Chennai: Commercial vehicles major, Ashok Leyland Limited, will start export of auto components to the Japanese vehicle manufacturer, Hino Motors, for which it has developed some critical engine components.

According to officials, the components are undergoing tests and the company is working on the final price before starting the shipments. It may be recalled, Ashok Leyland sources engine technology from Hino Motors.

Ashok Leyland has decided to invest Rs 550 crore over the next two years towards capacity addition, research and development and replacements of old machinery.

Announcing this at a press conference, R Seshasayee, managing director, said, "During 2004-05 the capex will be Rs 300 crore and the balance Rs 250 crore will be spent in 2005-06."

The additional investments will be in four phases. The first phase will be increasing the capacity to 67,000 units per annum (pa). The second phase will comprise activities like development of new aggregates, product improvement (high power/torque), development of new engine, expanding the cab production capacity. The third and fourth phase involves increasing the overall capacity to 75,000 pa and production of new generation vehicles totaling 10,000 units pa.

The company has slated a slew of launches during this calendar year. In August, Ashok Leyland will be launching a new generation tractor vehicle, a factory built 12m, 180hp bus, followed by a rear-engine 260hp coach.

"During the last quarter of this fiscal we will be launching the Bharat stage III engine. Work is on for developing a Euro III engine with common 'rail fuel injection system'," Seshasayee added.

These aside, derivatives of existing models - Ecomet and Stag mini bus powered by diesel and compressed natural gas (CNG) have also been planned.

Listing out the company's priorities, Seshasayee said, "Our immediate focus is to expand capacity through the least cost route, introduction of technologically-improved products, improving the productivity and managing the input cost hike through cost reduction initiatives like value engineering and e-sourcing."

Towards this end, the company hiked its R&D spending to 2 per cent of its sale revenue in 2003-04 and substantial investments have gone into the company's testing facilities.

According to Seshasayee, the Indian commercial vehicles market will move slowly towards high-powered vehicles, and as such poses no immediate threat to the company. The year also saw Ashok Leyland forming a joint venture company with Gulf Oil Corporation Ltd to set up model dealerships offering total transport solutions.

Speaking about the company's China and Pakistan plans, Seshasayee says that talks have commenced with Pakistani bus operators. "We are studying the Chinese vehicles and the aggregates market. China's latest auto policy makes it difficult for the new entrants."

Financial engineering engineers higher profit

For the year 2003-04 Ashok Leyland has logged sales revenue of Rs 3,927 crore and other income of Rs 18 crore.

The company sold 48,654 vehicles and 5,085 marine engines as against 36,444 units and 5,924 engines during 2002-03. The company sold 44,837 (passenger vehicles - 11,354, goods carrier - 33,483) in the domestic market. While sales to the defence forces came down to 35 units from 820 units in the previous year, exports went up by 1,232 units to 3,782 units. Sales of spares to the defence sector declined to Rs 446 crore from Rs 477 crore during 2002-03.

"Our capacities were utilised to roll out vehicles to meet the demand spurt and hence marine engine production came down slightly," said Seshasayee.

For the FY 2004, the company registered a net profit of Rs 193.5 crore, up from the Rs 120 crore posted in FY2003. According to Seshasayee, the profits would have been higher but for the increase in input costs - steel 68 per cent and copper 29 per cent - over the past two years as a result of which, the company spent Rs 2,363 crore on raw materials last fiscal as against Rs 1,620 crore.

"We were able to raise vehicle price only by 6.2 per cent. Similarly power cost too went up by 10 per cent effective from January 2003." According to him, the company has decided to source components from China to cut costs.

In addition, staff costs and other expenditure too went up by Rs 11 crore and Rs 79 crore to Rs 309 crore and Rs 364 crore respectively.

According to Seshasayee the staff cost increased due to incentives to workers for higher productivity. Last fiscal, Ashok Leyland reduced its workforce by 337 through a voluntary retirement scheme (VRS) bringing the current labour strength to 12,007 workers."

Adds K Sridharan, executive director, finance, "The upswing in the other expenditure head is mainly due to the investments made in R&D and testing facilities." Last fiscal, the companies other expenditure went up by Rs 79 crore to Rs 364 crore.

Last fiscal, the company slashed its finance cost by Rs 38 crore to Rs 20 crore, which added to its. This was possible by prepaying high cost debt to the tune of Rs 260 crore, remarked Sridharan.

To augment its financial resources, Ashok Leyland raised Rs 441 crore in April by issuing foreign currency convertible notes (FCCN) at 0.5 per cent interest rate.

The board has proposed a dividend of 75 per cent (Rs.7.50 per share).