higher inventories and end up paying more to truck companies, which is why it helps when companies step in to manage inventory and reduce overall costs, thus improving dealer profitability. “The fact that dealers have stuck with us throughout this period and are now reaping the benefits of the uptick in our shares shows that our strategy has been effective,” says Dasari. The operator morale has definitely improved, if one goes by the rise in replacement demand. Of course, the reduction in diesel prices has also helped operators improve profitability.

Screeching To A Halt

Just like the rest of the industry, Ashok Leyland was also excited about the rapid growth in the Indian market between 2000 and 2006. In fact, the company had lined up many plans and investments in the aftermath of the 2008 slowdown. “Most of our investments were in the incubation stage, that is, they were good investments but would require several years of cash infusion before they yield results. Cash flow projections were also not in sync with the rapidly changing business context and the several tough calls we took were based on this requirement,” says Dasari. In the eye of the storm, the truck-maker went straight to lowering its working capital, trimming its workforce, cutting costs and reducing debt. In a bid to send the same message across the organisation, the company enforced uniform pay cuts above board. “It was painful. We not just cut back the number of employees but everybody took a 5% pay cut. Of course, now that the market is back, we have enforced a 10% hike at the junior level that has offset things somewhat,” says NV Balachandar, senior VP, group HR and excellence.

Ashok Leyland did not stop at just trimming the variable pay of every employee — the company also managed to cut down power costs, travel costs and sales overheads. “Of course, we sold off non-core assets and shut down some warehouses. But we had decided that we would consider this not as a cost-cutting exercise but as a transformational experience for the company, introducing a new product pipeline to make the company future-ready,” he says. “About 18 months ago, the situation here was very different. The commercial vehicle industry volumes were plummeting, with nearly 50% being lopped off in just 24 months. We were witnessing declining sales, our debt was at Rs 6,300 crore in 2013 and debt to equity ratio levels were very high at over 2:1,” says Gopal Mahadevan, chief financial officer, Ashok Leyland. “The entire management rallied around to reduce working capital by nearly 80% in just seven months — from over Rs 1,400 crore in July 2013, absolute working capital was brought down to below Rs 250 crore by March 2014. This helped release much-needed cash. We also sold non-core assets to the tune of Rs 700 crore to augment cash flow,” he says.

One of the key factors behind Ashok Leyland’s transformation has been the asset sale of non-core businesses to reduce debt. Late last year, the company sold its 38% stake in Hinduja Tech, formerly known as Defiance Technologies, to Nissan International Holdings, the Japanese carmaker’s global investment arm. Further, in its 2013-14 annual report, Ashok Leyland lists its associate companies Albonair GmbH, Albonair India and Avia Ashok Leyland Motors as open to sale.

As part of its move to sell non-core assets, it announced the sale of its entire stake in Czech Republic subsidiary Avia Ashok Leyland for a cash realisation of about Rs 70 crore; the announcement came on the last day of FY15. “We have a portfolio of non-core assets — businesses that we believe have a good future but which we, perhaps, are not the right owners of. Our objective is to retire debt to the extent that we do not get into a debt trap again during future downcycles,” says Mahadevan.

Dasari points out that with the market expected to turn around and the transformation already brought about within the company, the management is not as worried about Ashok Leyland’s debt situation as it was three years ago — debt levels have come down from Rs 6,200 crore in September 2013 to around Rs 4,323 crore in September 2014. A QIP issuance of Rs 650 crore in July 2014 further strengthened the balance sheet. “The QIP was a proof of investor confidence reposed in the company,” says Mahadevan.

Despite low volumes, the company claims that it has started making money over the last couple of months, having brought down the debt to equity ratio to 1:1. “Our fixed costs have also been structurally corrected as we went in for a leaner production model and our breakeven point lowered by over 30%. This has given us high operating leverage, thus improving profitability and our ability to generate cash as demand revives,” adds Mahadevan. The truck-maker’s employee expenses also went down by 7% in 2013-14, primarily due to a reduction in executive strength and lower number of working days. Ashok Leyland also managed to contain manpower costs in spite of wage increases at various factories in Bhandara, Hosur and Ennore. The company also undertook many cost reduction initiatives in FY14, leading to a 16.5% reduction in expenses over the previous year.

Revving Up

One of the major areas of transformation for the company includes streamlining its business process and reengineering processes right from product development to sales and marketing and operations planning. “From a functional organisation, we are now a matrix organisation, with separate and independent verticals for trucks, buses, LCV, defence and power solutions — each one is an SBU in itself, with responsibilities for top-line and bottom-line growth,” says Dasari. He sees each of these five verticals panning out and taking on a significant presence on their own. In fact, the company has ambitions of growing the defence arm in revenue from Rs 600 crore at present to Rs 6,000 crore over the next five years. In its power business, it aims to grow revenue from Rs 500 crore at present to Rs 5,000 crore over the next five years.

Besides, plans are afoot to scale up its market share in international markets from 15% of total volumes now to over 30% by 2020. “We have identified global clusters based on their attractiveness and our ability to serve them effectively. We are currently consolidating our presence in west Asia and growing in Africa,” says Dasari. Leyland has a dominant share in the bus market of the GCC region, with over 60% share in most countries. Over the next three years, its hope to grow the African business to the match its west Asian operations. Africa has definitely seen some juicy deals coming its way, with the most recent worth $79 million coming from Tanzania and Zimbabwe. The company has already seen a 25% increase in sales from international operations in the first half of FY15, compared with the first half of FY14 — from roughly 4,500 vehicles across all segments to 5,600 vehicles across all segments; sales also expanded across west Asia, Sri Lanka and Africa. While Dasari and his men know that the slowdown is not over yet and the economy is yet to recover, they aver that every rupee earned or saved through continuous persistence will help them in the long run.

Click here to see the article in its standard web format