Markets
Likely UK plant closure a positive for Ashok Leyland. High promoter pledge isn't.
Summary
- Sluggish e-buses demand amid an uncertain outlook for e-buses in the UK has made manufacturing operations unviable in the region, leading to a consultation process with employees on the facility's closure.
Ashok Leyland Ltd’s step-down e-bus subsidiary Switch Mobility Ltd (Switch UK), is cutting its losses. Post market hours on Wednesday, Ashok Leyland announced that the board of Switch UK had approved the commencement of a consultation process with employees, which could potentially lead to the cessation of its manufacturing and assembly activities at its Sherburn facility.
Sluggish e-buses demand amid an uncertain outlook for e-buses in the UK has made manufacturing operations unviable in the region, leading to this decision. That said, Ashok Leyland has no plans to exit the UK market and plans execute all the orders on hand. Also, it will continue to provide aftermarket and service support from two other facilities in Rotherham and Thurrock for existing vehicles. Switch UK is present across the UK and Europe.
The potential closure of UK manufacturing would contain the current around £21 million profitability drag. Secondly, a likely discontinuation of these operations would mean no earnings dilution at the consolidated level for Ashok Leyland’s earnings. Moreover, Ashok Leyland is upbeat on the prospects of Switch Mobility Automotive Ltd (Switch India), which is expected to clock ₹900-1,000 crore revenues in FY25 and be Ebitda positive. earnings before interest, taxes, depreciation and amortization.
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Aided by a strong order backlog of 1,300 buses, management expects Switch India to treble volumes in FY26 and to break even at the profit after tax (PAT) level over the next four to six quarters.
Share pledge overhang
But investors don’t appear thrilled; Ashok Leyland’s shares fell about 2% on Thursday. The recent increase in promoter pledges could be acting as an overhang for the stock, which is up a striking 26% in the past one year, significantly beating the Nifty Auto Index. The latest disclosures to stock exchanges indicated that the Hinduja Group had pledged an additional 300 million of Ashok Leyland or around 10.21% of the total shares on 25 March.
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“Considering the earlier disclosed pledging of 30% of promoter holding, a total of 50% of the promoter holding is pledged now. Note that promoter holding in the company is 51.1%. We also note that as per the last disclosed data, ~50% of promoter holding in IndusInd Bank is also pledged. (Promoter holding in IndusInd Bank is ~15%)," said a Nomura Global Market Research report dated 26 March.
Thus, any drop in Ashok Leyland’s share price is a risk. Note that the Hinduja group company IndusInd Bank’s shares have been volatile lately due to a series of negative developments.
