Ashok Leyland's decision to merge the loss making Hinduja Foundries Ltd with the company was not received well by the investors. Company's stock dropped by 3.43 per cent to Rs 81.65 in BSE on Thursday morning.
On September 14, company stock closed at Rs 84.55 a share, up by 1.26 per cent.
Late Wednesday night, Ashok Leyland said that it got Board's approval for its proposal amalgamating Hinduja Foundries Limited (HFL), a Hinduja Group company with Ashok Leyland Limited (AL), subject to various regulatory approval and approval of shareholders of both the companies.
Ashok Leyland management did not respond to Business Standard's request for a comment on the logic behind the merger. Meanwhile market experts fear that this will eat into Ashok Leyland's cash.
A senior analyst who tracks the company said that its a bad deal for Ashok Leyland since HFL is a loss making company and consistently for the last five years it has been reporting loss.
In 2015-16, Hinduja Foundries loss was Rs 394.25 crore as compared to Rs 262.44 crore, a year ago.
During the same period, Ashok Leyland reported profits of Rs 721.78 crore and Rs 334.81 crore respectively.
Meanwhile Hinduja Foundries said that D M Reddy is appointed as the managing director of the company.
"The Company continued to face numerous challenges due to negative growth of the OEM market for some period, uncertain power scenario and sharp decline in the price of end products. The Sriperumbudur Unit (SPU) ramp-up with debottlenecking of capacity constraints and stabilisation of production processes was slowed down," said HFL.
Besides, HFL is sitting on a debt of around Rs 460 crore, which will now come in Ashok Leyland's book and it needs to be serviced. The other negative factor is that this deal also means three per cent dilution of equity for Ashok Leyland and all the capex and funds for operations need to be funded by Ashok Leyland.
Vinod K Dasari, Chief Executive Officer and Managing Director, Ashok Leyland in a statement on Wednesday late evening said that the amalgamation will result in operational efficiencies and help realise significant cost synergies.
"We are confident that the roll out of the best practices of Ashok Leyland Limited will benefit Hinduja Foundries Limited. While it is a critical supplier to Ashok Leyland Limited will continue its focus to grow its relationships with other customers".
He added, in fact the new arrangement will help in providing a wider range of solutions to them. There is so much more Hinduja Foundries can do under the new arrangement.