Light Trucks, Modular Tech, EV-Focused Unit: Inside Ashok Leyland’S Drive to Make It Big Globally

Light trucks, modular tech, EV-focused unit: inside Ashok Leyland’s drive to make it big globally

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Nitin Seth (left) Anuj Kathuria, COOs, Ashok Leyland; image courtesy Ashok Leyland

From launching new light commercial vehicles to building a modular platform called AVTR, which can make vehicles of different configurations, to pushing its EV ambition through UK subsidiary Switch Mobility, the Hinduja group company is leaving no stone unturned. Will the bets pay off?

Commercial-vehiclemanufacturer Ashok Leyland wants to push hard with its ambition to bulk up. The Chennai-based company is stitching up a plan to become a bigger name in the global market.

The bets are on three facets— light commercial vehicles (LCVs); a modern modular platform, which will make the new generation of medium and heavy commercial vehicles (M&HCV); and electric vehicles. So why is Ashok Leyland putting special emphasis on these areas? The answer is hidden in the changing market dynamics.

Driving growth with LCVs Till five years ago, the Indian LCV market, which consists of up to 7.5T (tonne) GVW (gross vehicle weight) automobiles, made up 50% of the total commercial-vehicle (CV) industry. Globally LCVs make up for 75% of the CV market.

In the domestic market, LCVs are now seeing strong traction. In FY20, they became 70% of the total pie. By October-end FY21, this segment had grabbed 80% of the CV market, as muted economic activities reduced M&HCV sales. From July, the LCV segment has seen an incremental rise month-on-month, driven by e-commerce demand, with more consumers ordering groceries and vegetables online.

Predominantly an M&HCV player, Ashok Leyland has expanded its presence in the 2T GVW-3.5T GVW category, where Tata Motors and Mahindra & Mahindra (M&M) are major players. The Tata Ace is present in the sub-2T segment as well. Ashok Leyland’s COO Nitin Seth, who takes care of the LCV and international businesses, says that till a few years ago, the sub-2.5T segment accounted for 50% of the LCVs.

But the equation has now changed with overcrowding of products, shrinking volumes, and lack of growth, giving a boost to the 2T GVW-3.5T GVW market. Ashok Leyland is now eyeing this category along with the 3.5T GVW-6T GVW segment, with its Dost and Bada Dost trucks.

“We are selling less than 5,000 vehicles a month,” elaborates Seth. The plan is to increase the LCV business in the medium to long term, as the segment is huge. DuringApril-September FY21, Ashok Leyland held a 10% market share in LCVs, with sales of 13,638 units, according to data from the Society of Indian Automobile Manufacturers (SIAM). Seth says, with October sales, the company holds an 18% share of the pie and is gunning for over 20% with an uptick in the market.

A late entrant in the LCV segment in 2011 with a joint venture with Japanese automaker Nissan, Ashok Leyland soon hit roadblocks. Its experiment with the Stile mini-van came to naught. It was based on the platform of the Nissan Evalia, another non-starter.

In 2016, Ashok Leyland exited the partnership with Nissan. But it still holds the licensing right to make the Dost, Partner, and Mitr LCVs based on Nissan’s technology, engineering, and designs.

For Ashok Leyland, the focus on LCVs would help bring sizeable additional revenue from 2023-24 onwards.

Pushing the cargo Mitul Shah, head of research, Reliance Securities, expects a strong growth for the CV market, especially the cargo segment. The cargo category constitutes 70%-80% of the overall M&HCV space.

After the lockdown, the demand for M&HCVs has been returning month-on-month since July, with October being the best month till now. “We expect November to be even better,” says Anuj Kathuria, COO, who heads the M&HCV business at Ashok Leyland. The company holds 30%-35% market share in M&HCVs, with Tata Motors being the largest player. In the first two quarters of FY21, Ashok Leyland held a market share of 26.53% with sales of 7,683 units.

The company’s strategy to drive growth is “looking at segments within trucks separately”. It is more needed now, as demand for CVs is returning in specific segments. Ashok Leyland has seen a strong pickup in intermediate commercial vehicles (ICV) due to a surge in demand for e-commerce, FMCG, and agri products. This is driving the 7.5T GVW-16T GVW vehicles as well as the 4x2 haulage segments (16T GVW-19T GVW). In addition, the outbound logistics of vehicles and white goods have given a fillip to the ICV and haulage-truck segments.

The construction and mining segments are also pushing demand, as road development is now back on track. Demand for ready-mix concrete vehicles for laying roads and infrastructure projects has also started to emerge. In heavy vehicles, the tipper segment is doing well, buoyed by road construction, infrastructure, and irrigation projects, including construction of dams in Andhra Pradesh and Telangana, and mining activities (iron ore and coal). Last year, tippers accounted for a fourth of the total industry volumes, but this year they have contributed a third. Kathuria clarifies that while tipper volumes have increased as a percentage, the overall segment is below 2019 levelson a year-to-date basis. But October numbers are similar to the same month last year.

Demand is, however, weak in multi-axle rigid vehicles and tractor trailers. Freight trade has not improved, as diesel prices are still high. In freight trade, utilisation of these types of vehicles still hovers between 70% and 75%, but according to Kathuria, here also month-on-month fleet utilisation is improving. “When fleet owners’ utilisation reaches 80%, they start purchasing new vehicles, so we have almost reached the threshold,” he says. “In Q4 FY21, demand for multi-axle vehicles should return.”

"We are considering EV initiatives through Switch, which could include financial participation and strategic tie-ups."

— Dheeraj Hinduja, chairman, Ashok Leyland

A new modular platform In June, Ashok Leyland rolled out its new modular platform, AVTR. The platform can build a host of ICVs, rigid trucks, tractor trailers, tippers, and multi-axle trucks in the 18.5T GVW-55T GVW range, with different configurations for load capacities, suspensions, axles, cabins, and drive trains. The company claims this is the country’s first modular platform with such a wide vehicle range in BS-VI. The AVTR vehicles have received a positive response, with customers coming with repeat orders. Kathuria says Ashok Leyland will keep adding new variants to this platform in the future.

The advantage of the AVTR platform is that various aggregate combinations can be configured based on applications. Special emphasis has been given to driver comfort, driving experience, and safety while designing the platform. “Customers can custom-build their vehicles based on the usage and application. All combinations are readily available with us,” adds Kathuria.

A high level of commonality in parts and use of the same exhaust after-treatment in all AVTR vehicles make them easy to maintain without the need for different spare parts.

The company’s ICV range, including the Ecomet and Boss, transited to BS-VI earlier this year and is already modular to some extent. Further improvements in vehicle architecture are also underway. “This year, we have been able to put over 10,000 ICV vehicles on road,” Kathuria says.

Plugging in EVs Last month, Ashok Leyland renamed Optare, its majority subsidiary in the UK, as Switch Mobility. It is part of a plan to push electric vehicles (EVs) and new mobility services worldwide.

This strategy, according to Dheeraj Hinduja, chairman of Ashok Leyland, reflects the clear growth opportunities in the global LCV and the EV bus market. This segment is projected to grow at a CAGR of more than 25% and will be to the tune of USD50 billion by 2030. “To capture part of that market, we are considering EV initiatives through Switch, which could include financial participation and strategic tie-ups,” he says.

Pawan Kumar, founder and director of financial-services provider Coinage Capital, says, “The new identity of Switch Mobility will house all EV activities of the Hinduja Group across the globe. They are looking at a big-time LCV entry into the international market.”

Optare is a large player in electric buses in the UK and has sold 200 double-decker buses in its home turf so far. With half of the vehicles pegged to go electric in Europe and the US by 2040, vehicle makers see a mega opportunity in these markets.

Abhishek Jain, assistant vice-president, research, Dolat Capital, says vehicle manufacturers like Ashok Leyland are looking to enter the EV segment and making investments in this area. While the capex is in low double digits, they are creating subsidiaries that will generate business over the next three to five years. Ashok Leyland has also been supplying buses, including EV variants, to state transport undertakings (STU) in various India cities. The company is looking to expand this business.

Seth, however, rules out leveraging the Optare electric technology in India, as it is too costly and cannot compete with the cut-throat competition for STU tenders, where Chinese players have hogged the lion’s share till now.

Ashok Leyland entered into a partnership with ABB Power Products & Systems Indiafor an e-bus charging technologycalled TOSAearly this year. The facility is for larger buses and is currently operational in Ahmedabad. The same service will soon start in Bihar as well.

The desert safari Ashok Leyland’s Ras al Khaimah assembly plant in the United Arab Emirates (UAE), which makes 2,000 buses annually, is expanding its offerings with the addition of left-hand-drive Mitr buses from January 2021. In India, these are used as school buses and are smaller in size.

Seth says the UAE plant is modern and profitable and as the company expands its product portfolio further, new buses are planned to be made there. “The plant capacity can be expanded to 3,000 units per annum, and we will have around six types of buses made there by next year.”

Starting January, Leyland’s newly launched Bada Dost light trucks will also be exported to the Gulf with a left-hand-drive option. The Partner truck was launched with a left-hand-drive option a year ago. Ashok Leyland’s first rollover-protected and front-crash-compliant bus Oyster is also being made at the UAE plant, besides the Falcon and Falcon Super. The company has developed a strong vendor base in the UAE, from where it also plans to tap into the African market.

However, the Gulf market, which reopened in September, was severely impacted by the pandemic. Emirates Transport, which buys 300 Ashok Leyland buses annually, has also reduced its fleet size to half due to low passenger strength. With oil prices under pressure, the Gulf economy is also not looking too good. Neighbouring export markets of Sri Lanka, Bangladesh, and Nepal have also put restrictions on import of trucks and buses. This has hit Ashok Leyland’s volumes.

New subsidiary for buses To push future growth in buses, Ashok Leyland recently spun off its bus business into a separate subsidiary, Vishwa Buses & Coaches (VBCL), which will expand its customer base. VBCL will develop fully built BS-VI buses (28- to 60-seaters) and coaches at its existing facility at Alwar, Rajasthan. “We had a bus-body facility earlier, but now we are taking the right focus. VBCL will offercustomised designs to customers, deliver faster, and reduce costs while maintaining the same quality level,” says Kathuria. “Our ability to source steel at cost-effective rates will also reduce theexpense of development.” The ticket size of fully built buses is also higher, which means they will add more heft to the company’s top line.

The company’s Alwar and Indore plants were earlier making bus chassis. But many customers preferred to get bus bodies built, based on their requirements, by external body builders after buying the chassis from Ashok Leyland. Now this discrepancy has been eliminated with VBCL.

Shah from Reliance Securities says the VBCL subsidiary could be useful for the future structure of the company, as it helps in terms of taxation, operations, and fundraising. VBCL would also galvanise the company’s global footprint, and increase, albeit incrementally, volumes in overseas markets.

What the market thinks Auto stocks are going steady at present.

Eicher Motors’ stocks are riding on the improvement in the Royal Enfield business, which accounts for around 80% to its profits. The Tata Motors stock is on a high, primarily due to its Jaguar Land Rover operations globally, which bring the largest share of its revenue. Also, positivity around its passenger-vehicle division in India has come as a surprise, with plans to hive it off as a separate entity.

For M&M, the good show in the stock market is mainly due to the strongperformance of its tractor division, as the rural economy has largely been unaffected by the pandemic. A good monsoon and harvest have increased sales of farm equipment. To some extent, SUVs have also contributed.

Ashok Leyland has done a course correction and increased its focus on LCVs, a segment that is showing good growth potential.The company has come up with new products like the Bada Dost.These steps might help the company take some market share from M&M. Ashok Leyland has also rejigged its M&HCV platform. Investors have noticed these initiatives and the market has rewarded the stock.

“Whenever investors put money in these sectors, they always track the up cycle or down cycle, and the last three years saw the CV segment in a down cycle. Now it looks as if it has bottomed out, with good prospects over the next four to five years. Investors feel this segment will grow at a CAGR of 30%-35% over the next few years. So, Ashok Leyland’s stock valuations are capturing this growth,” says Jain from Dolat Capital.

A word of caution from him is that most large-cap companies have already captured their valuations other than a few global players like Tata. “I don’t see large caps witnessing a significant upside from here on,” he adds. Shah of Reliance Securities believes that Ashok Leyland will follow the sharp rebound witnessed in the two-wheeler and passenger-vehicle segments with a two-three-month lag. The Ashok Leyland stock is also expected to rise to an all- time high like Bajaj Auto and Hero MotoCorp, as the company is fully focused on CVs, unlike other players that have a combination of products. The bounceback will be equally strong for M&HCVs, Shah believes.

Motilal Oswal Securities believes that stocks are coming back with sales volumes. Ashok Leyland is on a growth cycle and will continue to see improvement from here on. Kumar from Coinage Capital feels markets are reflecting Ashok Leyland’s focused actions in CVs; there are strong government orders on the EV side, too. In the defence space, Ashok Leyland is supplying products ranging from armoured trucks to radars and security sensors. Investors are anticipating that these initiatives could include higher financial participation and lead to bigger rallying of stocks in the next two to three years.

The bottom line Ashok Leyland has weathered many storms in the past, including a cold foray into the LCV space.

LCVs have been seeing a robust demand from the rural markets as well for transporting crops from villages to cities.Around two and a half years ago, Ashok Leylandwas hit by the new axle-load norms, which increased load-carrying capacities of trucks by 25%. This had impacted sales of M&HCV vehicles. In addition, a slowing economy resulted in lower capacity utilisation at about 50%. The company successfully came out of both situations. In fact, capacity utilisation has now improved to around 65%-70%.

The LCV segment constitutes 70% of the CV space in India at present and Ashok Leyland’s products cater to 35% to 40% of this market. This shows that there is huge legroom for the company to launch new products. A bigger product portfolio will also help it get a firmer foothold in the global market.

(Data support by Rochelle Britto)

(Graphics by Sadhana Saxena)