Ashok Leyland - 2007-2008 Annual Report

ASHOK LEYLAND LIMITED

ANNUAL REPORT 2007-2008

DIRECTOR'S REPORT

Part I - Performance/Operations

The Directors are pleased to present the Annual Report of the Company, together with the audited Accounts, for the year ended March 31, 2008.

Financial Results (Rs. Millions) 2007-2008 2006-2007

Profit before tax 6,381.50 6,045.06

Less: Provision for taxation 1,688.40 1,632.20

4,693.10 4,412.86Add: Transfer from/(to):

Debenture redemption reserve 50.00 135.00

Balance profit from last year 3,616.86 2,303.70

General Reserve (1,000.00) (1,000.00)

7,359.96 5,851.56

Add: Excess provision written back

- Dividend (Including Corporate Dividend Tax) - 29.62

Profit available for appropriation 7,359.96 5,881.18

Appropriation:

Dividend 2006-07 - 1,985.81

Proposed Dividend 2007-08 1,997.71 -

Corporate Dividend Tax 339.51 278.51

Balance profit carried to Balance sheet 5,022.74 3,616.86

Earnings per Share (Face Value Re.1/-) - Basic 3.53 3.38

- Diluted 3.53 3.36

Dividend

The Directors recommend a dividend of 150% (Rs.1.50 per equity share of Re.1/-) for the year ended March 31, 2008. This Dividend will also be payable on the shares arising from conversion of Foreign Currency Convertible Notes (FCCNs) issued in April 2004, to the extent converted upto the Book Closure Date(s).

Business operations

The domestic market for the Company's products experienced a slowdown in the year under review. Your Company was however able to secure a higher share in the passenger vehicles market. Total sales of vehicles, engines and spares registered increases over the previous year.

The highlights are discussed in detail in the Management Discussion and Analysis Report attached as Annexure-D to this Report.

External Commercial Borrowings (ECBs)

During the financial year, despite a difficult situation in the financial market, the Company contracted for ECBs for a sum of US$ 270 mn. to part fund its capex requirements and overseas investments. Out of the above, the Company has drawn US$ 90 mn. during the year 2007-08 and the balance would be drawn during 2008-09. The Company has fully complied with the guidelines prescribed by RBI in this regard. Research and development, technology absorption, energy conservation etc.

The Company continues to lay emphasis on investing for the future through Research and Development activities. The facilities in the Company?s Technical Centre at Chennai have been further upgraded, to ensure contemporary development capabilities in order to offer competitive products to the market place.

The particulars prescribed by the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 relating to Conservation of Energy, Technology Absorption, Foreign Exchange are furnished in Annexure-A to this Report.

Other Ventures

Joint Venture with Nissan Motor Co. Ltd., Japan The Company will be expanding its business and entering the area of Light Commercial Vehicles with the promotion of Joint Venture with Nissan Motor Co. Ltd., Japan. Discussions on the Joint Venture Agreements are in an advanced stage. This will be a major project and will cater not only to the domestic market, but also to the export markets.

Ashley Alteams India Private Ltd.

A Joint Venture Agreement was signed on July 3, 2007 with Alteams O.Y. Finland, for the manufacture and sale of High Pressure Die Casting components for the telecom and automotive industries, including for the Company?s own requirements. Ashley Alteams India Private Ltd., the Joint Venture Company, is making steady progress in the implementation of the project. Commencement of commercial production is expected by end 2008.

Automotive Infotronics Private Ltd.

A Joint Venture Agreement was entered into with Siemens VDO on July 16, 2007 (now known as VDO Automotive A.G. a Company of Continental Corporation, Germany) for design, development and adaptation of electrical and electronic automotive components and customer-specific software applications. Automotive Infotronics Private Ltd., the Joint Venture Company is slated to commence commercial activities during 2008-09.

Ashok Leyland (UAE) LLC, Ras Al Khaimah, UAE

Your Company has made an investment in Ashok Leyland (UAE) LLC for setting up a manufacturing facility at Ras Al Khaimah, UAE. The plant is expected to be commissioned in a phased manner by June 2008. The plant will have capacity to assemble and produce upto 2000 buses per year and will cater to the growing market for the Company's products in UAE and other neighbouring countries. Defiance Testing and Engineering Services, Inc. The investment in Defiance Testing and Engineering Service, Inc. Michigan, USA was made on July 17, 2007. The company is implementing plans to turnaround, despite recessionary conditions in the automobile industry in the USA.

Avia Ashok Leyland Motors s.r.o. (AALM)

The commercial vehicles business of Avia acquired by the Company in 2006, through a special purpose vehicle, has made steady progress during the year 2007. During this period, AALM focused on consolidating its business, setting up processes, integrating its research and product development activities with the Company, widening its market reach, etc. AALM successfully developed and positioned vehicles meeting Euro IV emission, safety and other standards prevailing in Europe and achieved sales in excess of 700 units during the previous calendar year.

Albonair GmbH

Your Company has made an investment in Albonair GmbH for development of vehicle emission treatment / control systems and products. Albonair GmbH will focus on the development, production and sales of exhaust after-treatment systems for environment-friendly diesel engines. Over the longer term, these cost effective systems are also expected to find application in Europe and the USA. The venture has already commenced operations and has been strengthened with the recruitment of appropriate technical personnel.

Foreign Currency Convertible Notes (FCCNs)

The Foreign Currency Convertible Notes (FCCNs) for USD 100 mn. issued in April 2004 are convertible into shares of the Company (Fixed Exchange Rate USD 1 = Rs.44.10). As of March 31, 2008, 99,000 Notes (99%) have already been converted into underlying shares, thereby increasing the paid-up capital as of March 31, 2008. All the procedures consequent to the conversion are being completed on time and these shares, which rank pari passu with the earlier shares in all respects, are tradeable on the Indian Stock Exchanges. The enhanced share capital as on March 31, 2008 and the corresponding revised shareholding pattern are shown in the Corporate Governance Report (Annexure-B) to this Report.

Subdivision of shares

The subdivision of your Company's shares (from a face value of Rs.10/- each to a face value of Re.1/- each) was effected in July 2004. The number of shareholders continues to increase and as on March 31, 2008, the number of shareholders was 303,954 as against 200,091 shareholders as of March 31, 2007. Part II - Corporate matters

Change in the Registered Office of the Company

Your Directors are happy to inform that your Company has constructed a modern Corporate Office at a prestigious location at No.1 Sardar Patel Road, Guindy, Chennai 600 032. The registered office will be shifted to this address shortly.

Corporate Governance

Your Company has consistently adopted high standards of Corporate Governance. The Code of Conduct for the Board and the Senior Management was adopted by the Company in March 2005. Your Company is fully compliant with the latest guidelines, and has even exceeded them in some aspects. All the Directors (and also the members of the Senior Management of the rank of General Managers and above) have confirmed in writing their compliance and adherence with the Code of Conduct. The details are furnished in Annexure-B to this Report.

The certification by the Managing Director regarding the Code of Conduct, as required by SEBI guidelines, is also furnished separately.

The Statutory Auditors of the Company have examined the Company's compliance, and have certified the same, as required under SEBI guidelines. Such certificate is reproduced as Annexure-C to this Report.

The Directors' Responsibility Statement as required under Section 217(2AA) of the Companies Act, 1956 is furnished in Annexure-E to this Report.

The particulars of employees as prescribed by the Companies (particulars of employees) Rules, 1975 are furnished in Annexure-F to this Report.

The CEO/CFO certification as required under the SEBI guidelines is attached - as Annexure-G to this Report. Directors

The present term of Mr R Seshasayee, Managing Director is due to expire on May 31, 2009. Under his stewardship, the Company has scaled great heights and has expanded its operations significantly. The Company has embarked on several new initiatives, not only in India, but globally. Bearing in mind the above, the Remuneration Committee and the Board consider it essential to continue to secure his leadership of the Company and have decided to foreclose / overlap the last year of his current term and has re-appointed him as Managing Director for a period of three years from 1/4/2008 to 31/3/2011 with a suitable revision in the terms of remuneration, subject to the approval of the shareholders at the ensuing General Meeting. Necessary resolutions relating to his re-appointment are being placed before the shareholders for approval.

Mr. Vinod K Dasari, the Chief Operating Officer of the Company, who was co-opted to the Board as an Additional Director vacates office at the ensuing Annual General Meeting.

Notice under Section 257 of the Companies Act, 1956 has been received from a member proposing his appointment as a Director. Necessary resolution relating to his appointment as Wholetime Director is also being placed before the shareholders for approval.

Mr. D.J. Balaji Rao, Mr P N Ghatalia and Mr D G Hinduja, Directors, retire by rotation at the forthcoming Annual General Meeting and are eligible for re-appointment. Necessary resolutions are being placed before the shareholders for approval.

Mr. D.J. Balaji Rao and Mr. P N Ghatalia are Independent Directors and Chairman of the Remuneration Committee and Audit Committee of the Board respectively. Mr D G Hinduja is a Promoter Director.

Cost Auditors

The Government has stipulated Cost Audit of the Company's records in respect of motor vehicles as well as engines. M/s Geeyes & Co., Cost Auditors have carried out these audits. Their findings have been satisfactory.

Secretarial Audit

As directed by Securities and Exchange Board of India (SEBI), Secretarial Audit is being carried out at the specified periodicity by a Practicing Company Secretary. The findings of the Secretarial Audit have been satisfactory.

Auditors

M/s M S Krishnaswami & Rajan, Chartered Accountants and M/s Deloitte Haskins & Sells, Chartered Accountants, retire at the close of this Annual General Meeting and are eligible for re-appointment. The Company has received confirmation from both the firms that their appointment will be within the limits prescribed under Section 224(1B) of the Companies Act, 1956. The Audit Committee of the Board has recommended their re-appointment. The necessary resolution is being placed before the shareholders for approval.

Acknowledgement

The Directors wish to express their appreciation of the continued co-operation of the Central and State Governments, bankers, financial institutions, customers, dealers and suppliers and also the valuable assistance and advice received from major shareholders Hinduja Automotive Limited, the Hinduja Group, and all the shareholders. The Directors also wish to thank all the employees for their contribution, support and continued co-operation through the year.

On behalf of the Board of Directors

Chennai R.J. SHAHANEYMay 8, 2008 Chairman

(A) Conservation of Energy

All manufacturing plants have implemented various initiatives for conservation of energy (around 1.2 mn. electrical units have been saved leading to significant savings in costs) during 2007-2008.

A few such key initiatives are:

* Maintenance of power factor throughout the year, through optimum use of capacitor banks.

* Use of wind power (Out of total electricity consumed, 36% is the share of wind power).

* Optimisation of compressed air system.

(B) Technology absorption

Research and Development (R & D)

1. Specific areas in which R & D carried out by the Company

- 'H' series 6 cylinder engines rated at 152 KW (with common rail) and 135 KW, both meeting Bharat Stage III norms, now in commercial production.

- Fully built cabs introduced on tractor models with GVW ratings of 49 and 40 tonnes.

- Pilot batch of 8X2 vehicles being launched in the market.

2. Benefits derived as a result of the above R & D

- Compliance with emission standards, present and proposed from 2010.

- Wider range of vehicles with enhanced value to customer.- Safer cabs.

3. Future Plan of Action

- Quantum improvement in processes and skill building to meet the emerging competitive scenario in the market.

- Development of more environment friendly fuel efficient and safe vehicles.

4. Expenditure on R & D

(Rs. million)

Capital 954.39

Revenue(excluding depreciation) 1068.84

Total 2023.23

Total R & D Expenditureas % of total turnover 2.3%

(C) Foreign Exchange Earnings and Outgo

Details of earnings and outgo of foreign exchange are given in Schedules 1.5 to 1.8 of Notes to the Accounts. The Company continues to strive to improve its export earnings.

Directors' Responsibility statement as per Section 217(2AA) of the Companies Act, 1956

Responsibility in relation to financial statements

The financial statements have been prepared in conformity, in all material respects, with the generally accepted accounting principles in India and the Accounting Standards prescribed by the Institute of Chartered Accountants of India in a consistent manner and supported by reasonable and prudent judgements and estimates. The Directors believe that the financial statements reflect true and fair view of the financial position as on 31.3.2008 and of the results of operations for the year ended 31.3.2008.

The financial statements have been audited by M/s M S Krishnaswami & Rajan and M/s Deloitte Haskins & Sells in accordance with generally accepted auditing standards, which include an assessment of the systems of internal controls and tests of transactions to the extent considered necessary by them to support their opinion.

Going Concern

In the opinion of the Directors, the Company will be in a position to carry on its existing commercial vehicles / engines business and accordingly it is considered appropriate to prepare the financial statements on the basis of going concern.

Maintenance of accounting records & Internal controls

The Company has taken proper and sufficient care for the maintenance of adequate accounting records as required by various Statutes.

Directors have overall responsibility for the Company's internal control system, which is designed to provide a reasonable assurance for safeguarding of assets, reliability of financial records and for preventing and detecting fraud and other irregularities.

The system of internal control is monitored by the internal audit function, which encompasses the examination and evaluation of the adequacy and effectiveness of the system of internal control and quality of performance in carrying out assigned responsibilities. Internal Audit Department interacts with all levels of management and the Statutory Auditors, and reports significant issues to the Audit Committee of the Board.

Audit Committee supervises the financial reporting process through review of accounting and reporting practices, financial and accounting controls and financial statements. Audit Committee also periodically interacts with internal and statutory auditors to ensure quality and veracity of Company?saccounts.

Internal Auditors, Audit Committee and Statutory Auditors have full and free access to all the information and records as considered necessary to carry out their responsibilities. All the issues raised by them have been suitably acted upon and followed up.

MANAGEMENT DISCUSSION AND ANALYSIS

A. Economy and Market trends

Global economy

Global economy grew strongly although the current turbulence in financial markets has clouded prospects. The growth was supported by generally sound fundamentals and strong momentum in emerging market economies.

Looking ahead, contribution from developing countries to the total GDP growth is expected to sustain at higher levels. This is likely to result in huge capital inflows into the developing countries. The share of the developing countries in world trade will also continue to increase, resulting in significant export opportunities. However, global inflation levels, fuelled by the sharp increase in global commodity prices as well as by the growth of developing countries such as China and India, are expected to remain high.

Indian Economy

After robust growth over the past few years, Indian economy witnessed a slowdown during 2007-08. GDP growth for 2007-08 as projected by the Government at 8.7% shows a deceleration from the high growth of 9.4% and 9.6%, respectively, in the previous two years. With the economy modernizing, globalizing and growing rapidly, some degree of cyclical fluctuation is to be expected. Last year, inflation flared up driven primarily by increase in the prices of coal and crude oil. This has, to some extent, adversely impacted the pace of economic growth in the short term, particularly the growth in the industrial sector, compared to the previous year.

Accompanying the recent moderation in industrial growth, the growth performance of some segments of the infrastructure sector such as power generation and movement of railway freight, as also the production of universal intermediates such as steel, cement and petroleum, have shown subdued performance.

India's Eleventh five year plan paper projects a GDP growth of 8.5% through a boost to growth in the agriculture sector, improving infrastructure aggressively and encouraging Public Private Partnerships for construction and operations of infrastructure services such as highways, airports and ports etc. The country is expected to continue the strong momentum of the past and take the economy back on the growth path of around 9%.

Commercial Vehicle (CV) Industry

The share of 'Second hemisphere' markets in the Global Commercial Vehicle market is increasing. BRIC (Brazil, Russia, India and China) countries are emerging as the key markets among the 'Second hemisphere' countries. Other'Second hemisphere' markets such as Eastern Europe, Latin America, and ASEAN are also witnessing strong growth.

With India being the next large and lucrative market after China, global players are entering the Indian market in association with local partners. Besides, local players are also diversifying their business to have a sizeable share in the total commercial vehicle market. With global majors planning to invest around Rs. 60 billion in the coming year to create capacities, the Indian CV market is likely to get crowded.

Technology trends in the global commercial vehicle industry are being increasingly driven by tighter emission standards and demanding customer requirements. These are set to dictate tougher tasks to new product development teams worldwide in terms of providing products with high 'value-cost' equation.

The Indian commercial vehicle market continues to accelerate towards the ?hub and spoke? model present in the mature markets worldwide. Of the total industry volume in the Indian commercial vehicle industry over the last few years, contribution from vehicles in the sub 7.5 T GVW and greater than 16 T GVW segments has been continuously increasing.

Economic growth in agricultural and industrial sectors coupled with the Government's emphasis on infrastructure development will continue to fuel the demand in India for commercial vehicles. The Automotive Mission Plan 2016, approved by the Government, is focusing on doubling the contribution of automobile industry to the country's GDP by 2016. The Government has indicated that a balanced approach would be pursued with regard to trade agreements with countries/regions such as ASEAN, China, Sri Lanka, Latin America and Middle East to provide growth opportunities for the Indian automotive industry.

Product trends in the Indian commercial vehicle market point towards an increase in the electronics content in vehicles and a shift towards higher power to-weight ratios. These trends will also be driven by legislations pertaining to vehicle safety and comfort including the imminent 'Bus Body Code' and 'Truck Code'. These measures to create an organized and regulated commercial vehicle industry in the country will enable commercial vehicle manufacturers to broaden their presence across the value chain and offer products with much higher levels of value addition than those presently available.

The logistics industry in India is expected to undergo large scale consolidation with the emergence of more organized players who would use high end commercial vehicles for long hauls and light commercial vehicles for the last mile distribution. Increasing awareness of all stakeholders in the Indian transport and logistics sector will drive the demand for fully built vehicle solutions that are engineered for specific applications.

Increasing urbanization has highlighted the need for mass rapid passenger transportation within the cities. Government bodies are looking at a Bus Rapid Transport Systems (BRTS) as a possible solution. Product trends for city buses will be significantly driven by these developments. In addition to this, the development of the road network between cities will influence product trends for inter-city buses.

B. Ashok Leyland-The year in brief

Indian medium and heavy commercial vehicle industry shrunk marginally during 2007-08 compared to 2006-07. The Company sold 76,045 vehicles in the Indian market during the fiscal 2007-08. The Company registered significant market share improvement in the bus segment but lost market share in the truck segment mainly due to production constraints arising out of supply chain bottlenecks. These have been addressed satisfactorily and the Company is on course to recover lost ground. The 'New Gen' cabin, expected to be bulk produced in 2008-09, will further aid this exercise.

Domestic Sales:

2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02

Buses 8420 9925 11354 10777 14168 12006 18198 Trucks 19103 23969 33518 37151 42608 65069 57847

The Company sold 7,285 vehicles in the overseas markets during 2007-08 - representing an increase of approximately 21% over the previous year.

Engines business has shown robust growth during 2007-08. A total of 12,169 engines were sold, including engines sold under the LEYPOWER brand of generator sets, a new line of business being pursued by the Company.

Spare parts sales amounted to Rs. 7,236 million during 2007-08, registering a growth of 45%. This includes the sale of knocked down kits to the Indian Defence establishment.

The Company fully utilized its production capacity of 84,000 vehicles across the five existing manufacturing units. The development activities for the new facility at Uttarakhand have been progressing as scheduled. This unit, designed for an annual capacity of 50,000 vehicles, is expected to be functional before June 2010.

The 'Mission Summit' initiative that was kick started last year to promote innovation, was responsible for the concept and development of the iBus, exhibited at the Auto Expo in January 2008. The team has since been involved in developing a strategy for the commercialization of the iBus. Besides this, the 'Mission Summit' team is exploring many other innovative concepts.

The Six Sigma initiative has been extended to all functional areas and the second wave of training and associated projects have successfully concluded. The third wave of training is all set to roll out shortly. With this, the Six Sigma initiative is expected to mature into a self sustaining process.

The Company's initiative to nurture future leaders is showing promising results. A number of initiatives put forward by the cross functional team of Young Executives (YEs) as part of their annual business plan are on their way to implementation.

The Company has always endeavoured to offer its customers the best value proposition in the market through product innovations and refinement and is pursuing the same with ever increasing vigour. Development programmes to bring out the next generation of key aggregates are currently underway.

The Company is executing a transformational change programme, with external assistance, to facilitate the development and marketing of winning products to suit the changing customer requirements. This would be facilitated by enhancing competence in project management, lean product development process, decision making and governance, portfolio and pipeline management as well as technology management.

JV with Nissan Motors

To become a full range player, the Company has entered into a joint venture with Nissan Motors Co. Ltd., Japan to develop and produce light commercial vehicles for both the domestic and export markets. The two organizations have been working closely over the past few months and the alliance is expected to roll out its first product by 2010-11.

JV with Continental AG

Vehicle electronics is expected to play an increasingly important role in the Indian automotive sector in the years to come. The Company has entered into a joint venture with the Europe based Continental Group (who acquired Siemens VDO in September 2007) to develop and produce cutting edge vehicle electronics products.

Albonair GmbH

The Company has made an investment in Albonair GmbH for development of cost effective vehicle emission treatment/ control systems and products, which, over the longer term, are expected to find application in the first hemisphere markets as well. The venture has already commenced operations and has been strengthened with the recruitment of appropriate technical personnel.

Ashley Alteams India Private Ltd.

The Company entered into a joint venture with Alteams O.Y., Finland, for the manufacture and sale of High Pressure Die Casting components. Ashley Alteams India Private Ltd., the joint venture Company, is making steady progress in the implementation of the project and will cater to telecom and automotive industry. Commencement of commercial production is expected by end 2008.

Avia Ashok Leyland Motors s.r.o. (AALM)

The Commercial Vehicles business of Avia made steady progress during the year 2007. AALM focused on initiatives to consolidate its business, set up the processes, integrate product development activities with the Company and widen its market reach. The company achieved sales in excess of 700 units during the previous calendar year.

C. Risk Management

The Commercial Vehicles business has a specific set of risk characteristics, which need to be carefully evaluated, managed and mitigated. In order to effectively manage the cyclical nature of demand, Management has adopted an internal risk management protocol. Risk Management covers the entire process of business, including, inter alia, capital investment, technology development and customer acquisition / retention.

Continuance of the reform process and emphasis on infrastructure and agriculture augur well for the road transport sector. However, given the cyclical nature of demand in the Commercial Vehicles industry, capacity build up plans are periodically reassessed, taking into account market conditions and demand forecast.

The Company has plans to increase its annual capacity to 184,000 vehicles (medium and heavy duty vehicles) over next two / three years. Capacity addition through de-bottlenecking engine / gear box manufacturing facilities at Ennore unit is nearing completion. This would enable the Company to overcome capacity constraints during the coming years. In addition, the Company is moving ahead with capacity addition of 50000 vehicles per year at the Uttarakhand plant which needs to be completed before March 2010 to avail the fiscal benefits. The Company is pursuing plans to increase the share of non-cyclical business including exports, non-auto engines and sale to Defence sector to mitigate the impact of cyclicality.

Competition in the domestic Commercial Vehicles market has increased significantly with many global OEMs setting up manufacturing base. Consequent to the policy of progressive opening up of the market, customs duty, as a trade barrier, is likely to lose its influence. The Company is preparing to face these challenges through focused R & D efforts in designing / developing vehicles that offer appropriate transport solutions and meet the changing preferences of customers.

Rising fuel prices in the international market, coupled with competitive pressures to contain freight rates, could lead to erosion in vehicle operators' margins, thereby leading to lower demand. However, increased use of heavy tonnage vehicles for moving large freight loads has reduced the tonne / km cost. This has helped improve the operational viability for the vehicle operators.

There are continuing concerns on input cost increases particularly steel and rubber, due to commodity price movements. In a competitive market, the Company may not be able to pass on the cost increases fully through pricing action. Hence, margins may come under pressure.

The Company is taking steps to competitively procure components through global sourcing, reduce cost through Value Engineering and improve productivity through shop floor initiatives.

The Company's foreign exchange exposure has increased manifold, through contracting External Commercial Borrowings of US$ 315 mn. over the years. Exports are likely to cross US$ 250 mn. in the next 3 to 4 years.

Strengthening of the Rupee, if it continues, can adversely affect realization from exports. However, the Company has an active, centralized treasury department, assisted by technical experts to mitigate adverse effects of currency / interest rate fluctuations. Considering the extent of capital expenditure (over Rs. 30,000 mn.) in the next three years, the Company may face uncertainty in fund availability at reasonable costs.

However, given the low gearing at present, the Company believes it would be able to raise the required funds at competitive rates. The Company manages

liquidity risk through tie-up of short term facilities from banks which could be used in case of requirement.

D. Internal Control systems and their adequacy

Based on the nature of business and size of operations, the Company?s internal control system has been designed to provide for:

* Accurate recording of transactions with internal checks and prompt reporting.

* Adherence to applicable Accounting Standards and Policies.

* Review of capital investments and long term business plans.

* Periodic review meetings to guide optimum utilization of resources.

* Compliance with applicable statutes, policies, listing requirements and management policies and procedures.

* Effective use of resources and safeguarding of assets.

The internal control system provides for well documented policies / guidelines, authorizations and approval procedures. The Company, through its own Corporate Internal Audit Department, carries out periodic audits at all locations and all functions and brings out any deviation to internal control procedures. The observations arising out of audit are periodically reviewed and compliance ensured. The summary of the Internal Audit observations is submitted to Audit Committee of the Board of Directors. The status of implementation of the recommendations is reviewed by the Committee on a regular basis and concerns, if any, are reported to the Board.

Information security and IPR protection initiatives

While the Company endeavours continuously to align IT investments to business strategies, efforts have simultaneously been made to safeguard the Company's invaluable information assets and intellectual property. As a part of this initiative, the Company implemented, during 2005, BS7799 - 2:2002, the most widely accepted security standard and got the coveted certification, the first among all auto majors in India.

Continuing this journey further, the Company migrated to ISO27001 during 2006, consequent to ISO adopting BS7799, as part of the ISO standard for information security. Subsequently, the scope of the certification was extended to Advanced Engineering activities of the Company during 2007, as a part of Company's strategy to extend the scope to all critical business units, where intellectual property and critical information are either created, handled or stored.

During April 2008, STQC (MIT, Govt. of India) renewed the ISO27001 certificate for a further period of three years, subject to periodical surveillance audits, following an assessment and detailed review of maintenance of the implemented standard, best practices and further improvements over the last three years.

E. Financial Review

During the year under review, growth in profits has been commensurate with growth in revenues. The Company achieved an overall growth in sale revenue by 7.8% over the previous year. Drop in domestic vehicle sales by 1.4% over previous year was adequately compensated by 21% increase in export volumes. The Company improved its nonauto Engine sales by 37%, supported by sale of 'Leypower Gensets', a new line of revenue stream. Parts sales (including supply of kits to Vehicle Factory, Jabalpur) registered 50% growth. The share of non-cyclical revenues (covering revenues from Buses / Chassis for buses, non-auto Engines, Defence, Exports and Spare Parts) improved from 24% to 33% in 2007-08.

Summary of Profit and Loss Account

Rs millions 2007-08 2006-07 Inc/(Dec)%Income

Sales (Net of Excise Duty) 77,291 71,682 7.8

Other Income 740 708 4.5

Total 78,031 72,390 7.8

Expenditure

Material Cost 57,647 54,632 5.5

Employee Expenses 6,162 4,807 28.2

Other Expenses 5,443 5,216 4.4

Depreciation 1,774 1,506 17.8

Financial Expenses 497 53 838.5

Total 71,523 66,214 8.0

Profit Before Extraordinary item 6,508 6,176 5.4

Extraordinary item-VRS Expenses Amortisation (127) (131) (2.6)

Profit Before Tax 6,381 6,045 5.5

Tax Provision - Current 1,014 1,351 (24.9)

- Deferred 604 230 162.7

- Fringe benefit tax 70 51 37.3

Profit After Tax 4,693 4,413 6.3

Basic Earnings Per Share (in Rs.) 3.53 3.38 4.4

Diluted Earnings Per Share (in Rs.) 3.53 3.36 5.1

Revenues:

The Company was able to earn revenue through the following streams of business activities:

i) Vehicles: Income from vehicles was Rs 68,819 mn. 4.1% over the previous year level of Rs 66,092 mn.

ii) Engines: Income from Engines increased to Rs 1,921 mn., 59% growth over the previous year level of Rs 1,210 mn. During the year the Company offered factory built genset engines, which accounted for 17% of total engine volume.

iii) Spare Parts and others: Income from Spare parts including sale of kits to Vehicle Factory, Jabalpur increased to Rs 6,551 mn., a jump of 50% over the previous year level of Rs 4,380 mn.

Other income registered an increase by Rs. 32 mn. mainly due to better realization on sale of investments during the current year.

Costs:

Material Cost: Steel, the major input material, witnessed a steep increase during the year (62% increase on point to point basis compared to March 2007). The other major input, rubber also witnessed an increase of 10% in commodity prices. However, the Company mostly neutralized these increases through continued efforts in value engineering initiatives and better product mix. The Company also managed to secure from global sources (including from China where it has recently set up an office) components at lower costs to offset the commodity price induced input cost increases. The Company was also able to get the full year benefit of VAT, introduced by Tamil Nadu Government in January 2007. Average pricing action of about 4.5% effected by the Company in a phased manner helped to protect the margins.

Staff costs: The increase is mainly due to full year impact of salary revision made in the previous year and incremental manpower for ongoing activities at Uttarakhand and Product Development initiatives.

Other expenses: These increased by 4.4% (excluding R & D activities), mainly due to the activity levels and inflation. Reduction in rates and taxes is due to full year impact of abolition of Additional Sales tax in Tamil Nadu consequent to introduction of VAT effective January 2007.

Depreciation for the year has increased to Rs 1,774 mn. compared to Rs 1,506 mn. in the previous year due to deployment of resources to augment capacity and incremental provision for impairment of assets by Rs. 28 mn.

Financial expenses

Interest cost has gone up due to borrowings to meet the capital expenditure and working capital requirements. The Company is regulating its borrowing in line with capital expenditure requirements. Centralised Treasury Department is active in the money market to manage day-to-day investment of surplus funds and raise short-term funds as required and bring down cost by such borrowings.

Capital employed

Total capital employed by the Company increased by 21% from Rs 27,075 mn. to Rs 32,680 mn., mainly due to investments in facility creation.

Total Shareholders' funds as at March 31, 2008 aggregated Rs 21,267 mn. of which equity capital was Rs 1,330 mn. comprising of 1,330 mn. shares of Re 1 each. Out of the above, 6,468,000 shares were issued during the year by way of conversion of Foreign Currency Convertible Notes.

BALANCE SHEET Rs. millions 2007-08 2006-07 Inc/(Dec)%Sources of Funds

Shareholders' Funds 21,267 18,702 13.7

Loan Funds 8,875 6,404 38.6

Deferred Tax 2,538 1,969 28.9 Liability - Net

Total 32,680 27,075 20.7

Application of Funds

Fixed Assets 20,548 15,445 33.0

Investments 6,099 2,211 175.8

Net Current Assets 6,033 9,419 (35.9)

Total 32,680 27,075 20.7

Dividend

The Directors have recommended 150% dividend for the year 2008, i.e. Rs.1.50 per share.

Capital expenditure and Investments

During the year, the Company incurred Rs 6,959 mn. towards capital expenditure. This expenditure covers investments related to capacity expansion in the existing plants and in the new plant at Uttarakhand and R & D programmes. The Company also started making investments in Ashley Alteams India Private Limited (Joint Venture Company with Alteams O.Y. Finland) and Automotive Infotronics Private Limited (Joint Venture with Continental AG). These two companies will focus on supplies to meet specific component requirements for fitment in Commercial Vehicles.

In addition the Company made investments in a vehicle manufacturing / assembly plant at Ras Al Khaimah, Design Engineering services business viz., Defiance Testing and Engineering Services Inc. USA and Albonair GmbH, Germanywhich is engaged in the development of fuel emission treatment / control systems.

Net Current Assets (excluding cash / bank balances) as on March 31, 2008 stood at Rs 1,519 mn. compared to the previous year level of Rs 5,069 mn. mainly due to reduction in trade debtor levels. Inventories have gone up to Rs 12,239 mn. as on March 31, 2008 compared to Rs 10,703 mn. as at March 31, 2007. The increase is mainly due to increased activity levels and higher level of finished vehicles and engines. Focussed effort on collections reduced the sundry debtors level to Rs 3,758 mn. from Rs 5,229 mn.

Liquidity

As at March 31, 2008, net debt (net of cash & bank balances) to equity ratio was 0.2. During the year the Company had tied up External Commercial Borrowings (ECB) for USD 270 mn. Against these facilities, the Company drew USD 90 mn. to fund imported capital expenditure/ investments. The balance of USD 180 mn. would be drawn during the ensuing year. FCCNs issued during April 2004 has been converted except for USD 1 mn., representing 1% of the total issue size of USD 100 mn. Assuming conversion of this balance portion, the equity of the Company will increase to Rs 1331.8 mn. The Company manages its liquidity through rigorous weekly monitoring of cash flows and surplus funds are invested, mainly in units of mutual funds and in bank deposits.

The Company's principal sources of liquidity are:

a) Existing cash and cash equivalents

b) Cash generated by operations

c) Unutilised limits with banks

d) Unutilised limits out of term funding limits tied up with financial institutions and Banks.

Fitch has awarded ratings at 'AA (IND) / stable' for the Company's long term borrowings. ICRA has assigned the rating LAA (L double A) for long-term loans and also assigned special rating of A1+ (A one plus) for short-term loans. CRISIL has given the ratings for long-term borrowings at 'AA / negative'. On Commercial Paper programme (short term borrowing), CRISIL maintained the earlier rating of P1+. The Company believes that it has sufficient liquidity to meet its working capital requirements and other anticipated cash outflows.

Results of operation

The Company generated profit from operations after tax of Rs 6,956 mn. After meeting working capital requirements and extraordinary item of payments for Voluntary Retirement Scheme of Rs 48 mn., the Company earned net cash inflow of Rs 10,657 mn. from its operations.

Cash flow from financing activities significantly improved mainly due to payment of dividend for 2006-07 in March-07 itself. This enabled the Company utilise internal generation for meeting capital expenditure (including capital advance) requirements and minimise the borrowings during 2007-08.

Profit before tax and extra-ordinary items improved by 4.5% to Rs 6,508 mn. During the year, the Company charged Rs 127 mn. towards amortisation of VRS expenses. After providing for taxes at Rs 1,688 mn. (including deferred tax and fringe benefit tax), profit after tax for the current year improved by 6.3 % to Rs.4,693 mn.

F. The Years ahead

The Company has set itself the task of consolidating and enhancing its position in the Indian commercial vehicle market, both in terms of volumes as well as in customer satisfaction, in the medium term. The Company is executing various initiatives in terms of process and product improvements to achieve this goal.

The Company aspires to widen its footprint in the global commercial vehicle industry through organic and inorganic growth and is examining opportunities towards this end.

Cash Flow Statement Rs. millions 2007-08 2006-07

Profit from operations after tax 6,956 4,958

Dec. in Net Working Capital 3,749 372

Net Cash Flow from operating activities (before extraordinary item) 10,705 5,330

Payments under Voluntary Retirement Scheme (48) (330)

Net Cash flow from operating activities 10,657 5,000

Payment for Assets acquisition-net (6,095) (6,704)

Other cash flow from Investing activities-net (2,002) (519)

Cash flow from Financing activities 3,645 (2,908)

Net Cash Inflow/(Outflow) 6,205 (5,131)

Development programmes for the next generation products and aggregates are currently underway. These include the 'Future Vehicle Development Programme', the 'New Engine Platform' development programme among others. The successful culmination of these programmes should give the Company significant competitive advantages.

In order to compensate for the cyclic nature of the domestic commercial vehicle industry, the Company has been focussing on increasing its presence in allied businesses like non-auto engine, Defence, Exports and Parts so as to achieve a significant portion of its revenues from such non-cyclical businesses.