Ashok Leyland Industries Annual Report 2013-2014

2United Breweries Annual Report 2013-2015

Ashok Leyland Industries Annual Report 2013-2014

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Financial analysis of Ashok Leyland Part 1Rushin MehtaMMS - B - 128

Content1. Industry Overview2. Historical performance of the company (page 4) 3. Directors Report (page 5-6)4. Annexure A to Director Report (Page 7)5. Annexure B to directors report (Page 8-18)6. Annexure C to directors report (Page 19)7. Annexure D to directors report (Page 20-24)8. Annexure E to Directors report(Page 25)9. Annexure F to Directors report(Page 26)10. Independent Auditors Report (Page 27)11. Annexure to Independent Auditors Report (Page 28-29)

1. Industry OverviewIndia Commercial Vehicle Market Analysis: Two decades ago, under then PM P V Narasimha Rao and then Finance Minister Dr. Manmohan singh opened Indias doors for Multinational Automobile companies, allowing them to enter the market, thus bringing into picture modernization of Indian transportation system and making it beneficial for the end-users. Since then, several companies have started and established their production units in the country, offering a wide range of vehicles to vast Indias population. Since then the Indian commercial vehicle market has been growing by leaps and bounds due to economic liberalization, and the Indian economy which has gone strength to strength backed by strong finance facilities would lead to strong growth of Indian Automobile sector in the time to come.Medium & Heavy Commercial vehicle (MHCV) is the fastest growth in the automobile sector with growth around 20% expected this FY 2014-2015 with improvement in agricultural output, industrial activities and speedy infrastructure execution. Light Commercial Vehicles (LCV) sales is set to recover against the background of slowdown of in previous Financial year and it is poised for a growth of 7-9 % with increased in financial availability and improvement in consumption. Domestic commercial vehicle sales to decline by 13 per cent Y-o-Y in 2014-15 as light commercial vehicle (LCV) sales continue to falter. LCV sales are expected to decline, owing to a weakness in consumption spending (measured by GDPPFCE) and tightening of financing norms for SFOs (small fleet operators)/first time users (FTUs). Increased credit defaults had forced lenders to tighten advances to smaller players. In 201314, LCV sales had declined owing to the factors listed above.Industry interactions suggest that loans extended by captive financiers (who were the most aggressive over the past two years) have turned sour, with the outstanding (for over 90 days) is as high as 1015 per cent. Consequently, financiers to continue to focus on loan recollections rather than fresh disbursals during the year.On the other hand, sales of medium and heavy commercial vehicles are expected to rise in 2014-15, owing to an expected improvement in GDP and IIP growth. Resumption of stalled infrastructure projects, a recovery in mining activities, and improvement in EXIM trade and a pickup in replacement demand (especially from large transporters).In the Union Budget 2014-15, Rs 2.1 trillion was allocated for infrastructure projects, a sharp increase of 24 per cent over the allocation in the previous budget. In 201314, MHCV sales had declined as freight availability plummeted to a decadal low, as a result of sluggish industrial GDP growth (mere 0.4 per cent). Bus sales are expected to decline by 24 per cent yoy in 201415. Demand from the unorganized sector is expected to remain muted as corporate and intercity bus transport is expected to remain subdued. Growth will be driven by state transport undertaking (STUs), as 35004000 bus sales (of 6,5007,000 orders placed) under phase II of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) scheme are likely to be booked in 201415.However, STUs are likely to postpone orders (that have been placed outside the JNNURM II scheme), thus moderating overall demand growth.In 201314, bus sales had declined as a slowdown in the services sector and a sharp hike in diesel prices and high interest rates pulled down demand. Demand from STUs too remained subdued owing to their weak financial position and concerns with regards to delayed payments to OEMs.MHCVs experienced a negative sales growth of 27%, while LCVs experienced a negative sales growth of 18.3%, whereas Bus experienced a negative sales growth of 14% in last financial year. This year Things are on a positive note.

2. Historical performance of the company (page 4) In this section of the annual report historical performance of Ashok Leyland is given over the past 10 years.

Sales of Vehicles in 2004-05 were 54,740 and in 2013-2014 were 89,337 thus increasing of 63% over the last decade.

The highest increase was in the year 06-07 from 05-06 which was 34% however the slump in sales of 34% happened in 08-09 when the world and India were going through tough economic slowdown.

Revenue in 2004-05 was INR 4810 cr and in 2013-2014 was INR10560 cr. thus increases of 120% over the last decade.

The highest increase in revenue was in the year 10-11 from 09-10 which was 55% however the highest decrease of revenue of 25% happened in 08-09 when the world and India were going through tough economic slowdown.

Profit after tax in 2004-05 was INR 271 cr and in 2013-2014 was INR 29.4 cr. thus decreases of 89 % over the last decade.

The highest increase in PAT was in the year 09-10 from 08-09 which was 122% however the highest decrease of PAT of 93% happened in 13-14 i.e the current financial year, one needs to carefully see this decrease of Profit into the company, drop of 93% Profit after tax is alarming and it is a wind of cautious.

Current Assets grew at 8.1% Y-o-Y during the last decade from 04-13.

Current Liabilities grew at 28% Y-o-Y during the last decade from 04-13.

Basic Earnings per Share has eroded 93% from 12-13 to 13-14.

Employees are also decreases in the FY 13-14 and thus seeing overall scenario we can say 13-14 was not a great year for the company and PAT falling as high as 93%, company needs to look at the operations.

3. Directors Report (page 5-6)Financial result:

The brief financial result is given compared to the previous year and the figures are not so encouraging one. Even the company has not declared any dividend.

Company Performance:

The director explains the reason of slowdown and it is explained the slowdown was overall the industry and commercial vehicles decline at 20% over previous year whereas MHCV had a steeper decline of 25.3%. The market share of Ashok Leyland 26.1% is still maintained.

In LCV segment, a well know model of Ashok Leyland Dost suffered declined in sales due to discounts and financial schemes by Competitors. It also introduced couple of new models to strive hard and gain market share. Power Availability and financial availability affected the demand.MHCV export volumes didnt see any growth despite seeing a drop of export nos in Sri-lanka.

Dividend:

The company did not declare any dividend in the F.Y. 2013-2014.

Research and Development, technology absorption and energy conservation: Company is continuously working on R&D aspect and it is striving to improve Efficiency on various aspects of the automobile functions. They have developed various types of engines and cabin an achievement in R7D of its own sense.

Long Term BorrowingsSecured Non-Convertible Debentures:

During the F.Y. 13-14 company secured Non-Convertible Debentures of Rs 300 cr. They also redeemed 70cr in July 2013.

Rupee Term Loan:

The company took a secured loan of 500cr from financial institutions for tenure of 5 years.

Debentures/ Term loan were taken for general purpose, Capital Expenditure and loan repayment.

Part II Corporate MattersHuman Resource:

The company believes that Humans are the most important assets and view of this they have started Chairmans award and would be given to individual teams/ Teams who performed well. They have also started internal leadership programme. They have started various activities on shop floor. Improve is an initiative has made sure various cross-functional teams participate and it has led improvement of product/process/quality/cost thus contributing to profit. 15th edition of IMPROVE witnessed11,000 innovative ideas, with participation on of about 45% of employees, leading to bottom line impact of INR 264 lakhs in one time savings and INR 518 lakhs in recurring savings.

Corporate Governance:

The company is fully compliant with the corporate governance guidelines.

Consolidated financial statement:

The company has disclosed the accounting policy it has followed to make the financial statements. Accounting standards have been followed and explained wherever necessary Accounting policies have been followed consistently so as to give fair and true picture of companys financial state. Sufficient care has been taken for the maintenance of adequate records and preventing any irregularities.

Subsidiaries:

The subsidiaries company financial has not been included in the annual report and will only be available on request.

Directors:

During the year two directors stepped down of the position. Director is eligible for reappointment. Notice for the same will be given Annual General Meeting.

Cost Auditors & Auditors:

The name of the auditors has been given who carry cost audits.

Acknowledgment:

The director acknowledges work and corporation of all those who has helped in the financial year.

4. Annexure A to Director Report (Page 7)Conservation of energy:Manufacturing plants do efforts in saving energy. They have save 41% from last F.Y. thus saving higher energy and money. This was done using awareness and implementing avenues through Mission Gemba Cost Management and Go Green initiatives. Besides saving of energy of 41% as mentioned about INR 4.02 cr were also saved.

Significant Initiatives:Company made use of non-conventional source of energy i.e wind energy & Bio gas which resulted in saving of Rs. 23cr appx., use of IEX also resulted in saving of Rs.2.01cr. Plant power load was optimized.

Awards & Recognition:The plants of the company were awarded with various recognitions in its effort of saving energy.

B) TECHNOLOGY ABSORPTION1. Specific areas in which R&D carried out by the Company

Engines & AggregatesCompany developed several engines, they developed cost effective SCR after treatment system to meet BS-IV emission norms.

VehiclesThey launched few new variants of vehicles and also developed CNG of model DOST its famous model. It has readiness for a type of Bus and it developed U-truck tractor and specialized application.

2. Benefits derived as a result of R&DThe R&D is the roots of the company and better the R&D better it is for the company. Due to R&D it could launch new types of engines with improved performance and fuel economy. Thus new product with improved operation efficiency and improved price performance proposition was developed. It also filled 95 patents in 13-14.

3. Future Plan of actionLaunch of Captain tractor and even export oriented vehicle named Boss

4. Expenditure on R&D The expenditure on R&D is INR 256 cr which is 2.43% of turnover. Looking at the benefit of R&D and the company needs to counter competition the amount is justified.

5. Annexure B to directors report (Page 8-18)1. Philosophy on Corporate GovernanceThe company corporate governance philosophy is to do the business in the right spirit and through values. The have adopted code of conduct for board of Members.

2. Board of Directors

Mr Vinod K. Dasari is the Managing Director of Ashok Leyland Limited and Director on the Board of Ashok Leyland. He has work experience of over 26 years and did MBA in 1992 from USA.

Mr. Dheeraj G. Hinduja(Chairman) holds a B.Sc. (Hons.) degree in Economics & History from the University College, London, 1993. He has completed his Masters in Business Administration with specialization in Project Management from the Imperial College, London University, 1994

Mr. R. Seshasayee is the Non-Executive Vice Chairman of Ashok Leyland after having been its Managing Director of Ashok Leyland for 13 years till 2011.He is the member of CII and honors in BA from university of California.

Mr. D J Balaji Rao is an Independent Director of the Company who joined the Board in March 2002. Mr. Balaji Rao is a member of Audit Committee, Stakeholders Relationship Committee, Risk Management Committee and Chairman of Nomination and Remuneration Committee.He is mechanical engineering with work span of over 4 decades.

Mrs. Manisha Girotra is a graduate of the Delhi School of Economics. She use the country head for India of Moelis & Company and CEO of Mindtree before joning Ashok Leyland.

b) AttendanceAttendance of all directors at the Meetings has been given, also the siting fees and no of shares held by the director has been disclosed.

3. Audit CommitteeThe Audit committee had been set up in the year 1987 and it provides direction to audit function and monitors scope of audit. The committee reviews quarterly/ half yearly/ annually when needed. It communicates with external auditors.

4. Risk Management CommitteeReview and recommend changes to the Enterprise Risk Management System and / or associated frameworks, processes and practices of the Company.

5. Nomination and Compensation CommitteeThis committee searches and recommends the position of Managing director and directors. The remuneration of the directors is also decided by this committee.

The remuneration and compensation details of Managing director are given and sitting fees of each director for board meetings has been given. This is according SEBI rules and regulations.

The company doesnt have any ESOP option.

6. Shareholders/Investors Grievance CommitteeThis committee is formed to solve Shareholders/Investors Grievance if any. Last year 2047 complaints/ correspondence had come and all were dealt satisfactorily.

7. General Body MeetingsThe details of the Annual General Meetings have been mentioned, since the company is registered in Chennai, the meeting held is in Chennai. Shareholders approval is required for remuneration of Managing director; the approval has been taken via postal ballot.

8. DisclosuresThis head is for the disclosure if any director or any person has any conflict of interest with the company, as expected, they dont have. Also the company doesnt have any non-compliance on any matters in capital markets and imposed fine by SEBI. The merger of Ashley Holdings Limited (AHL), Ashley Investments Limited (AIL) and Ashok LeylandProject Services Limited (ALPS) with Ashley Services Limited (ASL), ASL had become a wholly owned subsidiary of the Company with effective date of merger being August 19, 2013 and Appointed Date being April 1, 2013.

9. Means of CommunicationThe company published the result in English business newspaper and in Tamil in one newspaper. The company also updates the result on its website regularly.

10. General shareholder informationGeneral information about the company, annual general meeting, financial calendar, book closure date, Stock which in which exchanges, stock code, details of debenture Trustee, stock market data, Registrar and Transfer agent, share Transfer system, unclaimed shares, Distribution of shareholders pattern, Dematerialization of shares and Liquidity, Outstanding GDR/ Warrants and Convertible Notes, Conversion date and likely impact on the equity, Plant Locations, Address for Correspondence has been given, so the shareholder has general information about the company.

The things to note in the above is the stock price of high 24.60 touched in May 2013 and low of 11.75 touched in Aug 2013.

When one analyses the share holding pattern of the company, the promoter has highest share of 54%, followed by residents clearing member i.e 12.30%.

No GDR was outstanding as on March 31, 2014 thus having no impact on equity.

Code of ConductThe code of conduct is given on how the members of the board and senior management shall have, the code of conduct doesnt have any financial impact on the shareholder but the brand equity gets enhance when one reads.

6. Annexure C to directors report (Page 19)This annexure is an auditors certificate on compliance with the conditions of corporate governance under clause 49 of the listing agreements.

7. Annexure D to directors report (Page 20-24)

A. Market trends

Economy India:The director talks about world economy and Indian economy, The Indian economy grew at 4.7% in FY 13-14, which is low compared to last 10 year trends, as there was contraception of industrial sector.

In F.Y. 14-15, world GDP is poised to grow higher of about 0.3% due to improvement in living standards and infrastructure growth. Overall numbers indicate that the global slowdown has bottomed out and 2014 appears to be better than 2013 for most global economies.

It is also forecasted, Indias GDP to improve in the FY 14-15. However, economists also point out some risks, viz. stuff pressure by RBI to keep policy rates high, possible impact of El Nino in Agriculture sector, uncertainty over the seeing of minimum support prices for agricultural commodities andAdministered prices of fuel, fertilizer and electricity that couldDampen the GDP growth rate.

However the overall picture looks brighter with change in government at center and favorable demographics

Commercial vehicle industry:Continued economic slowdown in India has severely affected the domestic commercial vehicle industry. The industry is currently going through one of its longest down cycles in recent periods. Having declined by 2% in 2012-13; the market experienced a much sharper (20.2%) drop in volumes in 2013-14.

Medium and Heavy Commercial Vehicles (M&HCV) were most severely impacted, with a drop of 25% in 2013-14, on top of a 23% drop in volumes in 2012-13. While Light Commercial Vehicles (LCV) had grown 14% in 2012-13, this segment also slowed down by 17.6% in 2013-14. Exports of CommercialVehicles in 2013-14 decreased marginally by 3.7%, and stood at 77,056 vehicles.

B. Ashok Leyland The year (2013-14) in briefThe market was in decline in the year however Ashok Leyland maintained its market share. The 27% drop in volumes is directly attributable to the steep drop in total industry volume. M&HCV export remained flat despite drop of Sri-lankan market of about 50%.The company is investing heavily on M&HCV product development in order to meet customer expectation.

Company placed significant thrust in expanding its presence across all geographies. Network presence in North East had been nearly doubled. Company also upgraded its dealerships to serve its customers more efficiently and has deployed low cost service formats to expand its presence.

In 2014, companys flagship model Dost recorded decent sales figure of about 29,000. Also the companys JV with Nissan Motors continues to go strong.

Power Solutions Business earned revenues of 417.8 crore in FY 2013-14, 13.6% lower than the previous year. Improved power availability, tight liquidity, lack of clarity from Government on transition from CPCB I to CPCB II and slowdown in projects due to low economic activity had a negative impact on overall demand.

Revenues from the Spare Parts Business declined 22%, due to lower utilization of transport fleets. In 2013-14, Spare Parts Business registered revenue of 787.7 Crore.

The Defense business was impacted by production and budgetConstraints in the government, resulting in lower sales.

C. Risk ManagementThis year the company faced low demands of truck due to economic slowdown, the management has tried to mitigate the risk by enhancing the network availability and expanding to north east in particular. Also the management has tried to explore other than SAARC nation.

The management efforts in Working capital and CAPEX control has been successful and the company has been able to save substantial amount in interest cost.

In case, the demand surges, company has sufficient install capacity to meet the demand.

Impending legislation of emission norms continues to put pressure on improving the technology level resulting in higher investment and product cost. To address this specific risk, Company has proactively launched programs to develop BS IV vehicles that are required by the current non-BS IV markets in India where BS IV is expected in the near future.

D. Internal Control Systems and their AdequacyThe internal control systems have been set up and the policy/guidelines are well documented, all suggestions by Audit committee have been implemented and efforts are made to improve continuously.

E. Information Security and IPR protection initiativesAshok Leyland, among the first auto majors in India to be certified under BS7799 in 2005 (for its Data Centre at Ennore), strategically decided to expand the scope in a modular manner to critical areas, particularly handling IPR and / or sensitive information. The company is also ISO 27001 certified.

F. Financial ReviewTotal sales decline 20.2 Y-O-Y, Basic Earing per share eroded 93.2%.Revenue from various sources is listed with Vehicles being maximum, followed by Engines and least revenue is by service.

Costs incurred from various heads have been listed. Material cost, Staff cost, depreciation, finance cost, capital employed are the main head under which expenses have occurred.

There was a 2.2% decline in application of fund compared to previous year.

Capital Expenditure and InvestmentsDuring the year, company incurred 160 Cr towards capital expenditure, predominantly towards sustenance of existing capacity, product development activities and improvement in post product on storage facilities.

Current assets decreased by over 10% from previous year due decrease in production and finished vehicle inventories. Trade receivable also decreased 90%.

LiquidityCompany continued cash and carry model so that it manages to enhance liquidity. Company raised US65mn unsecured loan, short term loan of Rs 500cr & placed NCDs to the tune of INR 300 Cr.

ProfitabilityCompanys profitability remained subdued due to lower volumes for second consecutive F.Y. The general economic slowdown adversely impacted the volumes.

Results of OperationsProfit after tax in 2004-05 was INR 271 cr and in 2013-2014 was INR 29.4 cr. thus decreases of 89 % over the last decade.Cash outflow for acquisition of assets and investing activities for 2013-14 dropped by over 50%.

Loss before tax and exceptional items stood at INR 597 Cr.

DividendThe company has not declared any dividend for the current F.Y.

The Year Ahead/OutlookThe year ahead of 2014-2015 is looking bright for Indian economy and so for the Commercial vehicle industry. Implementation of key projects by the government will be a top driver and will revive growth.

New product launches backed by R&D, reinforce market share in domestic market and increase export sales.

The sales and marketing process will enable the Company to penetrate new markets and face fierce competition actions in the years to come.

8. Annexure E to directors report (Page 25)Responsibility in relation to financial statementsIt is the declaration of the director that the financial reports of the company has been prepared in conformity with generally accepted accounting principles in India and the Accounting Standards prescribed by the Institute of Chartered Accountants of India in a consistent manner and supported by reasonable and prudent judgments and estimates. The report is best to his knowledge and in fair view.

Going ConcernIn the opinion of the Directors, the Company will be in a position to carry on its existing commercial vehicles / engines business and accordingly it is considered appropriate to prepare the financial statements on a going concern basis.

Maintenance of accounting records, internal controls and CompliancesAll the accounting records are documented and directors have companys internal responsibility of control system.

The system of Internal Control is monitored by the Internal Audit Function.

The Statutory Auditors, the Internal Auditors and the Audit Committee have full and free access to all the information and records as considered necessary to carry out their responsibilities. All the issues raised by them have been suitably acted upon and followed up.

9. Annexure F to directors report (Page 26)This annexure is Certification by Managing Director and Chief Financial Officer to the board that the financial statements are true and best of their knowledge.

They also take responsibility for establishing and monitoring internal control system.

They have communicated with audit team about change in internal control system, changes in accounting policy, instances of fraud which they were aware.

This annexure is Declaration and signed by MD & CFO on 22nd May 14 in Chennai.

10. Independent Auditors Report (Page 27)Report on the Financial StatementsThe auditors have audited the financial statements in accordance with standard practices.

Managements Responsibility for the Financial StatementsThe Companys Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company.

Auditors ResponsibilityAuditors responsibility is to express opinion on these statements based on their scrutiny and they have conducted in accordance with standards followed.

Auditors have tried to do best of their information and according to the explanations given to auditors, the aforesaid financial statements given the information required by the act in the manner required and given a true and fair view in conformity with the accounting principles generally accepted in India.

Report on Other Legal and Regulatory RequirementsThe report is in accordance with legal and regulatory requirements.

11. Annexure to Independent Auditors Report (Page 28-29)1. The auditors report that in case of fixed asset, it has maintained proper documentation and the management has physically verified.

2. In respect of inventories, the inventories have been physically verified during the year by the Management at reasonable intervals.

The explanation given by the management in the above was satisfactory.

3. Company has not taken any loan or given under section 301 of the act.

4. Auditors feel that there is sufficient internal control system in placed in the company.

5. The company doesnt have any accumulated losses during FY 13-14.

6. Company has not defaulted in any payment from financial institution or bank, debenture holders during the year.

7. No loans and advances have been granted by the Company on the basis of security by way of pledge of shares, debentures and other securities.

8. Funds raised during the year on short-term basis have, prima facie, not been used for long-term investment.

9. During the period covered by our audit report, the Company has created securities / charges in respect of debentures issued.

10. No fraud of material significance on or by the Company has been noticed or reported during the year.

References

Annual report of Ashok Leyland

www.crisilresearch.com

www.moneycontrol.com

www.hdfcsecurities.com

www.ashokleyland.com

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