Defence orders will help improve margins: Ashok Leyland

Vinod Dasari, managing director, Ashok Leyland is hopeful of a revival in the auto sector. In an interview to CNBC-TV18, Dasari says the company has stopped giving any discount as it cannot afford it in the current economic conditions.

Moreover, he expects the company to start posting better margins once defence procurement orders come through. Also read: Domestic Two-wheelers volumes to remain flat in FY14: ICRA
"I have been told that defense procurement has been withheld because of budgetary constraints. If defense procurement, infrastructure and mining orders comes back added with JNNURM, it will provide a fillip to the industry," he adds. Below is the edited transcript of Dasari's interview to CNBC-TV18.
 
Q: You have talked about 4-5 percent volume growth through the course of FY14 but could you walk us through what do you expect to see even in the latter half of this calendar year in terms of where you think you will end up with volume growth and with sales you think you could generate every month?
A: We expected the market to fall by about 10 percent in the first half of this year and it is exactly in-line with what we had said will happen. However, we had also said that in the second half of this year, hopefully the market would turnaround and it would be upwards of 20 percent higher than last year’s second half. So far, it is trending that way and I hope that the trend will continue. Q: What also did not go down very well with your investors is what this week market is doing to your margins which have collapsed to nearly 5 percent, do you see even more pain there or sustained pain there?
A: There are three aspects to this. It is partly the heavy discounting that was happening in the industry because of several new players. We had to follow, but I think we have not put a stop to it and said that this chasing number at any cost was not the right strategy. We put a stop to it about a month ago and we will continue to live by that.
Secondly, when one looks at Ashok Leyland, the margins will look smaller because of the fact that we sell light commercial vehicles (LCVs) now which come at a substantially lower margin than heavy commercial vehicles (HCVs). So, one is comparing apples to oranges.
Thirdly, the overall export market and the domestic market itself is not so buoyant so the pricing levels are weaker than what we expected them to be. But I expect it to recover. Q: What exactly is the situation right now, if you were to map it from the start of the year to now, would you say you are seeing any recovery either in terms of the heavy discounting being removed or seeing a little more traction in terms of demand?
A: I do not see much demand traction but I see some green shoots here and there. I think the highway projects being released is a good sign, there is some hope that the mining projects will also start.
The finance minister had announced procurement about 10,000 buses under the new Jawaharlal Nehru National Urban Renewal Mission (JNNURM) scheme, so I think that is likely to come up. I am hoping that the government also releases some funds to the defense sector, so that the vehicle factory at Jabalpur and the other commercial vehicle manufacturers can place orders.
I have been told that defense procurement has been withheld because of budgetary constraints. All of these are hopes. If defense procurement, infrastructure and mining comes back added with JNNURM, all of this are very likely to happen, I think this will provide a fillip to the industry.
As far as discounts are concerned, we have stopped giving it as we cannot afford it. I am sure others cannot afford it either but that is their business to handle. I think the margins will also improve once the defense and other businesses will start to come back.