Crisil revises Ashok Leyland outlook to -ve

Rating agency Crisil has revised its rating outlook on the non-convertible debenture programme of the commercial vehicle manufacturer Ashok Leyland to ‘negative’ from ‘stable’ and reaffirmed its rating on the company’s commercial paper programme at ‘P1+’.

The revision in outlook reflects the likelihood of Ashok Leyland’s financial leverage increasing over the medium term, owing to its large committed debt-funded capital expenditure and investment plans. Due to the increased financial risk, the rating could become vulnerable in the scenario of a continued slowdown in the domestic medium and heavy commercial vehicle (M&HCV) segment, a release from the Crisil stated.

The agency expects that Ashok Leyland will implement its Rs 2,000 crore M&HCV project in Uttaranchal by March 2010 in order to avail of the fiscal benefits offered by the government. In addition, the fiscal benefits offered by the Uttaranchal project would also benefit the company over the medium to long term.

The deterioration in Ashok Leyland’s financial profile may correct itself over the medium term if M&HCV sales revive and the benefits from the capacity enhancement are realised. The performance of the domestic M&HCV industry and the ability of Ashok Leyland to reduce its exposure to the M&HCV market through its ventures in the light commercial vehicle (LCV), passenger vehicle, and engine segments, and through exports, will be key determinants of the company’s credit quality in the context of its increased financial risk profile.

Ashok Leyland’s operating margins for 2007-08 are estimated at 9.5 per cent in spite of a significant increase in raw material costs. Continuous cost reduction efforts, recent hikes in vehicle prices, and an improved working capital cycle are expected to cushion pressures on the company’s operating margins from input price hikes.

The company is slated to increase its capacity to 184,000 vehicles per annum from the current 84,000 vehicles per annum over the next four to five years. The rating is also constrained by Ashok Leyland’s vulnerability to cyclicality in the domestic demand for CVs, and limited success in the fast-growing LCV segment.