Ladies and gentlemen, good day, and welcome to Q3 FY 2024 earnings conference call of Ashok Leyland Limited, hosted by ICICI Securities. As a reminder, all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Basudeb Banerjee from ICICI Securities. Thank you, and over to you, sir.
Thanks. A very good morning, good afternoon, good evening to all the participants. Thanks to Ashok Leyland management for giving us the opportunity to hold the call. We have with us the management represented by Mr. Shenu Agarwal, Managing Director and Chief Executive Officer, Mr. Gopal Mahadevan, Director and Chief Financial Officer, and Mr. Balaji, Deputy Chief Financial Officer. So without wasting any time, I'd like to hand over to MD, CEO, sir, Mr. Shenu Agarwal. Over to you, sir.
Good morning, ladies and gentlemen. It gives me immense pleasure to be with you today. I thank you for the interest shown in Ashok Leyland. I'm happy to share that current year has been a record of all sorts. In the first nine months of the current financial year, Ashok Leyland has recorded the highest turnover at INR 27,100 crore, highest sales volume at 138,416 units, highest EBITDA at INR 3,014 crore, and the highest PAT at INR 1,718 crore. While at the beginning of the year, we had given a guidance of double-digit EBITDA for the whole year, we could achieve 10% EBITDA margin in the first quarter of the year itself.
Since then, we have moved up consequentially, registering an EBITDA of 11.2% in Q2 and 12.0% in Q3. We are moving well in line with our medium-term target of mid-teen EBITDA margins. The domestic MHCV industry in the first three quarters of the current financial year has grown by 9% over same period last year. H1 growth was at 10%, and Q3 relatively had a lower growth at 7%, affected mainly by elections in several large states of the country. Q4 this year may also see a subdued pattern because of the high base effect of last year, as well as some impact of union elections. Overall, for the year, the MHCV industry would still be short of its peak of FY 2018-2019, thereby signaling further room for growth going forward.
Industry factors for medium- and long-term continue to be favorable. This is backed by strong macroeconomic environment, healthy replacement demand, good traction on infrastructure projects and improving trade demand. Higher allocations in the recent interim budget for the core sector will help drive the momentum in economic activity, thus helping CV industry growth. The bus demand is well set to move closer to the previous high registered in FY 2012. Replacement of existing fleets of buses, public transport impetus, and increasing demand for school and staff transportation should continue to drive the bus demand. On the LCV side, our addressable industry has seen a 3% degrowth this year till December 2023. Our volumes have grown by 2%, which has resulted in our market share improvement of 1%.
Though the steel prices went up marginally in the first few months of the current financial year, prices have softened since then and are expected to continue to remain soft for at least a few more months. This is being closely monitored by us. Our cost reduction efforts are in full swing, looking beyond direct material costs. This is visible in our margin improvements quarter- on- quarter. We are following a very strict pricing discipline. While market share is very important to us, we are clear that it will not come at the cost of margins. Therefore, in the short term, one may see a bit of dip here or there, depending on competition action. Our actions are focused on improving our products and differentiate them to command a better price parity and market share.
During the quarter, Ashok Leyland launched several new models and variants with Ecomet 1915 CNG, BOSS 1815, AVTR 3525 RMC, Lynx Smart bus chassis, 10x2 DTLA haulage with 25 feet loading span and 222 Viking air-rear intercity bus with AC, Stallion water bowser for defense business, DOST Plus CNG, and many more. While we have started doing very well now in north and east zones, which have been traditionally our weaker markets, there is certainly ample headroom to grow further. We are progressing well on our network expansion plans, especially in north and east zones. We have tied up with the TVS Group, with whom, with whom we enjoy a long-standing partnership in Tamil Nadu and Kerala, to represent us in the National Capital Region. We hope to start launching several new outlets in this region within the next few months.
In the first three quarters of the year, we have added 37 authorized service centers and 44 dealers for the MHCV business. Now we are at total of 399 authorized service centers and 491 dealers throughout the country. We wish to take this number to 1,000 in times to come. Similarly, for LCV business, we have added 17 dealers and 53 authorized service centers so far this year, making our LCV touchpoint count at 690. I am extremely confident that with unique strengths of our current and new products, backed by continuous expansion of our sales network and service reach, we will continue to grow our market share in times to come. The EV business housed under Switch is crucial for future-proofing Ashok Leyland.
While we will continue to look at external investors, Ashok Leyland board has earlier approved an equity investment of INR 1,200 crore in Optare, which is a holding company for Switch UK and Switch India. During Q3, AL has invested INR 662 crore in the equity capital of Optare PLC. AL shall be inducting the balance equity in more than one tranche over the next few months. Ashok Leyland balance sheet is strong enough to support our vision on electrification of buses and LCVs under the Switch brand. I'm happy to share that Switch products are performing extremely well in the market. We are very excited about starting to deliver our first batch of electric LCVs within the next few months.
On the truck side also, we are happy to share that at the recently concluded Bharat Mobility Global Expo at Delhi, we delivered the keys of our first ever electric truck sold commercially. This was model BOSS in 14-ton GVW category, powered by a 200-kilowatt battery pack. We are also nearing market trial of our fully electric 55-ton AVTR tractor trailer for long haul transport. We are proud that within a short span of one year, from display of some of our alternative fuel vehicles in Auto Expo in January 2023, we are now in a position to commercially bring these vehicles in pilot lots to the market. This goes on to demonstrate our acute focus on alternate fuel technologies. Now, let me quickly run you through some numbers on Q3 as well as YTD performance.
It might be pertinent to note that this has been our best Q3 ever. Q3 revenue stood at INR 9,273 crore, 3% higher than Q3 of last year, which was at INR 9,030 crore. EBITDA for Q3 this year was at INR 1,114 crore, at 12%, as against INR 797 crore at 8.8% in Q3 last year. EBITDA for the first nine months of the year has grown by 82% and is at INR 3,014 crore, as against INR 1,655 crore last year. PAT for Q3 was up more than 1.6 x, at INR 580 crore versus INR 361 crore in the previous quarter.
For the first nine months, our PAT was up more than 2.73 x, at INR 1,718 crores. Operating working capital is at INR 2,004 crores as of December 2023, primarily supporting the increased activity levels. Sequentially, it has gone up by INR 850 crores, compared to INR 1,138 crores in September 2023. Capital expenditure for the quarter is at INR 90 crores. Cumulative CapEx for the nine-month period is at INR 290 crores. During Q3, AL has invested INR 662 crores in the equity capital of Optare PLC. Net debt as of 31st December 2023, was at INR 1,747 crores, higher than previous quarter by INR 608 crores. For the first nine months, our overall LCV volumes have grown almost in line with the industry growth.
AL volume growth is at 7%, while the industry growth is at 9%. TIV, specifically for bus in this period, has outperformed all other segments, growing by 38%. The corresponding growth for AL in buses has been 65%, thus considerably gaining bus market share. Cumulatively, our LCV volumes have grown by 2% from 48,682 this year, against 47,829 last year. While industry in our addressable market in this period has de-grown by 3%. In Q3, LCV volumes have grown by 3% over last year. IO sales have registered a 7% YoY increase in Q3, despite continuing meltdown in many economies around the world.
We registered exports volume of 3,128 numbers in Q3 this year, versus 2,936 numbers in Q3 last year. Most of our industry peers have registered a sharp decline in their export volume. Good performance in aftermarket sales continued in Q3. Our aftermarket sales at INR 658 crore grew by 30% over same period last year. Volumes under power solution business grew by 24% in Q3 over same period last year, from 5,902 last year to 7,318 units in Q3 this year. As I said, AL has recorded an historic high on revenue, EBITDA, and PAT in both Q3 and in the first nine months of the current fiscal year. With this, I will open the floor for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while question queue assembles. And the first question is from the line of Chandramouli from Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my questions. My first question is on the gross margin level achieved this quarter. In spite of selling 5% fewer volumes of vehicles this quarter, it appears that gross margin has expanded almost 130 basis points, quarter-on-quarter. So just trying to understand what were some of the key drivers that helped you achieve that?
Yeah. Thank you, Chandra. I'll answer briefly, and then I'll hand over to Gopal as well for more details. See, as I said in my opening statement, you know, I mean, our focus is on profitable growth, you know. So we are very, very strict on pricing discipline. We are focusing relentlessly on cost reduction, and I think the softening of the commodity prices also helped to some extent. But maybe Gopal can give you a broader view.
No, I think you said it, you know. Hi, morning, Chandra, and morning, everyone. I think as Shenu had mentioned, you know, we were very clear that we have grown in market share over the last few quarters, if you noticed. So for us, what was important is to ensure that as having grown at this level, and I'm sure that there is further growth that is going to come based on the product launches, the distribution that we are looking at, and Shenu did mention about some of the penetration that we are doing very strategically in the northern side of the country. We believe that there is enough steam left for us to grow in the market share.
But having said that, we also wanted to ensure that we continue to start improving the price realizations, because the industry itself has improved its pricing capabilities. One was that. The second one, again, was that, consciously, internally, there has been a huge amount of effort on taking cost out of the product, looking at VAVE, looking at, you know, alternative suppliers, consolidating buyers, and all of that has started to actually yield results. And for us, this journey will continue, you know, our improvement in pricing, as well as, continuous improvement in product cost, because that is what OEs do typically. And, of course, the third bit of it, which was helpful, was commodity prices. You know, they continue to decline, and that is hopefully we will see that happening in the fourth quarter as well.
Got it. That's helpful. My second question is on the electric bus industry and the sort of announcements we've seen over the past few months from the government. I think just last month, there was an announcement that about 800,000 diesel buses will be considered for transition to electric powertrain by the central government. I think before that, there was also the Prime Minister's e-Bus Sewa, where the government has announced almost $7 billion worth of incentives for electrification of 10,000 buses, right? So, the budget, the interim budget also had some commentary around trying to bolster the payment security mechanism within the electric bus industry. Just trying to understand what you make of some of these comments and, and any negotiations or discussions you have with the government on, on the payment security mechanism and how robust it is likely to be going forward.
Yeah, Chandra. So, so firstly, you are right. I mean, there is a lot of, lot of positive news about electric bus and bus- electric buses and the transition from diesel to electric. I think, what we have created in Switch, is going to really help Ashok Leyland now, going forward, as this transition happens. We already have some wonderful products, as you know, in Switch, and we are developing some more to cater to the entire spectrum of the electric bus market. Yeah, I mean, announcements are there, you know, big numbers are there for the next, seven to 10 years, which have been announced. Yeah, so I think, we are seeing execution of that on the ground as well. I am not saying these are just announcements.
I mean, we had a PM-eBus Sewa tender, which is going on right now, and Switch is going to participate in that as well. Now, on the payment security mechanism, I think things, while the government has already said that it will come out with a payment security mechanism, in fact, in the latest PM-eBus Sewa tender, it has been specifically mentioned in the tender that government would come out with this payment security mechanism by a certain date. We are under discussions with the government as to exactly how this will, how this will work. You know, so those details are still being worked out, but we hope that within the next two or three months, something more specific, the government will be able to say on this.
Got it. That's helpful. And lastly, just a housekeeping question. Just want to understand what is the net debt balance for the auto business and, and the rest of the business, including financing? If you could just split that out, if you have those numbers with you.
We just give the consolidated numbers, yeah. So, you know, I think, as Shenu had mentioned that, so our net debt is INR 1,747 crore. But I just wanted to add one more bit here. You know, this is after infusing nearly about, you know, INR 950 crore, both in Switch and in OHM. So if you look at it, the cash flow position of the company from operating side has been very good.
You know, we started the year, I think first quarter, we had INR 750 crore of debt at the-- on first of April, if my memory serves me right. And then after that, we've seen 1,700, you know, 1,400 crore at the end of Q1. But after in Q2 and Q3, after investing nearly about INR 950 crore, our debt position is only INR 1,747 crore. And I think as we move forward in the fourth quarter, if things go well, we should actually see the debt position improve.
Got it. That's helpful. Thank you very much, and all the best.
Thank you. The next question is from the line of Kapil Singh from Nomura. Please go ahead. Yes, Mr. Kapil, you are unmuted. Please go with your question. ... As there is no response from the participants, so we'll move to the next question. The next question is from the line of Pramod Kumar from UBS. Please go ahead.
Yeah, thanks a lot for the opportunity, and, congratulations on good financial performance. Shenu, my question is regarding demands, because we have seen a sudden deceleration in demand in MHCV. The industry was optimistic of a high single-digit growth. Now, looks like we're gonna be more like, low single-digit growth for the industry for this year. So, can you just help us understand what has led to this sudden demand deceleration, at the industry level?
And within that, why are we kind of, not pursuing market share more aggressively? I'm not talking about discounting per se, but our market share numbers have gone in a very different way than what we talked about during our Investor Day. I'm just trying to understand the market share in the context of the industry bit, if there is any shift from large B2B fleet owners to retail market, which is resulting this market share. If you can just help us understand the slowdown bit and the market share thinking, sir.
Sure, sure. So let me first talk about the industry itself. You know, so if you see, April, December industry, you know, MHCV, I'm talking about right now, it has grown by roughly 9%, which is specifically very much in line with what we had projected in the beginning of the year. You know, January, February, March, I think you are referring to January industry, degrowth a little bit. You know, so January, February, March, what we have, what we were already imagining that, you know, since we are sitting on a very, very high base of last year, the industry growth may not be that much, right? So, we may see some moderation in industry in January, February, March. Now, also, you know, few months from now, the elections would be announced.
Yeah, so elections normally have some kind of a slowdown effect on the industry, right? So I am just saying that January, February, March, because of the high base effect and maybe April, May and June, because of some elections, we might see some moderation in the growth, right? But this is the... All this is not fundamental. This is very temporary in nature, right? This, We are very confident that even if there is a moderation of growth in the industry in next few months, it will recover very, very well, and it will recover very sharply. The reason we are confident about that is we don't see any problem with any of the macroeconomic factors that govern our industry. You know, whichever thing you look at, you know, it is running positive. The overall economic activity is positive.
The freight demand is positive. Replacement demand is positive. There are a lot of actions that are kind of happening on scrappage. You know, so everything that you look at, and we have not even reached the peak of FY 2019, right? So, so I think, overall, very confident there might be a certain dip in the growth levels, in the near future, but overall very confident about the industry as of now. Now, coming to market share, you know, it is right that we have said that in the MHCV, we want to move towards 35% in the mid-term, right? And last year, you know that we clocked a 5% growth. In our market share, we moved up from roughly 25% to roughly 30% MHCV, right?
Now, having done that, you know, we do expect that there would be some kind of, intense competition reaction. Yeah, and at such times, it is very wise of us to kind of hold on to our fort and focus more and more on, price discipline. See, we said in the investor meet also that our mantra is profitable growth, and we are not going to sacrifice, profits for market share. So in a quarter or a couple of quarters, you may see all those kind of actions, but we are very, very focused and confident that market share will not be won through quarterly tactics. It will be won through our product and service differentiation and strength. And that is what we are focused on, whether it is through new products or whether it is through network expansion.
Yeah. Before I move to the next question, just clarification, when you say 4Q soft, is you're implying a decline for the industry?
No, I think there could be either a small decline or there could be small moderation in the growth from what we have seen in Q2 and Q3, right? So, I mean, let us see how it happens, but definitely the base is very high. You know, Q4, I think last year, was more than 120,000 or something around that, right? So that is the only issue. So let us see how it goes, but there could be a small decline or there could be a moderation in the growth levels.
Thank you. And, Gopal, this question is for you, sir. On the cost side, what exactly is driving a deflation in our employee and other expenditures sequentially? Because we've generally seen other companies have a uptick, even with lower volumes. And how sustainable is that? And the second part is on the investments on the EV side. So, given the, how should one look at investments going forward? Because the opportunity is huge, so it will require a lot of investments upfront to prepare the base, right? So how should one look at the investment cycle for, specifically for Switch Mobility and also outside of that in the other subsidiaries as well? Thank you.
Yeah, as we have you know, shared with you folks earlier itself, while we will continue to pursue investors from outside, yeah, and which is something that we will welcome, we will continue to invest into the business. So we have, we are doing the initial INR 1,200 crore this year. We'll come back as to what the status will be for the next year, but there are some very exciting products that are going to get launched. And so slowly we are going to see the cash flows of Switch India actually standing on its own legs. So, you know, this is the initial product introduction phase, right? So there are some investments being made in products. We are going to launch our light commercial vehicle.
We have also formed OHM separately, because that's going to be a separate e-mobility as a service company. So I think there's a lot. See, it's very leading in the market, and that's exactly what we're doing. So, you know, a lot of people are waiting for our light commercial vehicle, e- like, e-LCVs to be launched in Q4. And that will continue. We aren't too concerned about, you know, I know from a from an analyst perspective or from a financial analyst perspective, you may be looking at, you know, how much of cash, how much of investment required. Let me assure that, I think with the profitability of the core business, we are very, very well placed for funding the requirements of switch, if necessary.
But I think in the medium term, we will get some good investors whom we can partner with. Money is available, it's not that, but I think it's important to get the right kind of investors to partner in a long-term business like this. As far as, you know, your other question on employee cost is concerned, I think these are very marginal adjustments and, you know, the trend predominantly will continue to be. I think we have come down from very high percentage levels because of the operating leverage kicking in to about 5% to 5.5%-6%. I think you can, as if the industry continues to grow, and Leyland will certainly grow, we would see these percentages to be maintained or come up in the future as well.
Thanks a lot, and best of luck, sir. Thank you.
Thank you. The next question is from the line of Gunjan from Bank of America. Please go ahead.
Yeah. Hi. Thanks, team, for taking my questions. I had follow-up on the margin roadmap again. If you can share with us as to, you know, what were the sort of price hikes taken in the quarter, the net absorption around those, you know, because I recall last quarter you did mention that the market absorption of those price hikes hasn't been that great. So, you know, a little bit color on what was the pricing improvement, how much really came from commodity tailwind, and are there more price hikes which are being taken in quarter four?
Okay. So Gunjan, thank you for the question. First of all, let me clarify that when we made a comment last time, or previously, that the absorption of the pricing has not been that high, we were referring specifically to Q1, when the industry had tried to take a 3% price hike, which was quite aggressive, but that whole thing could not be absorbed. Yeah. So, but yeah, but that was like in Q1, mainly April 1. Yeah, so see, as I said, you know, our focus is profitable growth, and we have said this before, that we are not going to sacrifice margins for the sake of market share. Market share, we will always focus on differentiating our products and differentiating our service and our reach to the customer.
So now, you know, I mean, three things again. One is our price discipline, our intense focus on how much we can do better realization. Second is our cost program is actually, cost compression optimization program is actually working really, really well. Last year, in FY 2023, you know, we did, I mean, the team did a great job, and we thought we have probably done our best in cost optimization. But this year again, you know, we thought, let us just find more opportunities, and to our own surprise, you know, we are actually doing better in cost optimization in FY 2024 than in FY 2023, and that is on top of whatever we have done in FY 2023. I personally believe, you know, this is a very continuous story.
You know, I mean, companies like us, especially in the automotive sector, have this huge potential, especially when some, some technology changes. You know, in our industry, in BS VI, the technology changed quite a bit, you know, with the new emission norms and also moving to the modular platform. So we have a huge potential to look at cost again. So that was second, and third was, of course, the softening of the commodity prices, which, as I said, has helped and will continue to help for at least few more months.
Okay, got it. Is it possible to just get a number on what has been the price hike taken in nine months, you know, overall, if not broken up into quarters? Maybe also get the revenue from the other businesses, spares, power solution. Is there anything, you know, we've seen any meaningful change in those other segments?
See, I think we have shared it. We don't have that number readily available. We'll take it offline, Gunjan, but, rest assured, that quarter-on-quarter, Q1, Q2, Q3, we have actually been raising prices. You know, so across businesses, both in trucks as well as in light commercial vehicles and of course, in all the other businesses. And also, the other important bit, I think, what Shenu also mentioned, was that the bus business is doing very well, and we have actually seen the profitability of the bus business scaling up very, very quickly. So this has been a confluence of factors which has actually resulted on the pricing front. But, you know, we don't have that exact number for the nine months that you're asking for.
Okay, and other segment, like spares, power solutions, defense, anything on the revenue to call out?
Yeah. So, Gunjan, I gave out the numbers in my, in my opening remarks, so maybe after the call we can give you more...
Okay.
-specific numbers, if you like.
Got you.
I would just like to mention that we are actually very happy with all the non-auto businesses, because we are doing really, really well this year, whether it is spare parts or defense or the power solution business. ... You know, I think we'll have a record year in all the three S, on all these three businesses this year. Actually, the defense business, you know, we are gunning to achieve, roughly INR 900 crore, between INR 900 crore and INR 1,000 crore of turnover this year, which will be an all-time high for us. You know, that is the kind of positive momentum we have been able to, generate on defense side. Even on the power solutions business, you know, our already nine-month volumes are record volumes, and, I think we will continue to perform, this business will continue to perform like this in quarter four as well.
Okay, got it. Last question: Any thoughts on Scrappage? Anything you're hearing in terms of, you know, government looking to, you know, to accelerate this or relook at the incentive levels? And how should we think about this whole Scrappage policy, maybe not from a near-term perspective, but, you know, is there a thought process to revisit the incentives and, you know, drive this placement?
Yeah, yeah, definitely, Gunjan. So there has been a lot of discussion even in the last few months on the Scrappage. Government is very, very keen to find ways so that this whole thing can be pushed really well. As you know, government vehicles now are mandatorily have to be replaced after the useful life. But such condition is not enforced for the private vehicles so far, right? So right now, government and industry are looking at various options. You know, first is government is really wants people like us and other companies to invest into these facilities, the Scrappage and refurbishment facilities.
Also there has been some dialogue going on between SIAUM and the government, to see how we can incentivize customers to come forward voluntarily and scrap their vehicles after the end of useful life. These incentives would be coming both from the government side as well as from the industry side. So a lot of discussions are happening. I think it is moving in the right way. Government, of course, cannot immediately make it mandatory for obvious reasons. But yeah, I think at some point in time, if government starts enforcing it, it will really. It can really happen very, very fast.
Got it. Thank you so much.
Thank you. The next question is from the line of Pramod Amthe from InCred Capital. Please go ahead.
Yeah, hi. Thanks for taking my question. So the first one is with regard to the EV trucks which you have launched. Congrats for that. Can you just specify? We can understand the ICV one, but it's interesting to see the tractor-trailer being launched or being tested. What are the operator economics? Why you selected this? How are you planning to develop the supply chain, and when we expect it to hit the market?
Yeah, thank you for that question. We are actually very, very proud of, you know, achieving this milestone in our electric truck journey. You know, we have lots of buses on the roads already. Very, very soon we'll have some light commercial vehicles on the road. But what we have delivered in Bharat Mobility Expo is a BOSS 14-ton electric truck for mid-mile transportation. And we have actually got more orders, and we are going to deliver a few more in the coming months. Also, as I said, we are nearing market trials for launch of 55-ton tractor trailer as well. Right now, you know, our focus is on two things. We are not running or running behind volumes here when it comes to electric trucks.
You know, our focus is to make these machines more and more efficient. Yeah, and the other thing is bring the TCO down. You know, roughly at an industry level, I can tell you that the TCO equivalence of diesel is coming in roughly about five to seven years right now on the electric trucks. Yeah, I think, if we can bring it down below five years, you know, then it will start making much more sense. You know, so that is the whole intention.
Right now, what we are doing is not really launching it in a mass, massive way, but, with very selective customers and selective geographies and selective applications, we are doing a lot of customer trials or market trials. You know, there are many customers in the market right now who want to actually get into electric trucks for various reasons. These customers, we are partnering with these customers to see if we can try these trucks out in the real life, in the real conditions, and then prove that, you know, prove the various benefits of the electric powertrain.
Sure. And, second, related to that is, since you started delivering these trucks, will these be part of the standalone entity or will it be part of the switch?
Electric trucks would always be part of Ashok Leyland. Switch would, is focusing only on electric buses and on electric light commercial vehicles.
Sure. Thanks. Thanks, and all the best.
Thank you. The next question is from the line of Mumuksh Mandlesha from Anand Rathi. Please go ahead.
Congratulations on the solid margins.
Sorry, sir.
Yeah, sorry. Yeah. Thanks for the opportunity, and congratulations on the solid margins, sir. Sir, just to understand more on in terms of demand perspective on the recent slowdown, is it the demand more seem weaker in the new demand where the expansion of fleet has slowed down? Or is it the replacement demand where there's the slow growth we are seeing in the recent months? Just basically to understand more, is it a new project slowdown which is impacting the demand, or there has been absorption of pent-up demand, hence the things have slowed down?
... See, it is, I think it's a combination of both, right? Because the last year, there was a huge pent-up demand that was there, especially in the second half of the last year, right? So of course, that with the volumes growing like this, last year, we had a mammoth growth in the industry. You know, some of that pent-up demand has also diffused now, right?
So that is one, of course. And the other thing is that, not right now, but what we are expecting, like in next two, three months, is that projects may slow down a little bit because of the code of conduct or other effects of the elections. And therefore, you know, we are saying that the growth may moderate down in the next three to four or five months. It will be a combination of both the factors, but right now it is just the high base effect in this quarter.
Understood, sir. Considering this near-term demand slowdown, do you see the path of further improvement in margins to continue, led by better price realization, or do you see there would be some temporary pause in the price increases?
Oh, that is very hard to say. You know, it depends a lot on competition action. But what I can say for Ashok Leyland is that we will be very, very focused on increasing increasing our margins, you know, not just from the pricing side, but also from the cost side, right? Price discipline is something that we do want to maintain, you know, so that will really help. We are finding more and more avenues how we can increase our price realization, especially with the better network and the better service reach we are creating in north and east zones and to some extent in the central zone. You know, that is also giving us some of the pricing power, right? So we are picking our battles.
I'm not saying that we are totally aloof as to what is happening in the market, but we are picking our battles very, very wisely. But, as I have said, I'll repeat for the third time, we will not sacrifice margins for market share. Market share is a medium, long-term story for us. We will achieve that as well, but not on a quarter-to-quarter basis, but we will achieve it through the strength of our products and our network.
Just to add here, even in the month of January, you know, we have raised prices. Our NSRs have improved.
Yeah.
So, you know, so this is, this is completely two different tracks that we are looking at. You will see a traction happening, you know, as Shenu mentioned, you will see a traction happening on the market share. That is an independent, that is distribution, products, new customers, better way of selling, using digital. That track will continue irrespective of... This is not a price versus volume war that we are having in the market today. You know, so this is, very important to have value selling that's happening, and that we believe is what is going to be the, you know, very stable medium-term strategy.
See, one thing you should keep in mind that it's not just Ashok Leyland, but the entire industry realizes that, you know, the margins of the industry have to come up. I think we have seen you know statements from other industry peers as well. You know, and the reason I have been saying this, the reason is very, very simple. You know, our industry is going through, going to go through a huge transition. You know, we have already put electric buses on the road. Now, we are putting some electric trucks on the road. We are about to launch electric light commercial vehicles, then we may launch hydrogen powered vehicles in some more time. You know, and all these, they need lot of investment, or they need lot of resources, yeah.
Therefore, if the industry is going to go through such transition, I mean, we have to generate more cash to be able to help this transition, rather than resisting the transition, you know? So I think that whole notion is very well understood by our peers also, and to some extent. Yeah, and that also helps in maintaining overall pricing discipline.
Understood, sir. Thank you so much. This is ...
Thank you. The next question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead.
Hi, sir. Congrats on good set of numbers. Quickly, a question on the pricing in the market. So we have seen a quite substantial increase in cost of trucks, say, since pre-COVID versus now, I mean, almost 20% increase in cost of trucks. So is that a factor which will also play part in on the demand side? And I have seen in other segments, obviously, on the B2C side, where demand has been materially impacted because of higher cost. Obviously, trucks have different dynamics, but how do you see the dynamics of price versus cost inflation versus demand from medium-term perspective?
Well, I don't think, Jinesh, you know, I think this was, like, long ago, when the cost increases because of emission norms or other changes, yeah. I mean, of late, we didn't have any, any major regulations that have an effect on the overall cost of, of the vehicle. Yeah, so that period is long past us. I mean, that was, like, more than, like, about, like, four years ago when we switched on to BS VI, yeah. So that is long... I mean, whatever shock, that, increase in cost or increase in price created in the market, that is gone, right? So right now, we are not in a scenario where, where demand, demand is getting affected through the prices.
Okay. And secondly, with respect to the replacement demand, so I remember we had been talking about average age of the fleet at a decadal or multi-decade high. Have we started to see that demand coming in, in average age of fleet started to moderate? And if not, what are the reasons why replacement demand is not being coming back?
...No, no, average age won't, won't get affected that soon. You know, it will take several years for the average age to come down. So you are right, average age is now closer to ten years now, which used to be, I think, about eight or less than eight earlier, right? But it will take many, many good years of industry growth to be able to bring the average age down back to eight or lower than eight. So yeah, I mean, that is why, you know, I think, you know, in the medium term, we are very, very confident about the performance of the industry as a whole. You know, because, I mean, most of the factors are going well.
You know, the CV industry is very well linked to the overall economic activity or the GDP growth of the country, and the country is doing very well and is expected to do well going forward as well. Yeah, I mean, lot of focus the government has put on infrastructure projects. You can see in the interim budget also, and we expect to see similar focus and similar consistency of government approach, even in the main budget that will come in July. So, so I think all those factors are pointing to a positive, confidence.
Got it. And lastly, if you can talk about performance of HLFL, how are they performing probably in three, two , and for nine months in terms of the AUM growth and profitability and NPA?
I think HLFL is doing very well, yeah. So, you know, if you look at it, the size of the book now is almost INR 45,000 crore. And, you know, they have had a cons-- I'm talking about consolidated numbers. They've had disbursement of nearly INR 17,890 crore, and their PAT percentage is 13%. Their NPA isn't too high. It's been very well controlled. I think it's at about 2.6% or 2.8%, and the NIMs have also improved. So overall, I think HLFL and, you know, there is this subsidiary called as HHF, which is a 100% subsidiary of HLFL, which is also doing very well.
I mean, the portfolios are good, and, you know, the other bit is that exciting company called as Gro, which is a, you know, equally held between HLFL and Ashok Leyland. And I think that this is the company that is to watch out for, because this is into solutions and using technology for enabling the whole ecosystem around our customers, and not just customers, our partners. So, that's also, I think, very much on track.
Okay. Thanks a lot for this.
Thank you. The next question is from the line of Raghunandhan N.L. from Nuvama Research. Please go ahead.
Thank you, sir, for the opportunity. Congratulations on strong margin performance and recent EV unveilings. Couple of questions. Firstly, when we look at the history, say, the 30-year history shows that whenever there is an upcycle, the new peak surpasses the previous peak by at least 10%, even in tonnage terms. So there is still some room to go ahead. So how do you expect various categories within MHCVs to perform going ahead, buses, tractor-trailers, ICVs? Which category do you expect to do better?
Yeah, Raghu, thank you for the question. Yeah, it is true. Like I said, also, you know, in my opening statement, that the previous peak was in FY 19, and we have not—although we were hoping we'll cross that peak this year or get close to it, it seems we'll fall short of that. So there is still very high room of growth, you know, left in the industry. As far as segmental growth is concerned, we think there is a lot of steam left in buses, even now. You know that we have received huge number of orders, and our peers have received also some orders. Yeah, so that will be executed over the next 6-8 months or 9 months. So that will keep the bus industry going really, really well.
Then, second, I think, would be the tractor-trailer segment, which has already shown considerable shift, you know, from multi-axle to tractor-trailer because of many, many reasons. This started happening, I think, even in FY 2022, but FY 2023 was a great shift towards tractor-trailers, and even this year we are seeing that tractor-trailer is leading the growth of the tractor industry.
I think the second element, the second segment would be in the trucks, would be the tipper. I think with all the infrastructure projects, all the mining projects, you know, going on in the country, and there has been some talk about privatization of mines going into at a higher pace. You know, if all that happens, you know, the tipper industry should also look, I mean, is looking very promising right now. You know, so I think those are the three stars, as far as the segments are concerned: the buses, tractor-trailers, and the tippers.
Thank you, sir. Indicating a much better product mix. Sir, my second question, over the medium term, how do you see the powertrain mix shaping up, considering the efforts on EVs and recently also on the hydrogen side? How do you see the EV share increasing for buses and SCVs over the medium term? And also for near-term visibility, if you can indicate interest level or order books that the company currently has for LCVs and buses.
Yeah. So see, for buses, we have orders of roughly about 1,000 buses as of now, and then we are participating in some new tenders this month and next month, right? So that will probably help us bring in more orders. For the LCVs, we have MOUs signed with various customers, that is, and that number is roughly 12,000-13,000 units. Yeah, so that is where we are on LCV and buses. Of course, on the truck side, we are not yet signing any MOUs. As I said, we are being very, very selective for next few months in choosing our customers, our applications and geographies. We will first, our first intention is to mature the technology and make the trucks very, very efficient, bring the TCO down before we kind of start running for the numbers.
How do you see the medium-term panning out in terms of penetration?
Penetration of EV? Raghu, it is very hard to say, you know, I mean, there is so much data floating around in the, in the, in the industry. You know, I mean, some people tend to believe that, LCV and buses, you know, would cross roughly, I mean, something between 20%-40% penetration, as soon as, like, 2030 or 2032. You know, but it is very hard to say, Raghu, because, I mean, it's not just, you know, us, but lot of ecosystem, factors have to be in line. You know, I think our focus, I mean, I always say I don't get worried about these trends too much. You know, I am more worried about what Ashok Leyland should do.
Our focus is to mature the technology, mature the product, make it more efficient, bring the TCO down. I think if we can do that, we will do our job in pushing this transition. It is very important for Ashok Leyland to participate and lead this transition because, you know, we are a challenger. For challenger, it is very important that these disruptions happen in the market, because if something changes, only then we have a chance to disrupt the pecking order. So we are loving it, we are very focused on it, and hopefully we will have the best product in the market.
Wishing you all the best, sir. Just continuing with another question. On the Switch Mobility side, now that you know, you are investing INR 1,200 crore, there is a good set of orders for buses and LCVs, how do you see the growth shaping up? And as Gopal sir earlier mentioned, that you know the focus will be to make it self-sufficient in future. So how do you see those trends shaping up and relating to a stake sale? So any thoughts or any progress there? Thank you.
Yeah, Raghu, see, it's true that more action is happening in Switch India than in the U.K. or the European markets right now, because the growth in the EV adoption in UK or in Europe is not to the extent that we had earlier imagined or even the market had imagined, right? So even we are, like, highly, highly focused on Switch India operations right now. And we are very confident that by end of the next fiscal year or during sometime in the next fiscal year, you know, Switch India should be cash neutral. Yeah, so that is the...
At least that is the goal, that by end of next fiscal year, which is the last quarter of the next fiscal year, we should make Switch India cash neutral, which is self-sustaining. Yeah, so which is not very far off. So, like Gopal said, you know, in the meanwhile, you know, if there is further requirement, then Ashok Leyland's balance sheet is very strong to be able to support Switch. But, but, yeah, very focused on Switch business. Very happy, actually, the way it is shaping up. Not just what we are doing currently, but all the R&D and the product development that is happening in Switch right now.
Thank you very much, sir. I'll join back the queue.
Thank you. The next question is from the line of Mukesh Saraf from Avendus Spark. Please go ahead.
Yes, sir, good morning, and thank you for the opportunity. My first question is on the mix of vehicles. We have, like you mentioned, we have seen a significant increase in tractor-trailers and probably more 40-tonner kind of vehicles. Could you kind of give a sense on... I mean, we have looked at previous cycles, we have not seen this kind of a steep shift towards these higher tonnage vehicles. So, what exactly has driven this time around this kind of a steep shift? And, can this kind of continue a bit longer, according to you?
Yeah, yeah, yeah. So, Mukesh, yeah, it's true that we haven't seen this kind of a steep shift to higher tonnage, or even from multi-axles to tractor-trailers, et cetera. But you know, we are, I mean, we are seeing a lot of things that are happening for the first time in the country. You know, I get asked a lot by the media also about the cyclicity of the tractor, of the truck industry, and they say: See, this is how the history has behaved. Yeah, and my answer normally is, "See, it is very, it will not be very prudent in our country today to look at history and project the future." You know, so a lot of things are changing.
I mean, the kind of highways, the kind of infrastructure that is getting built in the country, the quadrilateral, the national highways, the state highways, you know, I mean, I mean, it is a direct effect of that, you know, because, because vehicles can cruise on a higher speed, you know, they are more comfortable. Drivers can work more hours, you know, without getting fatigued out. A lot of things are changing in the sector, you know, both in terms of product technology and in terms of the infrastructure. So I think that is the reason.
Always, you know, when these things happen, you always tend to see a hockey stick kind of demand curve, because there are a few adopters in the early part of it, but when people start seeing the benefits, then more and more people start adopting. So I think this trend will continue. Actually, we will continue to move towards better product mix, a higher tonnage, more tractor-trailers, because tractor-trailers, you know, 80%, I think 80% of the market is 55 ton. Yeah.
Right.
More and more volume is shifting to tractor-trailers. That is good for the customer, good for the industry.
Right. Right. So the reason I ask the question is, if getting into the third, fourth year of the upcycling and, say, if there is some kind of a deceleration, would you kind of again see a very quick shift back to, say, 25-ton vehicles, which can again, kind of impact our realizations, margins, discounting trends, et cetera? So you don't see that, in the near future, is what you're saying?
No, I don't think. I don't think. If you look at-
Right.
If you look at any international market and you look at tractor-trailers, they're the, I mean, the, their share in the mix is like very, very heavy.
Sure.
So very, very heavy.
Sure.
India, tractor-trailer has not even reached 20%, I think, right now, or maybe just 20%. Yeah, so I don't think... I think there is like, although we are all surprised by the speed of the shift, but,
Yeah
... I think at the same time, we should also be looking at the headroom available.
Got it. Got it.
Yeah.
And just my second question is on defense business. I think last quarter you had mentioned targeting INR 800 crore this year, and I think first half, you were at INR 300 crore. Any update on that? Where are we in the nine months, and how are we looking at, say, this year and the next year?
Yeah, we are still targeting INR 800 crore plus. You know, we have actually gained some confidence that we might even touch INR 900 crore. You know,
Sure.
I don't want to project numbers ahead of time, but yeah, what I'm trying to say is that defense business has really worked very, very well for us. And same is the situation for power solutions business. You know, we, I think we have done more than, more than 22,000 numbers in the first nine months, and we are gunning for even better numbers to close the year. And third business is spare parts business, which we are very keen on because it's a high margin business. And there also, we are growing considerably well.
Sure. Sure. Great. Thank you so much, Sirs.
Thank you. The next question is from the line of Mihir Jhaveri from Axis Capital. Please go ahead.
Yeah, thank you for the opportunity. Just my one question is on the demand side, sir. Given that the biggest competitor has also called out for the first half being weak next year, not only Q4. So anything you want to call out in terms of how much growth you're looking at for next year? And my second question is that has discounting intensified given that Q4 we are seeing that moderation coming in, so just on discounting, if I've missed out, sorry, but is the discounting intensified, have you seen that in the industry? Yeah, that's my two questions. Thanks.
Let me start with the second one, because I was not clear about the first one. Maybe you'll have to, I'll have to ask you to repeat the first one. But second one on the discounting: See, discounting, you know, is, I will not say it has gone up or gone down. You know, I mean, these are very tactical situations where people would discount a little bit on something in one quarter and then shift to something else in the other quarter. You know, discount, and we don't worry about this too much.
I mean, as I said, you know, we are very, very focused on maintaining a price discipline, on, seeing how can we get a better NSR, you know, how we, how we can, you know, play on the strengths of our products wherever we are strong and improve on our weaknesses. Yeah, so we are, I mean, yeah, I mean, in a nutshell, I would say discounting is there. It hasn't gone down or gone up substantially, but Ashok Leyland is very, very focused on picking our own battles and, focusing on profitable growth. On the first one-
What volume forecast for next year?
Oh, we have not issued a formal forecast as of now. I think we will just wait for a few more weeks before we do that, because we are just waiting for some announcements from the government on elections, et cetera. And also just see how this quarter four pans out, little bit more. Yeah, but very soon we will make an announcement on that. But Gopal, I think, has something to add.
Yeah, I think just to on your discounting front, because I think all the questions are, you know, based only on market share and, you know, pricing. I think repeatedly, and I don't blame it, because that's where the whole thing is. See, what you have to see is the trend that has happened over the years, okay? Now, it is not only for us. We have actually, I think, if I may say so, Ashok Leyland has been reporting best-in-class numbers for CV performance consistently, right? Now, but overall, if you look at all the players also, they have actually moved their margins up from Q1 to Q2 to Q3. The highest growths have been from Q1, Q2, Q3, because of the base effect.
So we are actually seeing that there is a lot of, you know, rationale, rationality that is coming in. So it is not like, you know, we are not anticipating that in the interest, if suppose the markets were to be a little flattish, and there is nothing wrong with the market being a little flattish, sometimes it has to catch up a breath. You must understand that this industry has grown fantastically over the last eight quarters. So there will be a certain amount of catch-up. What we have to look for is the mega trends. You have seen that even in the latest budget, you've had nearly INR 1,100,000 crore being used for infra. All of that investments, if it's going to come in, will start to have a direct and an indirect benefit on the commercial vehicle industry.
You've seen huge growth in buses. You've seen we are now the second largest road network in the world today. The government has got a policy to ensure that the supply chain costs start coming down, which means turnaround times have to improve. If turnaround times improve, then you're going to see more investments coming in. There was this question about moving into higher tonnage. That's happening because post-GST and post the efficiency of road network, people are seeing that ROIs are coming on larger trucks. There is a trifurcation that has happened on heavies. There is a intermediate commercial vehicle and light commercial vehicle.
If you really ask me, while we don't want to sound overtly exciting, about, you know, a statement that we make, I think there's a lot of steam left, in, you know, transportation, both, for haulage and for people. And that is how we are planning the whole thing. Quarter here, quarter there, is not what we are looking at. Are we seeing, are we seeing a trajectory of growth? Yes. Are we, you know, significantly better than where we were, 12 months back? Yes. Are we looking at margins improvement? Yes. Are we becoming more pan-India? Are our presence getting more and more...
Are we acquiring customers in new geographies? Have we got the strategies and product development in place? Are we devolatilizing the company by investments in hydrogen, fuel cell, hydrogen ICE, EVs? Yes. So I think this thing about a huge cycle coming off and then we are slugfest on price. I think it, I, we possibly will not see that happen. I mean, that's what I, you know, I just wanted to share with you very quickly. Yeah, back to you, Shenu. No, no, that's it.
Thank you. Thank you.
Thank you. Ladies and gentlemen, due to time constraint, we will take this as a last question. As that was the last question, I would now like to hand the conference over to the management for closing comments.
Hi, thank you, once again. This has been a record quarter and a record year so far, as I said. While we continue to gain ground in MHCV as well as LCV, contribution from defense, aftermarket, and power solutions businesses supported the overall performance. Revenue mix was also positive. Price recovery and cost savings went as per our plans. With the robust economic growth outlook, as well as the increased outlay on infrastructure, we expect a good demand situation going forward. Softness in commodity cost and our relentless focus on driving operational efficiency should also help us further. Given this backdrop, we hope to steadily improve our margins, as well as gain market share penetration in all the segments we operate in. Ladies and gentlemen, thank you once again for the interest shown in Ashok Leyland.
Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.