ICRA has downgraded Ashok Leyland's outlook from ‘stable’ to ‘negative’.
The ratings agency is concerned about Ashok Leyland’s “likely deterioration in credit profile” owing to the need for investing more into group companies most of which are currently in gestation phases.
The slowdown in Ashok Leyland’s core business of commercial vehicles was also a factor for ICRA’s action.
“Due to the economic slowdown, the financial profile of most of these key investee companies is currently stretched necessitating higher funding support from Ashok Leyland in the form of equity, loans and guarantees,” says ICRA.
Investment in group cos
Ashok Leyland’s investment in group companies stood at Rs 1,847 crore as on March 31, 2012.
The need for the company to put in more money into the group companies arises because they are not generating enough internal resources to support their own investment plans.
Key entities where large investments are required include Ashley Holdings Ltd, Ashley Investments Ltd, Hinduja Foundries Ltd, Leyland John Deere Construction Equipment Pvt Ltd, the next phase of ALL-Nissan JV, to name a few.
Most of Ashok Leyland’s key investee companies are in the nascent stages of operations and are yet to break even.
Impact on cash flows
While these investments are expected to provide diversification benefits and operational synergies for Ashok Leyland in the long-term, ICRA expects Ashok Leyland’s cash flows to be impacted over the near to medium-term given the incipient stage of investee companies and increasing funding support.
Demand for commercial vehicles
Further, the subdued demand environment for the domestic medium and heavy commercial vehicle (M&HCV) industry and anticipated contraction in margins on the back of rising raw material costs and higher sales proportion of the relatively low margin light commercial vehicles (LCVs), is expected to lower the cash accruals and stretch the overall debt indicators.
Ashok Leyland is the second-largest manufacturer in the medium and heavy commercial vehicles (M&HCVs) segment in India.
The company is the flagship entity of Hinduja Group. It has six manufacturing plants with a total capacity of 150,500 units and its key products include buses, trucks, engines, and defence & special vehicles.
During April-September, the company sold 41,414 vehicles compared with 42,936 vehicles in the corresponding period last year.