Ladies and gentlemen, good day and welcome to Ashok Leyland Limited 2Q FY 2023 post results conference call hosted by Batlivala & Karani Securities Limited. As a reminder, all participant 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. Annamalai Jayaraj from Batlivala & Karani Securities. Thank you, and over to you, sir.
Thanks, Vivian. Good afternoon, everyone. On behalf of B&K Securities, welcome to 2Q FY23 post results conference call of Ashok Leyland Limited. I also take this opportunity to welcome the senior management team of Ashok Leyland Limited. We have with us today Mr. Dheeraj G. Hinduja, executive chairman, Mr. Gopal Mahadevan, full-time Director and Chief Financial Officer, and Mr. K.M. Balaji, Deputy Chief Financial Officer. I will now invite Ashok Leyland management for the opening remarks to be followed the question and answer session. Over to you, sir.
Thank you. Good afternoon, ladies and gentlemen. It gives me immense pleasure to be in touch with you, and I thank you very much for the interest shown in Ashok Leyland. I will quickly run through Q2 performance as well as some of the latest developments. I'm extremely happy to share that Q2 FY 2023 continued to be good, aided by strong performance in domestic truck sales with a 32% market share. This is almost a 10% increase over our market share during the same period last year. This is the third consecutive quarter of 30+ market share for Ashok Leyland. In Q2, M&HCV truck volumes have grown more than 1.5 times of the industry growth.
AL growth at 102% versus TIV growth at 39%, resulting in Ashok Leyland market share improving to 32.3% as compared to 22.2% in Q2 of last year. Sequentially also in Q2, AL's M&HCV truck market share has grown by 1.2%. Our market share has grown to 32.3% in Q2 from 31.1% in Q1. EBITDA for Q2 was at INR 537 crores, 6.5% as against INR 135 crores, which is 3% in Q2 last year. LCV, which was on a growth phase, has been marginally impacted by semiconductor shortages, but for Q2, volumes were still higher than last year by 28%.
International operation sales have registered a 25% year-on-year growth in Q2. Q2 domestic aftermarket sales grew at 26% over same period last year. The Q2 operating profit was at INR 303 crore as against the loss of INR 116 crore in Q2 of last year. Working capital has increased by about INR 300-INR 650 crore during the quarter, primarily due to increase in activity levels. Consequently, our net debt has increased by about INR 400 crore in this quarter. Debt equity is at 0.4x versus 0.5x during the same period last year.
During the quarter, we have launched uncertain , Ecomet STAR 42 20 and 44 20 tractor, 41 20 30-foot and 32-foot, Bos s 19 20, cargo 6x4 ready-mix concrete, 19 20 with G45 FS expanding our range. I'm extremely confident that with these launches and the continued expansion of network, we will sustain the market share gains achieved in last 4 quarters. The growth in M&HCV trucks TIV in Q2 and LCV trucks is supported by the improved freight availability and growth in end-user industries, in addition to pent-up replacement demand. Freight rates have held up, coupled with healthy freight availability supporting the fleet operator viability. Domestic commercial vehicle industry volumes to witness growth in FY 2023 in line with economic recovery. Post volume recovery in FY 2022.
FY 2023 is set to register 22%-24% year-on-year growth as per CRISIL, though volumes will still be lower than the peak, previous peak of FY 2019. M&HCV trucks are expected to grow by 21%-23%, buses by 103%-105%, and LCV trucks by 18%-20% as per CRISIL. On a longer term, CRISIL expects commercial vehicle demand to grow at a robust 10%-12% CAGR for a five-year period between FY 2022 and 2027. Historical data shows a high pace of revival in commercial vehicle demand in the past. Demand for CVs to remain robust in the long run. CRISIL expects box segment to outperform in the long run over a low base.
This will add to our volumes and market share as Ashok Leyland is a leader in buses historically. With further demand growth, we are expecting pricing to become more rational. The softening of commodity prices, in particular for steel, should impact the margins positively in the coming quarter. Ashok Leyland, even while growing market share sequentially, has been raising prices owing to higher input costs. What is good to see is that retention of such price increases is better. LCV, both Dost and Bada Dost are gaining inroads and have been growing stronger by the day, and volumes are limited by the availability of semiconductors. Both these products hold immense potential for export and are a perfect fit in our addressable market. Aftermarket and international businesses continue to perform well. We are also putting efforts in reducing costs, both product costs as well as overhead.
Switch, which is an important initiative for us, I would like to reiterate our commitment to developing Switch as a global electric vehicle company. So far, we have been successful in establishing a name and a platform as a credible EV manufacturer in the industry. We are already aware that in India we are growing our sales pipeline quickly and delivering a competitive product range. In the UK and Europe, there's headroom for growth. Amidst challenging economic environment, we are chalking out our plans to utilize these growth opportunities fully by placing higher quality, cost-effective products. Regarding funding for Switch, we are in active discussions with investors, and it is taking longer than expected, as we would like to choose the right partners. Finally, before I open the floor for questions, let me share the financials in brief.
Revenue for Q2 at INR 8,266 crores, which is 85% higher than Q2 last year. Manpower costs in Q2 is higher than previous quarter by INR 82 crores due to increments, bonus settlements, and performance bonus provisions, a restatement. EBITDA is at INR 537 crores, which is 6.5% in Q2, up from INR 135 crores. Profit after tax after exceptional for the quarter was at INR 199 crores versus a loss of INR 83 crores in Q2 of FY 2022. Operating working capital for Q2 was at INR 490 crores as against the negative of INR 167 crores as of June 2022. Increased activity levels have necessitated increased working capital during the quarter.
Net debt was at INR 2,677 crore in September 2022, as against INR 2,281 crore in June 2022. Debt equity at the end of the quarter was at 0.4 times. Capital expenditure for the quarter was at INR 103 crore. Cumulative spend for first half was at INR 618 crore.
200.
Sorry, INR 218 crores. CapEx spend for the full year is estimated to be INR 600 crores. I now open the floor for questions. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Participants who wish to ask a question may kindly press star one on your touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Pramod Kumar from UBS. Kindly proceed.
Yeah, thanks a lot for the opportunity. My question is regarding some ICDs which have popped up again. Can you please help us understand why we are doing those and the rationale for continuing to lend within the group when we also have debt on the balance sheet. If you can just explain that bit, please.
Yeah. Hi, Pramod. This is actually because actually we have to mention it that way. This is actually a short-term loan that has been given to our own subsidiary Switch, and nothing more than that. The entire amount of INR 200 crore has been given, you know, for kind of helping them execute some of the orders that they're getting. You know, Switch has got some great orders in place, the BMTC, the BEST double-decker, plus the existing orders, that's what it has been given for. It has not been given for any other group companies. To our own subsidiary.
Gopal, I'm just trying to understand the funding bit here because we've been talking about raising money at Switch for almost a year now. What is the way out if you're not able to find any private equity investor at your term? I believe it's more about the terms and the restrictions which come with those funding, right? Is there a plan that you may think of eventually funding this yourself by raising equity at Leyland's level?
Pramod, hi. No, I think like you rightly said, there is interest in electric vehicles from many private equities and sovereign wealth funds as well. We have been delayed, as you point out, but we do feel that this delay, one, should not affect the long-term potential in this sector. Secondly, I think it is only right that we should get the right terms, conditions, valuations, et cetera. The EV sector globally, as you would have seen, has taken somewhat of a beating, because many companies had raised capital at substantial valuation. We have taken a very cautious approach. I think our business plan is very credible.
I would say that we do have opportunities of closing the funding, but I think it would be in the interest of all investor stakeholders to ensure that we do tie up with the right partners.
Related to it, and the last question, given the expected price inflation on on the diesel vehicles because of RDE, and the fact that CNG demand is now tapering off because of runaway CNG prices, so is there is there any timeline or thought process on accelerated rollout of EVs, especially in the light light tonnage categories? Because that's where the electrification is kind of picking up very rapidly. Dheeraj, it it will be great if you can just share your strategy here as to by if any timelines on number of product launches or categories which you'd like to address using the EV format. Thank you.
Yeah. Actually, you know, this is something we had spoken of last time as well. We will be launching the electric versions of the Dost and Bara Dost in the middle of 2023. You're right, we see increased requirements from many courier companies, logistic companies within cities for last mile delivery. They are asking for electric vehicles. I don't feel that when you look at the overall volume between where diesel is today, let's say between 400,000-500,000 LCVs, while the electric vehicles are making a headway, I still believe it's a long way till you really look at affecting the diesel market.
Yes, there is growth, there is potential, but I do feel that it will be a slow rise, and it'll be more a B2B business to begin with rather than retail.
Just to add to what chairman said, Pramod, you know, we will be definitely there in a multi-player approach. Our investments in EV, which is why we are very, very careful about the investor that we want because this is long-term play. Whatever we feed the business with today is what we are going to have in the future. We have decided, like chairman said, that we would, you know, want to get the right kind of investors. Rest assured that just as we have, you know, got onto the EV bus business and have been doing well, we have very clear plans for LCV as well.
Yeah. Thanks a lot. Thanks a lot, both of you. Best of luck. Thank you.
Thank you.
The next question is from the line of Jinesh Gandhi from Motilal Oswal. Kindly proceed.
Hi. My first question pertains to the pricing trend in the market. You alluded to the fact that prices have been increased and retention has been better. Can you quantify that in terms of what kind of price increases we took in 2Q and 3Q at period and how are the trends on discount?
In Q1, I think, Jinesh, we have been actually raising prices. That's why, I mean, just wanted to give, if you look at our EBITDA in relation to, the market, you would see, improvement even though we are playing in the same field, right? This has been because of a conscious effort of, two, three things. One is price increase, where, in Q1 we did about 1.9%. In Q2 we did another 1%. Very recently we have announced, almost another 1.9% price increase, 1.5%. So, you know, we have been consistently raising prices, and we will continue to do that. At the same time, if you notice, we were the only, large player to have gained market share in Q2.
We were the only players in LCV to have gained market share. This has come very, very astutely. Why this has come is also because we have been, as you know, chairman and I had mentioned in our previous calls, we have been refreshing the network very intelligently, bringing in, you know, partners who are confident of actually scaling up in some of the regions up in North, East, Central and West. I don't know whether you folks have noticed, that again, not only have we grown significantly, not only have we raised prices, we have increased market share, and more importantly, we have increased market share in all geographies. You know, North, East, West, Central, South, we have actually increased market share all through.
This has been a very, what should we say, very planned and systematic approach of growth instead of just, looking at either market share or profitability. Like Chairman repeatedly says, you know, we want to grow, certainly we will grow, but we will grow profitably.
Got it. Are you seeing discounts coming down, or at least stabilizing, given the demand environment in which we are in?
It has been almost stable between Q1 and Q2. Marginal differences have been there. But we are trying. See, what we are trying to do is to not participate in increasing it any further. Because you see, one of the other points that I wanted to also share with you, which is another, you know, kind of force multiplier for us, is the excellent performance of the AVTR range of products. You know, so, when we are meeting customers, the feedback on the product is not neutral, it is positive. People are extremely happy with the robustness of the performance of the AVTR range of products. The mileage that some of these SKUs are offering, which is why we are also able to get a slightly better realization.
You know, we had mentioned in 2020 that we will slowly start seeing the benefit of modularity and the technology that we are offering, and we're seeing that on the ground happening today. Hopefully discounts will start coming off, you know, if, as the industry realizes that this has been industry which has seen good cost increases, you know, it from BS4 to BS6. Then the steel price increases which happened, which are now slowly coming off. Hopefully we are expecting that discounts should kind of square off now.
Sure. There's a sharp increase in our staff cost on Y-o-Y and Q2 basis. Is there any one-off or just it's manageable level of activity which we had?
Staff cost is, you know, what we did and we have decided that we have internal, you know, plans for a bonus which are performance linked. We have actually kind of increased those provisions as well in the current quarter. The second one, you know, that has stepped up. We had been very, well, not conservative. We had taken a view in Q1, but we believe that, you know, things are getting better and we wanted to ensure that we start providing for it in Q2 itself instead of waiting for Q4. We'll make any adjustments that are required in Q4, you know, depending on the achievement of the internal targets.
The second bit that has happened is, obviously, we have, you know, our teams have been supporting, working hard over the last two years, even three years without any raises. We, you know, the leadership team felt strongly that we needed to give salary raises to employees this year because it has been nearly three years of hardship. The third one, the chairman had mentioned in his opening comment, was also on the settlement of workers that we needed to do, so that has also got approved. Otherwise, we have, you know, one thing that we are very careful about, which we are investing heavily in technology as well, is improving manpower productivity and ensuring that we are not adding to manpower.
Sure. Lastly, any indication of RM costs, influence in 2Q and what you expect in Q3?
Yeah. I'll just give you a quick thing, and chairman, you may want to add also about the initiatives that we are doing on the procurement side from the strategic side of it. You know, steel prices approximately had risen by about INR 5/kg in Q1. We actually saw almost a INR 10 decrease in Q2. INR 5 vis-à-vis what existed on first of April, and then it came down by INR 10 in Q2. It looks like prices are softening further, which is good for us. You know, we'll continue to monitor this, but we are expecting that steel prices should continue to soften as we move in the second half as well.
Now, Chairman, would you also want to add about what we're doing on the, you know, on the softening the manufacturing product cost part?
I think the key thing is that, margins need to keep improving. As Gopal mentioned, products are performing very well, and that is what's leading to the market share gain as well. There is a lot of initiatives internally where we're looking at cost reductions, again, as Gopal mentioned, improving productivity. Naturally material costs, we are with the volumes increasing, the economies will start kicking in as well, hopefully with some of our larger suppliers. We do feel going forward, with the softening of some of the commodity prices, this should help us well. Of course with the LCV volumes, we do have an initiative, I mean, on the value engineering of the product itself.
All I can say is that many, many initiatives going on internally by the senior team to ensure that the margins on the products would be much healthier.
I've got it. Thanks. I'll fall back into you.
Thank you.
The next question is from the line of Kapil Singh from Nomura. Can you proceed? Mr. Kapil Singh, you are unmuted. Can you proceed?
Thanks. Can you hear me now?
Yes, we can.
Hi, Kapil.
Hi. Hi, sir. I had to follow up small one. On the employee cost, are you saying that the Q2 level is what will sustain, going ahead, or is it the H1 level?
Well, we'll figure it out, yeah. Because I think what will happen is the truth is somewhere between Q1 and Q2. The reason is we did a catch-up in Q2, right? So Q2 has taken possibly the full impact of, you know, the catch-up that needed to be done. So we will see some softening in Q3, so the numbers will be somewhere in between Q1 and Q2, yeah.
Yeah. Second, on the commodity costs, because, you know, the RM to sales has seen a improvement of about 100 basis points or so, right? Hello?
Yeah. Sorry, Kapil. Just wanted to say that the manpower cost absolute while you look at it. The other thing is we are also expecting the growth in the industry, right? We possibly will see growth in the top line as we move forward into Q3 and Q4. When you look at a percentage to revenue, we believe that will actually come up. I thought I should clarify that. Otherwise, you know, absolute manpower cost is one part. Yeah. Okay, back to you.
Yeah. Thanks, sir. When I look at the raw material to sales, it has seen some drop, you know, nearly 100 basis points. But you took up prices by 100 basis points, and you also mentioned that the steel price during the quarter came down by INR 10. I'd imagine the benefit should have been larger, or were you carrying inventory and therefore you've not got the full benefit of that drop in steel price as of now?
I would have been disappointed if an intelligent person like you did not ask that question, but the point is you also had the answer for it. We have inventory of raw material and WIP and FG. You know, that needs to be sold out, and that's one of the reasons why, you know, this we have not seen. See, we must also remember another thing. While the team is pushing to a favorable mix, which is the la. You know, in this business, the larger the vehicle we sell, the more is the margins, right? But as an industry, you will also see that ICV is catching up quite a bit. You know, we need to ensure two, three things. We need to ensure that we are serving our customers for the entire suite of products they want.
We have to ensure we are gaining market share in the, you know, equitably in all the regions. The third one is we also have to ensure improved profitability. What has happened is the opening stock, which was there, obviously had to be sold out. You know, we need to, our guys in procurement side have to continuously peer into the future to see whether we need to buy more, should we, you know, defer purchases, et cetera. At the end of it, in this quarter, you're not seeing the full benefit of it because of the opening stock. Possibly things will look better, in Q3 and Q4, definitely.
Great. One question I had on the debt as well, you know, and CapEx actually as along with that. Earlier we used to talk about CapEx being somewhere around INR 1,500 crore and some investment of, you know, INR 300-400 crore as well. When we look at the business going forward, you know, what is the steady state of CapEx and investment that we should look at, say, you know, next one or two years? Also, you know, from a debt level perspective, you know, there's some increase in working capital as well. How much of it do you think you could realize by year-end? By when do you see yourself turning debt-free?
We have never had CapEx levels of INR 1,500 crore. I think going forward as well, as I mentioned, INR 600 crore is what we foresee for this year. Majority of the CapEx that we had envisaged happened already with the AVTR, the BS6. Going forward, I would expect our CapEx to be in that range of INR 500-INR 700 crore. Because the product range is already in position and the incremental CapEx that we move forward with will hold us well for the future product ranges as well. On the working capital Gopal, would you like to-
Yeah, you see. See, I would only mention one thing, you know. While we will continue to endeavor to improve our working capital, you know, and the debt level positions, I think our working capital situation is not at all bad. You know, the working capital situation is actually pretty decent for the industry that we are in. You know, what happens is, when the market is growing like this, we need to keep some ammo ready. We keep our inventory levels slightly higher because if there is an upside in sales, we need to be able to provide those volumes to the sales and marketing team if there is a quick upside that comes in.
The second is, as we mentioned, as the revenue numbers actually start going up, you will see that, you know, the receivables start to go up a bit because we are not getting back into cash and carry immediately. At the same time, I just want to kind of assure you, at the senior leadership level, one, I mean, among the various metrics that we keep almost looking at on a daily basis, receivables and inventory is one of them. We are ensuring that receivables are monitored efficiently. We have no concerns on that. We need to ensure that we are giving out the rope to our dealer partners to actually, you know, make the sales in the market, and that has also helped. It has been a positive effect.
The working capital that you're seeing has also been one of the reasons that has helped us in actually enhancing our market share. Having said that, we keep a close watch on cash. Our debt, as Chairman had mentioned and Balaji had mentioned, our debt-to-equity is just 0.4. Possibly by the end of the year, if things go as planned, we would see a significant reduction in the debt levels. All of it, by the way, is only short-term. We don't have any, you know, long- and short-term mismatches. We keep our long-term funding separate and the short-term funding separate. You would see possibly that our debt levels will come down quite sharply by the end of the year if things go as planned.
Sir, this INR 600 crore includes the electrification CapEx also? What is the investment plan for next one or two years?
I'll just quickly share it and hand it over to the chairman. As far as electrification CapEx is concerned, on the buses and the light commercial vehicles, all of that is housed under Switch. This INR 600 crore does not include that. You know, as chairman had mentioned, we are, you know, actively pursuing capital raise and possibly will share some news. We are not factoring in any further support to Switch at the current moment in the INR 600 crore. All of that will be short-term, by the way. As far as other CapEx is concerned, we are now actually pared it down, if you remember. We had started the year with INR 750 crore.
I think the team has come back and said that possibly it's more a realistic number of INR 600 crore. But as on date, in the midpoint of the year, we are hardly at INR 214 crore. Chairman, yes.
Yeah, just to add on, as we have said for Switch, the requirement over the next 2-3 years is close to $200 million-$250 million.
This would be for a range of buses and LCVs. Within the overall CapEx, since you asked about electric vehicles, Ashok Leyland would be looking at electrification of its truck range over the LCV range. The ICV and upward products, that would fall within Ashok Leyland.
Okay. Thank you so much.
Thank you.
The next question is from the line of Amyn Pirani from J.P. Morgan . Kindly proceed.
Yes. Hi, sir. Thanks for the opportunity. My first question was mainly a clarification on the upcoming BS6 Phase Two norms. So A, what is the kind of cost inflation you're anticipating? And B, is the implementation similar to what happened during BS4 to BS6 in the sense that will you have to clear all the inventory at the dealer end, you know, which could lead to a few months of destocking and wholesales coming down? If you can clarify that first.
Amyn, let me clarify the latter part of it first.
Yeah.
Ensuring one thing, yeah. This is not stuffing the pipeline.
Okay.
We have said that in the past, so we never stuff the pipeline. Stuffing the pipeline happens when your wholesale inventory is more, I mean, where the, you know, the retail sales are lower than the wholesale sales, right?
Yeah.
In our case, the retail sales will be equal to wholesale sales.
Okay.
In some, maybe the retail sales are more than the wholesale sales, which causes a concern for us. Because then what happens is there is no sufficient inventory in the pipeline. You see, the other thing that has happened, while we are looking at this, the working capital has also gone up. You know why? Because earlier, we used to have regional centers for distribution. Suppose a dealer wants the vehicle, all he had to do was to ask the regional center, and then the vehicle will be shipped almost overnight to him for him to make the sale. We used to carry the inventory not on their behalf, but that is we had a distribution which was different pre-GST.
Post-GST, what has happened is in, if you look at, you know, the overall cost-benefit analysis, we at some point in time had said that, "No, we will actually kind of close most of the regional centers and actually start selling to the dealers from the factory." Which means there is almost, at any point in time, there is an 8-10-day WIP, work-in-transit, to the dealers, which is to the account, because you're cutting an invoice, right?
Yeah.
That adds to the inventory which is shown as receivable. Actually, it goes to receivable part. The second part of it is the dealer also stocks up a bit because he's not sure about the immediate serving of the requirement given the distance that is there. What we are doing now is having seen the efficiency that GST has gotten, we are really looking at whether we should have central distribution points so that that will kind of help to keep, you know, the working capital more in inventory than receivable. Because once you cut an invoice, then it goes into the dealer receivable.
Yeah.
To answer your question, there is nothing that we have to worry about destuffing at the moment because our retail sales are same, if not higher than wholesale. Your first question was on the OBD2 requirement that is there. Here, we are working on this, but I think, we'll have to come back to you a little later on exactly what the cost impact is because we are working on options on this. Yeah.
Sure. Sure. Thanks for that. My second question is that, you know, the feedback that we're getting from the ground, you know, regarding one of the reasons why your market share has improved over the last 2-3 quarters is that as your BS6 offering has ramped up, and I think partly you answered it in the AVTR question also, it seems that you're able to offer a lower cost solution on the BS6 side. First of all, I just wanted to get your sense, is that correct? B, you know, how have you been able to achieve that and how sustainable that is? Thank you.
You're right. As customers are increasing the use of the AVTR product, they're recognizing that the total cost of ownership and fuel mileage that they're getting is much better than competitor products. I think this is a result of the overall development that happened during the BS6 process itself. You look at the consumption of not only the diesel but the AdBlue as well. Combined together, we are seeing a much better economy, fluid consumption than the competitor products.
Okay. Thanks for that. I'll come back in the queue.
Thank you. The next question is from the line of Chirag Shah from Nomura. Kindly proceed.
Hello. I hope I'm audible.
Yes.
Sir. Yeah. Sir, I have joined slightly late, so apologize if I'm repeating the question. Sir, anything on the defense revenue plus engine revenue in the quarter? And how it has moved sequentially Q2 versus Q1 versus Q2?
Yeah. Balaji, do you want to give the
Yeah. There's not much of a revenue on the defense side, Chirag. It is around INR 50 crores per quarter.
Just to share with you, Chirag, the reason why it's happening is not because of any. You know, this is a very government Ministry of Defence offtake-driven business. You know, we are expecting that the offtake will start in the second, third, and fourth quarter, yeah. You know, this is, see what we will do from the defense side, no? We are far more well-positioned than we were two or three years ago. Because, you know, three, four years ago, we had only the VFK kits and the Stallion kits which were there. Now, today, we have multiple products available, including, you know, the medium bulletproof vehicles, light bulletproof vehicles. We are transporting, you know, we have got vehicles which will transport missiles.
We have got vehicles where two of the large infrastructure providers, I can't name them, had chosen Ashok Leyland as the vehicle which will carry the, you know, the transportable bridges. You know, the retractable bridges. So there is a lot of technology that has come in, and both in armored and non-armored trucks. So once the government starts to make these orders, we believe that we are going to be pretty well-positioned to serve it, and you'll see our defense revenues actually getting better. Chairman, would you-
Yeah, I was just gonna add, as Gopal said, we do have a good order book, and the indications are that effective Q3 onwards, we should be able to start delivering. You will see by the year end, the defense volumes and revenues would be much, much higher.
Yeah, actually, you answered second part of my question. My question also was that for the futuristic products now, as an industry, everybody has been waiting. Any update or clarity that is emerging that now the defense, those, these revenues will start flowing in? Because earlier expectation was somewhere in 2022 or 2023, the revenue from defense, wherever you have seen technical approvals and trials that have been done would start flowing in. Is it on course or there is any delay? Any update if you can share would be helpful.
See, you know, what has happened, Chirag Shah, you know, we've as a country, of course, for a defense business, I mean, you know, security across the perimeter of the country is actually pretty needed. The second bit of it is that the government has been tackling COVID and its aftermath over the last two years. While they have been actually looking at defense, the procurement has not really started. Now, what we have seen, the recent announcements also is that the government has been talking about the defense preparedness of the country. I mean, as a normal strategic initiative, I'm not saying that there is anything to get worried about. We believe that the procurement will start, as Chairman had mentioned.
We are expecting that it's the procurement will start happening. These things are not something that we can predict so accurately. We can only predict a trend, and we can continue to invest in the business, which investments are not very high, by the way. What we are doing is we are offering various vehicles for applications, and we're keeping it ready. We are getting it certified by the Ministry of Defence, and we're keeping the offerings ready. We have won the tenders also. Now we'll have to wait for the offers to come in. Obviously, the government will place these orders because otherwise they would not have been floating these tenders and specs.
Yeah, yeah, Gopal Mahadevan, that's what we are trying to understand. When can we expect that? Because I understand that it's up to government, and beyond that point even we can't ride on that. I agree with that, sir. Sir, second question, just on commodities, I can just squeeze in. So if we look at our gross margin and this was net sales minus raw material, just like you said, we are back to where we were in Q3. Now, is commodity basket similar to Q3 levels for us? Q3 FY 2022, I'm referring to. Or it is more driven by mix? If you can help us understand that.
What do you mean by commodity basket?
The entire commerce. Steel plus aluminum, plus some precious metals, whatever goes, some engineered plastics, whatever goes in making the vehicle.
Yeah.
Because our gross margin as a percentage, Q3 was around 22%, and we are again around 22% in Q2.
Yeah.
What is driving this? Is it because commodity basket has gone back to that level or it is more of revenue mix which is driving it?
It is a mix of. See, there are three factors which will determine our margins, or maybe four factors. The first factor is commodity prices. You know, if they are coming off sharply, then you will see the benefit of it coming in. The second thing is what is the level of inventory we carry, not only in raw material, but also in WIP and FG. Nearly about. See, if you, in this industry, you will carry at least a month and a half of inventory. Not in absolute inventory, not in finished goods, but in various forms, including potential orders that we have placed with vendors, right? I mean, we can't renegotiate on that, right? So that will happen. In times of inflation, this also helps, right?
We have seen that there is a lag in our commodity price increase. This is the second factor. The third is the, as chairman had mentioned, the various initiatives that we are taking on VAVE across products to ensure that, you know, we are taking cost out of alternative material or design, et cetera, which again is a medium, it's a continued, improvement initiative that happens, right? The fourth one, which you rightly said, is mix. There is a confluence of factors that determine the commodity cost. As I mentioned earlier, we are looking at it on a vehicle-wise basis. Are we improving the raw material cost? We are looking on a vehicle-wise basis, are we improving the net realization after discount? While discount is one factor, we're saying, are we raising prices higher than the discounts to ensure that the net realization improves?
While we are doing that, you know, on a vehicle platform, you know, basis, we are actually improving. What happens is if there is a mix change, suppose we sell a little more ICV in a particular quarter, obviously the, you know, the mix will have an effect. It's a confluence of all four factors, yeah.
Okay. Lastly, on this industry volume growth, according to you, when does the base effect start kicking in? What is the normalized kind of volume for industry you would be happy with for 2024?
Sorry, can you repeat? What did you say? What kicks in?
The base effect, because as of now we also had a favorable base for volumes, hence we are seeing a very accelerated volume growth. From when does the base effect of volume start kicking, especially for medium and heavy vehicles? As 2024, what is the kind of volume growth that you would be happy with as of date? I know that number could change from here on, but as of date, what kind of volume growth is what you would be looking at for 2024 for industry?
Yeah. If you look at, if I may, take on that question. If you look at the last year, only Q1 was affected by the COVID. In Q2, there was a gradual increase in the total industry volume. Q1, if I recall, was around 30,000 vehicles, and Q2 it was around 53,000. Q3 was 64,000. Currently, in the first two quarters we have been doing around 75,000-80,000 vehicles per week, per quarter. This is the situation. You can judge where we are with reference to the numbers which we have talked in the last year. The base effect going forward may not be impacting in a bigger way.
By the last year volumes, especially now in Q4 was 94,000 and Q3 it was 64,000. You will not see the base impact, going forward in a big way.
Over to you.
No, the only thing that we are saying in reports here, we are saying that by the end of this year, as per forecast, the industry would be close to the previous peak, which was about 390 or 395 thousand. Right? It won't be at 395 thousand. That's not what I'm saying. Somewhere, you know, maybe close to that. What it actually means is the demand maturity curve is actually catching up quite fast. The second one we must remember is that the size of vehicles have also gone up in comparison to what it was in the past. You know, we have a lot more 49 tonners, 40-plus tonners, et cetera, which are actually coming into the overall industry.
I think we must also remember this is happening. You are right, and so is Balaji. There is a base effect in Q1 because last year Q1 was very low. We've seen that happening. You are also seeing that this year, I mean, this quarter again, the growth has been there, but not at the same high level as Q1 of the Q1 period. We should also be kind of clear that in the medium term this industry is set to grow if the Indian economy is going to grow because there is a multiplier effect vis-à-vis the, you know, the GDP growth that we are expecting in the country to happen. That's how we should actually plan our model.
Great. Thanks a lot from all of us.
Thank you.
The next question is from the line of Pramod Amte from InCred Capital. Kindly proceed.
Yeah, hi. This is related to working capital. Sorry to repeat this considering that interest costs are going up. It seems like almost like you added INR 2,000 crore into the working capital side. How much of that is towards the raw material inventory and how much is towards finished goods?
It is reasonably spread out, yeah, between raw material, FG and receivables.
Added to that, yeah.
The point is, you know, we don't provide that level of granular details. All we can tell you is that our working capital situation is very much under control. It is not, you know, in a sense where we have given you two data points. One is we are ensuring, and we have always ensured, that in Delhi our retail must be equal to wholesale, or retail should be higher than wholesale. Maybe a one-off month may happen where we have, you know, kind of wholesaled a bit in the last day and the retail has not happened. We keep track that we are not pushing stuff into the dealership pipeline. That's very important. Right? The second thing is we also are ensuring that our receivables position is strong. We review the receivables position.
We ensure that, you know, the collectibility of the receivables is fine and the aging is fine. Of course, as we mentioned, we do have, we are keeping a little bit of inventory to ensure that we are ready to serve the market and even because there can also be missed sales, which is awful to have just because we didn't have the inventory. I don't think there is any concern on the inventory side that you should get worried about. Balaji, how many days of sale is in net-net working capital?
Roughly five days of.
It's not significant at all. It's just five days, yeah. The net working capital.
Yeah. Gopal, I appreciate especially you have been managing and year-end you bring it back to literally a cash situation. The reason to ask is once you launch the AVTR platform, right, so there was supposed to be a lot of commonality of components and hence mix and match can be much easily done and cater to the marketplace. That was supposed to be one of the key reason to go for a modular. Hence the expectation that your working capital intensity should go down and whatever INR 300-400 crore you pay off in a year should also come in handy for you to fight out in the marketplace. Has it been achieved or you feel there is still a long way to go?
No, no, it is being achieved. It's not a long way to go. See, these things take time. You must remember AVTR was launched. It's a good question. AVTR was launched on April 2020. April 2021 was nothing. It was a complete washout. 2022 first half was a total washout. Only now, 2022, 2023 second half are we seeing this. This also takes a little bit of trial and error. If you really look at the launch of AVTR and the fantastic performance that this, you know, this range of products are having in the market, the real play on the ground has been less than a year. If you really look at it, you know, that has been the thing when the volumes have started to be kind of flow down into the market.
The second thing is, you see, AVTR brings in not only the raw materials, you are right. We will have fewer number of vendors, which is happening. We'll have fewer number of parts, which is definitely happening. Let me tell you this while you have not asked it, the modularity will be a strategic advantage for us when we are actually looking at even alternative fuels like hydrogen. Because what happens is the basic structure of the vehicle is. It is adaptable without a cost or a significant cost. You will see those benefits coming on the RM side or on the WIP side. You cannot say that AVTR will result in lower SG or lower dealer stock because that has got nothing. That is a sales strategy, okay? It's not a manufacturing strategy.
Modularity is more a manufacturing quality and serving the customer with various options that are available. Which is why, again, AVTR is doing well, because, you know, today we are able to offer vehicles that the customer needs more than what he wants. We tell him his needs on a hub application segment basis, and they are very happy with the solution that we are able to provide. Balaji, you want to say something?
Yeah. On the working capital side, Pramod, we also have to take a look at the following metal cost scenario. If we cannot stock high, but at the same time, you know, we cannot also run on a depleted stock level. Depleted stock level will lead to loss of sales. At the same time, you know, if we do a high stocking, then it becomes an issue, especially, you know, in the following raw material price scenario. We'll have to be extremely careful, and it is being managed very well, Pramod.
Sure.
Yeah, thanks for the detailed answer. Second one is with regard to the demand front. Considering that you are a very strong player in the tractor trailer segment, which caters specifically to the export-import segment. There seems to be some weakness on the export front, and the things are changing much faster on the weakness there. How are you seeing the demand specifically to that segment? And does it have an implication for your product mix and profitability?
Export.
In the export market, as you correctly point out, there are certain challenges as a result of the global theme. We are seeing, in fact, many of the Middle Eastern markets perform exceptionally well, and that is a segment that we're strongest. We are also introducing new products into those markets, and we've extended the network throughout the African continent as well. Over the last 6-9 months, 15 new distributors have been appointed. Overall, we feel that we will end the year much better on the export front than last year. Volumes will continue to grow as a result of the enhanced network and new distributors, and many more products getting introduced for the export market as well.
Yeah. Thanks. I was also looking for your tractor-trailer segment, which has exposure to more of export goods or import goods to that extent.
Which one? Tractor-trailer. You mean the demand for the tractor-trailer in India?
Yeah, exactly. Because it caters to a lot of port traffic and export-import traffic.
It has been growing well. Yeah. I mean, that's why I said we have been looking at it geographically and product wise also. If you look at our tractor-trailer segment, we have actually looked at our market share there. In that segment, approximately, I'm giving you some numbers, has been about 10 basis points. I mean, 10 percentage points more. We've moved from somewhere around 18% to about 26%. We have been doing well, I mean, across segments.
Yeah. In fact, the overall share of tractor-trailers, you know, in the overall MHCV segment, that has also gone up from 9% in 2021 to 13% now.
Sure. Thanks a lot.
Thank you.
The next question is from the line of Vipul Kumar Shah from Sumangal Investments. Kindly proceed.
Hi, sir. What is the share of spares business in our revenue?
About what?
Share business will be around 7%. 7%-8%.
7%-8%.
Yeah, 8% of the overall revenue.
Okay, sir. Thank you.
Thank you. Due to time constraints, we'll be taking the last question. It is from the line of Raghunandhan N.L. from Emkay Global. Kindly proceed.
Thank you, sir, for the opportunity. Sir, my first question was on tractor-trailers. As you indicated that the company has been successful in gaining market share and slowly inching towards the 30% mark. Dealers indicate that Ashok's four-cylinder vehicle has done well versus competitors' six-cylinder vehicle. Just want to understand, how do you see this market share gain trajectory? Because we used to have more than 40% share in FY 2019. Do you see the recovery towards those levels?
Yeah, we'll see. I mean, you see, I'm not too sure about the four-cylinder, six-cylinder that you mentioned, but certainly, all I can tell you is this, predominantly across spectrum of products, but certainly across all zones, we have been gaining market share in the current quarter, and we will continue to pursue that growth as we move forward, yeah. You know, it's very difficult to say one segment, one particular thing, whether we will continue to get a particular target like 40%. Certainly, you know, we want to ensure that we are getting into a higher and higher presence in the market, which means we have to enhance our broad strategy. You know, our broad strategy is this.
Instead of just talking about purely M&HCV market share, our broad strategy is to pursue domestic growth and share of business, but profitably. The second one is to grow our LCV business because LCV is a very, very important vehicle across the world. The third across, I mean, for export, you know, numbers as well, because globally, for every M&HCV sold, we have about 3.5-4 light commercial vehicles sold. So it's a very important thing for us. The third one is also to ensure that we grow our international business. You know, that's going to be very, very important. So we will pursue all three strategies, yeah.
Thank you, sir. On Hinduja Leyland Finance, so basically the segmental results have been improving quarter-on-quarter and year-on-year. Can you talk about the trend in collection NPA, also the timeline for listing?
Yeah. You see, as far as the listing bit is concerned, maybe I'll ask.
The listing is expected, of course, based on all the regulatory approvals, probably around June of 2023.
Right. As far as Hinduja Leyland Finance is concerned, it is continuing to perform well. Its total, you know, AUM is around INR 31,700 crore. It posted an income of INR 1,620 crore and a PAT of INR 215 crore, approximately about 13%. Its GNPA is about 6.3% and an NNPA of about 4.4%. Numbers are pretty good. You know, just as what the chairman had mentioned about the, you know, the IPO, the, that we are looking at post the merger with NXTDigital, which the company is looking at. The company has also already raised capital of nearly INR 910 crore from qualified institutional buyers.
There is no capital concern or request now that will come up from HLF to us. Secondly, they have sufficient capital for that growth. We must remember there is another subsidiary called Hinduja Housing Finance, which is a HFC, which is doing exceedingly well, growing very fast. We also have another joint venture between both Ashok Leyland and Hinduja Leyland Finance, which is called as Gro, where it's looking at solutions, both digital and financial, which we believe will be a multiplier effect for both our businesses. Both for Hinduja Leyland Finance as a finance company and Ashok Leyland as an OE.
you know, the erstwhile solutions business of Ashok Leyland has been transferred to Gro, and we have actually added some of the financial solutions, including freight financing, et cetera, into that, and you're going to hear a little more about that in the future.
Thank you, sir. Thanks for the detailed answer.
Thank you.
That's all from my side.
Thank you.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
I would like to thank everyone once again for your interest. As we said, we are very much on an upward trend in this industry. Our products continue to perform well across all segments. Market share has grown in each and every zone. New products will be introduced on a quarterly basis. We do feel that the growth that we have seen in the first two quarters will continue going forward as well. Thank you very much.
Thank you.
Thank you. On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.