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Chairman's Speech 2000

Tuesday, May 30, 2000

Ladies and Gentlemen,
I have great pleasure in welcoming you to the fifty-first Annual General Meeting of your Company. Last year, on the occasion of the AGM, I had referred to our optimism despite a difficult market situation. I am happy that this optimism has been vindicated.
The Report of the Directors and the Audited Accounts for the year ended March 31, 2000 have been with you for some time and with your permission, I shall take them as read.
Review of Operations
The recessionary trend that set in nearly four years ago finally came to an end and the revival of the economy is at last on course. Whilst the agricultural sector more or less stagnated at the level of the previous year, the industry and services sectors both showed growth of 6 to 8 percent.
As a consequence, after two years of very sharp fall in market demand, the medium and heavy commercial vehicle industry, where your Company has its major presence, registered a growth of about 34%.While more or less holding on to the domestic market share gains of the previous four years, in a declining export market, your Company has managed to more than maintain its volume. The small loss in domestic market share stems from a strategic imperative, to protect profitability in certain areas and segments of the market. It is your Company's endeavour to improve not only market share, but also profitability.
In improved market conditions, your Company has achieved a turnover of nearly Rs 2,600 crores, compared with Rs 2,045 crores in the previous year. Utilization of installed capacity for commercial vehicles has improved to 76% from 53% in the previous year. There was practically no increase in the finished goods stock of the Company at the year end, reflecting the degree of market responsiveness that has been institutionalized. In similar vein, the net current assets increased by less than 3%, despite a 27% increase in turnover. These and other efficiency gains in supply chain management have led to an almost four-fold jump in profits after tax from Rs 20.4 crores to Rs 79.9 crores.
As you are aware, during the year under review, your Company made a smooth transition to the Bharat - Stage I emission norms on all the three engine platforms. For the Defence sector two special application vehicles were developed namely, the Light Recovery Vehicle and a fire fighting truck, which have been approved and initial orders are expected soon.
Outlook for 2000-2001
Business confidence is high, with industry expected to grow as high as 8% and, with a stagnant agricultural output, an overall GDP growth of under 6% is in prospect. However, fiscal deficit continues to be a matter of anxiety and there are ominous signs such as increasing inflation and a drought gaining in severity. Meanwhile, the second phase of economic liberalisation has triggered sharper difference of opinion in the polity. Accelerated liberalisation of import policy and of imports,particularly in relation to second-hand goods, are also areas of concern for Indian industry.
Over the last few years, your Company has been preparing itself to meet the emerging competition through improved internal efficiencies and with technology upgradation. Anticipating changes in the domestic commercial vehicle industry, your Company has already initiated actions to retain the competitiveness of its products while ensuring compliance with future emission norms. This includes exploring options of a strategic alliance for engines which will offer the benefits of assured availability of latest technology, optimum utilisation of facilities and sourcing for global markets.
Leveraging its pioneering R&D effort in development of CNG powered buses, your Company is playing a lead role in the induction of such buses by the Delhi Transport Corporation and is geared to fulfill larger orders that are expected this year from Delhi and other metros where CNG is available.
Comprehensive approach to ecology
Accelerated tightening of emission norms and greater use of "clean fuels" are two technology solutions that are being adopted in India, largely in response to growing public concern about increasing levels of urban air pollution. Your Company welcomes and fully supports these steps and is committed to fulfilling its lead role in protecting a clean environment.
Yet, there are a few caveats to these steps because,inherent in any reactive response is a short term, limited view, ignoring the total perspective.
When we consider the total picture, it is clear that different forms of wealth including natural resources have a mutually competitive relationship. There has always been ¿ and will always be ¿trade offs between economic and ecological wealth, between short term and long term interests. This has repeatedly come into sharp focus, for example, in the matter of water management where the need for irrigation can conflict with the preservation of habitat. A sustainable development process tries to balance the trade offs. In a resource-strapped country like India, it is essential that we optimize the gains through resource allocation based on a comprehensive, long-term view. Reactive responses are susceptible to preemption, which benefits one sector at the expense of the others. With our finite financial resources, we should achieve maximum all-round gains and not allow preemption of resources that benefits some sections through better air or water quality, but to the neglect of the deprived masses.
Staying with the subject of air pollution, while the singular emphasis on stricter emission norms has resulted in positive steps, clean air will evade us unless simultaneous actions are taken in the other contributing segments. The task calls for the formation of a Central Air Quality Authority, on the lines of the Environment Protection Agency in the USA, empowered for effective coordination with the various agencies that have a role to play.
Clean air and emission norms
The Society of Indian Automotive Manufacturers (SIAM) has suggested a road map for accelerated implementation of future emission norms. Given the huge costs involved at each stage, SIAM has mooted a straight upgradation from Euro II to Euro IV norms for commercial vehicles and have assured industry's readiness to implement it within two years of its implementation in Europe. This will bring down the gap between India and Europe ¿ currently eight years - to just two years, within a compressed time frame of less than a decade. As pointed out by SIAM, Euro IV norms can be implemented only if all outlets in the country can dispense fuel with no more than 0.005% sulphur content. Closer in time,even though plans are afoot to implement Euro II norms in the next couple of years, a timetable for availability of the required fuel with 0.05%sulphur content is yet to be drawn up.
Even after we achieve purity of fuels through investments in our refineries, how do we ensure the quality of fuel as it reaches the vehicles? We have to address the problem of adulteration, through policy and enforcement. Adulteration is a direct result of the substantial difference in the price of diesel and kerosene, as also our failure in checking the malpractice. Policy can also promote, through an appropriate price mechanism, the use of green fuels while punishing polluting fuels.
Failure of the enforcement agencies in respect of fuel quality and the inspection and maintenance of vehicles on the roads will deny the country the potential benefits of high cost technology. Expensive technology can not ¿ and should not be called upon to - bear the burden of compensating for laxity or anomalies in allied segments.
Successive emission norms bring in their wake huge accompanying costs, in automotive research, new engine design incorporating sophisticated components and aggregates as also to the oil industry, once again raising the issue of resource allocation. Having implemented the Bharat - Stage I at considerable costs, it is time to introspect and take stock. Conformance to these norms has increased the costs significantly and combined with the hike in diesel prices, has put a burden on vehicle operators, affecting their earnings. I would like to identify three areas for action that will optimise gains in air quality.
1. Apply differential norms
            The localised legislative measures envisaged for the highly polluted urban centres recognise the need for differential implementation between urban India and the rest of the India, between commercial vehicles and private passenger vehicles. It makes immense sense to apply solutions where the problem exists. Let us not forget that air pollution is essentially an urban problem. An air quality mapping of the country will allow a calibrated implementation of differential measures. This should be done right away and before we move on to the future emission norms. In the urban areas where green fuels such as CNG are available, its use should be incentivised through pricing polices, for buses, cars and intra-city truck operations. Rest of the urban centres should attract the latest emission norms in respect of conventional fuels. In the rest of the country, successive emission norms can be implemented with a time lag. In the case of defence, the largely city-bound 4x2 vehicles should be made to conform to the latest urban emission norms while the 4x4 and 6x6 vehicles can fall in line with norms for the rest of the country.
Such a classification of the geography will lead to migration of older vehicles from urban centres to rural areas. This will also allow a phased introduction of purer fuels, thus reducing the burden on the oil sector.
2. Target in-use vehicles
          Even as we introduce increasingly stringent emission norms, the quality of air will not improve unless in-use vehicles ¿ nearly over 90% of total vehicle population - in our cities are targetted. This has been proved by the success in National Capital Region (NCR) in reversing the trend of increasing air pollution.
While scrapping vehicles that are over 15 years old, 8 to 15 year old vehicles can be allowed to complete their life cycle by retrofitting Bharat ¿ Stage I compliant diesel engines. These are vehicles of pre-1992 vintage, preceding the first ever emission norms of 1992. Vehicles that are less than 8 years old can have their engines upgraded to comply with Bharat ¿ Stage I levels. Your Company has developed a kit that will allow such an upgrade. Targetting in-use vehicles will yield better results, at lower costs, than implementation of stricter future norms for the incremental number of new vehicles and hence should get precedence. In fact, there is compelling rationale for mandating conformance of in-use vehicles to Bharat ¿ Stage I norms, in highly polluted urban centres.
In cities where CNG is available, retrofitting of CNG engines will no doubt be a preferred option. Tests show that while CNG can more or less match Euro III diesel norms for gaseous emissions,particulate matter will be just 14% compared to Euro III norms. Seven CNG buses of current technology will emit only as much particulate matter as a single Euro III compliant diesel bus will.
Given the low margins in Indian Transport Industry,upgradation of in-use vehicles needs to be promoted and incentivised. I have no doubt that the social benefit will far outweigh expenditure on this account.
3. Promote public transport
         At a time when the industrialised nations have recognised public transport system as a means of reducing total vehicular pollution, India, in a comparatively early stage of economic development and learning curve, is yet to do so. While less than 25,000 buses were sold in 1999-2000, total sale of two wheelers and cars exceeded 4.3 million. The impact of such vehicle distribution is best understood by comparing the amount of pollution per person/km. The per person / km hydrocarbon emission from a car is estimated to be 15 times compared to a commercial vehicle, and carbon monoxide 10 times.
Your Company has been a pioneer in designing and offering specialized urban buses including luxury coaches. Buses meeting varying levels of customer requirements will make public transport system a viable and less expensive alternative to private passenger vehicles for city dwellers. Here again, funds constraint stands in the way of potential air quality improvement.
This holistic package will take us closer to our objective of clean air, at a considerably lower cost to the automotive industry, the oil sector, the vehicle operators and the economy. The industry, at the same time, will be in line with global emission standards. The accompanying upgradation of other aggregates for compatibility with modern engines will help Indian industry become globally competitive in the post-WTO era.
Associate Companies
Ashok Leyland Information Technology (ALIT), an associate company dealing in software solutions, has merged with Hinduja Finance Corporation of the Hinduja Group which is emerging as a major convergence company with increasing stakes in technology, media and telecom. Given the Hinduja Finance Corporation's stake in INcable and recent initiatives including its alliance with Intel, the merger of ALIT places it on a growth path in the convergence sector. The terms of merger, based on valuation by two independent Chartered Accountant firms, were attractive to your Company as a shareholder. Your Company will focus on its areas of core competencies.
You are aware of the significant support, Ashok Leyland Finance (ALF) has been rendering to your Company's sales and marketing efforts. It is important that, in tandem with our enlarging market operations, ALF increases its network, to leverage resources for mutual benefit. Your Company has subscribed to the recent preferential capital issue of ALF, to the tune of Rs 49.49 crores.
Mr S C Chawla who was a Director of your Company for several years passed away suddenly on May 22 after a brief illness. Mr Chawla who was the Chief Executive of LRLIH Ltd, the major shareholder of your Company, had provided during his tenure very valuable advice to the Board and I shall personally miss his presence in the future. I am sure you would like to join me in conveying our condolence to all the members of the bereaved family.
Mr Dheeraj Hinduja, Mr Klingele, Mr Mukherjee and Mr Sorce are retiring by rotation at this meeting and have offered themselves for reappointment. I would like to place on record my grateful thanks to all the Directors of your Company for having taken keen interest in the affairs of your Company and to have actively participated and assisted me in the deliberations at our Board meetings.
I would like to express our thanks to the Central and State Governments, the Banks, Financial Institutions and various quasi-government and private agencies for continuing to be supportive of the Company's efforts and operations. My special thanks to our customers and the road transport community, dealers and vendors for assisting the Company in achieving a substantially better performance.
I am grateful to our shareholders for their continued trust in the management of the Company. A special word of appreciation for the guidance and technological support from our principal shareholders,the Hinduja Group and IVECO, acting through LRLIH Limited.
There can also be no doubt that without the dedicated and loyal commitment of all the employees of the Company, the improved market demand could not have by itself made the substantial improvement in the Company's performance occur - my sincere thanks to all of them.

Yours Sincerely,
Mr. R . J. Shahaney
Chairman, Ashok Leyland Limited