Likely to achieve 30% mkt share by FY10 end: Ashok Leyland

Q: What kind of volume projection one can look at for Ashok Leyland? Industry or analysts estimate it between 60,000-65,000 vehicles?

A: The industry is going through a very important turning point. IThe second quarter volumes have exceeded in certain important pockets like multi-axle active vehicles, heavy tractor trailers, etc. although the total number looks into the negative part. So in terms of the volume growth, one can certainly expect a run-rate above 20,000 vehicles per month for the total industry. Ashok Leyland should be clocking in at the rate of about 5,000 to 6,000 vehicles in the next three months to reach to a level of about 8,000 vehicles per month in the last quarter. I would say that Leyland can reasonably hope to achieve anywhere between 62,000-63,000.

Q: What kind of attendant margins would this 20% kind of volume growth come from? Would you be able to hold 10% plus margins or have material prices started hardening once again which might put some pressure going forward?

A: We will make all our efforts to maintain the second quarter margin of about 10.5%. This incidentally happened because of two major reasons. One is the pricing action that we took in October and July, the other one is the cost cutting that we did, more particularly the reduction in the material cost that we secured from our suppliers for whatever cost increases we granted to them in the first half of the previous year. This has coupled with the volume increase and pricing action. We again took one more pricing action in October. It should give us a hope that we should be in a position to maintain this 10.5% levels. Against this we have got two dark clouds, one is the pressure coming from the steel, rubber and aluminum sectors where the cost increases may have to be there. I must add that the industry has also been demonstrating its ability to pass on the cost increases. Hopefully we should, if such a situation happen, protect our margins and pass it on to the end customer. The second is the concern in terms of the a mix of vehicles with the high revenue, low margin percentage for the sale to the state transport undertakings. This is because the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) supply will only happen in the second half, more particularly in the third quarter. So something to the order of about 11,000 vehicles needs to be supplied to the JNNURM side, of which Leyland will be supplying about 5,100 or so. All these can affect the margins in terms of profitability. However, in terms of the absolute profits, one can reasonably be comfortable with the volumes growth. We should be able to achieve it.      

Q: What about the inventory situation? Where does that stand at this point for Ashok Leyland and have you been able to scale down in inventory levels this quarter?

A: The decision we took in May 2009, has been very strategic. We told our dealers that we will operate our cash and carry system, which has enabled us to bring down the total working capital from a level of about Rs 1,600 crore to about Rs 900 crore. Almost 45% drop has happened and most of it has happened only at the debtors level because it is all in cash and carry. With the run-rate somewhere closer to 6,000-7,000 in the coming months, I would say our current inventory levels of about 5,000 or so is reasonably adequate, which will translate to about 20 days sale. Hence, I would look forward to more of reduction happening in the production inventory and also in maintaining our cash and carry system, which has helped us to reduce our interest cost in the second quarter by about Rs 9 crore. So this strategy of cash and carry, even though in the market place the other manufacturers offer 30 day credit to the dealers, in our view has helped us in bringing down the cost substantially.

Q: What do you expect to see by way of volume growth in the bus segment? This was considered the one that might move at a faster clip in order to fund the needs of the Delhi government and the Commonwealth games.

A: In the first half the total volume registered in the bus segment was around 17,000 for the industry. I expect that the second half will be more than 32,000-33,000, which means almost doubling. Of that more than 50% of that 32,000 will be coming towards the sale to the JNNURM supply as well as to many of the state transport undertakings which are now coming up with substantial orders. In fact, Leyland itself is sitting on something like 3,700 vehicles order together with the JNNURM supply of another 5,100. We have got on hand an order of 8,800 vehicles to be delivered in the second half, which is fairly a substantial amount. So I expect the bus segment to significantly grow because of these order book positions.

Q: How is the Southern part of the country looking in terms of demand? We are getting a sense that the recovery from there is a little tardy. Our checks with vehicle financiers also throw up that cement companies are experiencing trouble and that is a large market for you. Would you say that the market is relatively more sluggish or is it showing signs of picking up?

A: You are very correct that this particular south market, particularly in the tipper segment has registered as significant de-growth, which could be attributed to many of the slowdowns in the mines as well as in the construction activity. However, if you go by the orders that have been awarded by National Highways Authority of India (NHAI) for the road building activity for the corridor, north-south-east-west corridor building phase. We find that more than 40% of the orders are been granted for building roads in the south side. According to me, the south has suffered in the past. In the coming months, I would expect both south and the Maharashtra belt to register a significant growth in the road building activity. Consequently, Leyland should be benefited by this because we have a very strong presence in these two markets.

Q: You have managed to recover some of your lost market share in Q2 which you got back to 27%. Do you think you can claw back to 30% plus by the end of the year?

A: This is exactly our target that we should move towards. If you really look at the success in the last seven months ending October, you would find that month over month we have been not only increasing in volumes but also improving in our market share. We do believe that we should reach this 30% level a very shortly. The south and the western markets are going to register a significant growth.

Q: Some analysts were a bit cautious that you didn’t give out a specific guidance in terms of margin improvement. But you did say that it could be improved slightly. Are you confident that it can hold at 10.5% and only scale up in the next couple of quarters?

A: We need to be cautious when we make these statements. I must say that the volume play, particularly if you look at 62,000 or 63,000 level, it actually means that we are doubling our volumes between the first half and the second half. The volume play itself should give us that benefit. But I won’t be able to say beyond this because we have also the pressures coming on the material cost side as well as on the poor mixed coming out if the JNNURM supplies.