Nov 09, 2012 03:05 PM IST | Source: CNBC-TV18

Tough, but will try to keep margins over 10%: Ashok Leyland

Managing director Vinod Dasari said, while it may be difficult, they will be able to maintain margins over 10%.

Hinduja Group flagship company Ashok Leyland registered 7.45 percent dip in net profit to Rs 142.59 crore for the Sepetember quarter. It had posted a net profit of Rs 154.08 crore in the same quarter last year.

Its total income rose to Rs 3,319.91 crore for the quarter under consideration from Rs 3,128.27 crore for the corresponding period previous fiscal.  The company’s better than expected margins boosted earnings.

Speaking to CNBC-TV18 about the financial performance managing director Vinod Dasari said, while it may be difficult, they will be able to maintain margins over 10%.

"Given the competitive environment there will be some challenges, but we will also have to focus on reducing our material cost, so that we bring back our margins up north of 10 percent," he elaborated.

The stock gained more than 5% today. Broking firm CLSA has upgraded the stock to a buy with a target of Rs 32.

Below is the edited script of his interview with CNBC-TV18’s Udayan Mukherjee and Sonia Shenoy

Q: What the street has like the most is the 10 percent plus operating margins for Ashok Leyland; do you think it’s sustainable?

A: It will be difficult but I think we will be able to sustain the 10 percent plus operating margins. I think given the competitive environment and low Total Industry Volume (TIV) there will be some challenges but equally we will have to focus on reducing our material cost so that we bring back our margins up north of 10 percent.

Q: Margins usually do much better the higher the contribution from the medium and heavy commercial vehicle segment, do you see any pickup over the next few quarters in the medium and heavy commercial vehicles (MHCV) segment?

A: I think we were all hoping that this quarter and next quarter there will be a significant improvement in demand but October to October, we saw 20 percent drop in the medium and heavy commercial vehicles. So I think there is a lot of pent up demand coming. I believe that some of the infrastructure projects are starting to happen; you can see that because the tipper market, which is usually a leading indication of where the medium and heavy commercial markets will go, the tipper market is actually doing exceptionally well. If that is the case that means the rest of the market is just about to follow.

So I am hoping that maybe even towards the late end of this quarter of early part of next quarter and all of next quarter will be a good quarter.

Q: How is the buses segment doing?

A: Buses are doing pretty good. I would say that everybody is waiting on the next round of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) II as they call it. If you recall about a couple of years ago we had JNNURM funding for about 15,000 buses, which lasted about a year-year-and-a-half. The second round of this is coming up which is about 20,000 buses. We expect to be the market leader in this just like we were last time. We continue to maintain our leadership position and the JNNURM II, will give us the chance to launch our patented ‘Jan Bus’, which is the world’s first front engine full flat floor bus with only one step.

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Q: Some other sectors have been complaining about lack of decision making and sluggishness in government orders. It has been shown up in Canteen Stores Department (CSD) sales for a few consumer companies. Have you witnessed any sluggishness in demand from the government segment?

A: Not really. There is a slight delay in the state transport undertaking (STU) segment. But that is usually only about 5 percent of our sales to a maximum of 8 percent of our sales usually in a year. I think all of the state transport undertakings are waiting to see what will happen in the JNNURM II. Finally all the specifications we settled, so that there aren’t 20-30 different types of specifications, one for each state. There is commonality across each of the states.

Now that that’s resolved I am hoping that late December or early January the orders will be starting to come, the tenders will be starting to be issued. I do not see an impact of this happening in this financial year but next financial year you will see a significant increase in state bus transport requirements coming basically from JNNURM. We are expecting roughly another 3,000-4,000 vehicles to be sold in state transport even in the balance of this year because of the orders that we are already having on hand.

Q: What are market share trends like in the commercial vehicle segment now over the last two quarters, particularly the quarter gone by?

A: We have gained market share from about 23 percent in the first half of last year to 26 percent in this year’s first half that is about 2.93 percent market share. Interestingly we gained market share across the entire regions and it wasn’t just in south or one particular region; we gained in all the regions. That is a clear testament to the fact that our products are performing very well because in this industry it’s not a consumer sale, it’s a B2B sale. So a customer only buys our vehicle if he finds that our product is providing him enhanced profitability.

I think two other things that helped. One was a significant and continued increase in our network. We have more than doubled our network over the last couple of years. It is interesting that in the last quarter; nearly 20 percent of our sales were coming from new dealers and in new states almost half of our sales were coming from new dealers who we had appointed in the last couple of years, without any loss of sales to the existing dealers. So that is giving us the boost.

Lastly, the brand campaign that we did with Mahindra Singh Dhoni especially in the regions outside of south, we have gained far more exposure than before and that is also helping. While you cannot put a direct correlation between a television advertisement and sales but that did have an impact overall in just creating the awareness about Ashok Leyland even more.

Q: Are you getting more confident that the down cycle in the commercial vehicle segment is slowly coming to an end and you may have passed the worst of the hump?

A: I hope so. I think we are just about at the bottom. I think it is going to start to recover. But it is flat across all segments. There are only two segments in the entire automotive industry which are doing well. Our ‘Dost’ seems to be doing exceptionally well in a segment that is growing. We have launched it only in eight states and we are already number one in those states, we are at 19 percent regarding all India market share. The second is the sport utility vehicle (SUV) segment where we are not present but in all the other segments the market is flat, so our focus will be a continued focus on the customer’s profitability and thereby get a higher market share.

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