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Saturday, February 20, 2010

Ashok Leyland to Enter Construction Equipment Business with John Deere

India Times

CHENNAI: Ashok Leyland, India’s second-biggest commercial vehicle maker by sales, is all set to make a foray this year into the booming construction equipment segment dominated by players such as Telcon of Tata Motors, JB, Escorts, L&T, Caterpillar and Komatsu.

Ashok Leyland CFO K Sridharan told ET on Wednesday that the joint venture with John Deere to manufacture construction equipment will take off in December this year. The company is setting up a facility near Gummidipoondi and has started testing products in the market. ALL floated the 50:50 joint venture in September 2008.

“The facility is being set up with an initial investment of less than Rs 300 crore and will roll out the products by year end. It will produce John Deere construction equipment like backhoes and four wheel drive loaders. We will start with a market share of 15%. We have examined some of the inherent disadvantages faced by existing players and corrected them in our venture.”

Mr Sridharan expectes the venture to do a business of Rs 300-Rs 400 crore in the first full year of operation. It will leverage on the technology muscle of JD and ALL’s manufacturing strength, engineering skills and distribution network. It will adopt a co-branding strategy using the names of both the partners.

Mr Sridharan said ALL’s plant in Uttrakhand will go on stream in the first week of March. It will be the only plant to start producing vehicles ahead of March 31 when the excise duty exemption will come to an end. It has been set up with an investment of Rs 1,100 crore with a capacity of 50,000 vehicles. In the first year, it will produce 25,000 vehicles.

“We expect the next year to be a landmark one for the company in terms of production. We will no longer be plagued by capacity constraints. We will go aggressive in pushing sales. While our internal target is to sell 90,000 vehicles, we hope to sell about 80,000 to 85,000 vehicles, including exports of 7,500 vehicles.”

The CFO noted that this will be a big jump over the expected sales of 65,000 vehicles in 2009-10 and beat the previous peak of 83,307 vehicles sold in 2007-08. “Our game plan will be to maximise production at the existing plants as well as to get additional production from the Uttrakhand plant taking advantage of the 8% excise duty relief or Rs 50,000 saving per vehicle.”

Hoping to get RBI approval soon for the new NBFC (Hinduja Leyland Finance), Mr Sridharan said as such finance is not an issue. It has tied up with 12 banks and the PSU banks have increased their share from 4% to 12% based on the government’s policy to support SME sector.

Mr Sridharan said on top of the capex of Rs 950 crore this year, it plans to spend Rs 1,200 crore in the next two years. It will be required to
raise only Rs 400-Rs 500 crore per year. He clarified that the proposed 15% price increase in vehicles is meant for the change in emission standards from Euro III to IV or from Bharat Stage III to IV. That depends on when the government wanted to make the change.

As such, the company took price action in January based on the commodity based increase in cost. It will act further based on cost-push factors such as steel and rubber prices.

He said the 15% price increase will happen predominantly in buses which are operated in the cities and when they moved to Bharat Stage IV. In the truck segment, the increase will be a maximum of Rs 50,000 or 5% when they moved from Bharat stage II to III emission norms.

While expecting no radical change in the stimulus package and complete withdrawal of excise-duty cut, he said at the most a 2-4% increase is expected. This will be passed on to the consumer and therefore the company hopes to maintain its margin. He also expected Budget to step up allocation for road building under NHAI and Jawaharlal Nehru Urban Renewal Mission