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Last Updated : Jan 04, 2018 08:44 PM IST | Source: CNBC-TV18

Expect better margin in Q3 with sales volumes moving higher: Ashok Leyland

Ashok Leyland is on a tear with a record number of commercial vehicle sales in December 2017. In an interview to CNBC-TV18, Gopal Mahadevan, CFO of the company spoke at length about the same.

CNBC TV18 @moneycontrolcom

Ashok Leyland is on a tear with a record number of commercial vehicle sales in December 2017. In an interview to CNBC-TV18, Gopal Mahadevan, CFO of the company spoke at length about the same.

We are seeing new truck demand from chemical industry, fast moving consumer goods (FMCG) sector and e-commerce, said Mahadevan.

According to him, goods and services tax (GST) has had a positive effect on demand.

He expects 10 percent growth in industry volume by the end of FY18.

He further said that fourth quarter should be good for the company.

Talking about market share, he said we have done a little better in southern region this time. Our market share in south India is around 50 percent and PAN India has risen to 25-30 percent.

Southern market is very important for us, but so is rest of India, he added.

On margin front, he said we expect better margin in Q3 with sales volumes moving higher.

There is no reason to offer discounts as demand is very high, Mahadevan added.

Below is the transcript of the interview.

Sonia: You have seen this time around 19253 units of sales. I have not seen this kind of a monthly run rate from Ashok Leyland forever. What is happening in the market now?

A: There are two reasons for it. I had mentioned in the last quarter also and at that point in time people were a little doubtful about it but we thought that at the end of the year we could actually see a 10 percent growth in the overall total industry volume when the total industry was significantly lower than last year. What we are actually seeing is a pullback in demand.

In pre-dominant part of the country, the regulation has driven rated load, so we are seeing more trucks being bought. GST I believe has also had a positive effect because we are seeing productivity of vehicles going up. We had mentioned that if we any sector improving its productivity, we will see more investments happening.

Thirdly, I believe that there is a lot of activity that has started off in infrastructure which is driving this demand and we are seeing a lot of tonnage going up. While on a YTD basis, it looks like the TIV has gone up by 10 percent but if you were to look at it in terms of absolute tonnage, I believe the growth in the TIV would be something close to about 17-20 percent.

Latha: Is this a new normal – 20 percent, compared to the last 24 months?

A: It is very difficult to say at this moment because it is just one month. I don’t get too excited by either a big upside or too crestfallen by a little bit of downside. However what I can say is that, there is definitely a pullback that has happened. January seems to be a good month also. I think Q4 should be good but we must remember that last Q4 was a pretty high number because of the pull that we had because of BS III to BS IV.

There are 3-4 things that have helped this volume, one is, the base effect itself. Q3 of last year was pretty low but the general economic activity in the country has been far better than what it was in the same period last year. So, in states like UP the demand is actually going through the roof. There are a lot of infrastructure project announcements, regulation is helping us because of rated load. For example cement, steel sector vehicles are now on rated load. A lot of companies, the final beneficiaries of freight who are using this freight like chemical industry, FMCG, even e-Commerce companies, steel companies, they are also insisting that the trucks have to be refreshed. It means they are insisting that the fleet operator should have the latest generation trucks. So, you are seeing a lot of replacement demand kicking in.

Fourthly, people have found out that it makes sense to move. For fleet operators it makes sense to move to the higher tonnage of vehicles. So, if you look at it over the last four five years, the tonnage has actually moved from somewhere around mid 20-25 toners to 31-41 toners and now we are talking about 49 toners. It makes a lot of sense for operators to move to the higher tonnage vehicles because of the total cost of operations. So, I think it is a confluence of factors. I would still say that Q4 looks reasonably good.

Latha: The CV business normally moves in a three year cycle. Do you think a new cycle is getting triggered here?

A: Again very difficult to say because my personal viewpoint has been that the concept of very large cycles – ups and downs are actually getting contracted because with information being available and the country becoming truly global, what we are actually seeing is contractions and expansions happening very quickly. So, organisations have to be very nimble footed to capture the upside when they happen. There is a lot of complex production planning, there is a lot of sales forecasting that our guys have to do in ensuring that we are able to capture the market.

I keep the CV industry especially the trucking industry very simple. What it actually does is, transport GDP. So, if the GDP were to grow, I think that we would actually see a good pull in CV industry.

The passenger side of it has been pretty stable, it has been growing and that also augurs well. There are lot of positives that are happening. As we move forward, we are going to have the CV industry becoming more and more par with global standards at least but for Indian conditions. So, when that happens, it is going to be a very positive for the CV industry as well.

Sonia: You guys are market leaders even in places like Southern India. I want to understand, is there a significant amount of market share gain that you are seeing in South India, is there more amount of construction activity, more tractor trailers being sold there?

A: We have done a little better in the southern region as well this time. Today if you look at it in Ashok Leyland, we are no longer a pure play south company while our market share in the south are around 50 percent. However on a pan India basis what we have done is we have grown quite significantly, whether it is east, west, central or northern regions, the shares are around the range of about 25-30 percent. So, for every three trucks that are sold in India, maybe 1.25 of them comes out of Ashok Leyland.

So, for us the southern market is very important, it is very close to us, we will continue to focus there but the rest of India is also important. So, that is why you have seen our networks actually going up quite dramatically over the past 5-6 years. From nearly about 300 points of presence, we are now at something like about 2800 points of presence be it in terms of sales, service or spares.

So, southern markets are important, we have seen growth and typically December-January are good for southern markets. However the growth has been there in all other regions as well.

Latha: How would operating margins move from here on? Along with growth has come higher fuel prices and higher commodity prices. So, will it be 11 percent or will growth allow you to pull it up?

A: I don’t know where you got this number of 11 percent. Last quarter we did about 10.1 percent. I don’t want to forecast anything for Q3 but with the volume upside that has happened, we would see better operating margins certainly because operating leverage will kick-in.

However there are two points which you rightly mentioned. One is, the commodity prices themselves going up and the second one is a bit of a concern, that is the level of discounting that the industry is indulging in. There is no reason for us to be doing this when there is this kind of demand. I think we should be far more innovative in capturing a customer than just merely offering discounts and getting the customers eye.

So, for us at Leyland we are looking at total cost of ownership, we are looking at how are we penetrating the markets, what is the quality of service, are improving in day on day, is the downtime of the vehicle coming down significantly, are we able to offer a more comprehensive solution to the customer, are we using digital, how are we reaching the customers. So, we are looking at this whole thing a little more long term or medium term.

Of course there is a price war in the market but we are a very reluctant player in that game. We believe that it is not good for anyone.
First Published on Jan 4, 2018 09:49 am

tags #Business

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