Q3 could be subdued but Q4 looks promising: Ashok Leyland

The third quarter of current fiscal may be weak on the back of demonetisation, says Gopal Mahadevan, CFO Of Ashok Leyland. But the fourth quarter looks very promising as the initial negative effects of the cash ban fade away. November was not very good for the commercial vehicle space but Ashok Leyland was the only medium and heavy commercial vehicle (MHCV) manufacturer to grow in the month, he says.He expects the government to focus on growing infrastructure and rationalisation of taxes in the upcoming Budget. He says the commercial vehicle segment's growth along with the entire economy hinges on what is announced in the Budget.The company gets a majority of its demand from South India. But the company witnessed a setback in demand from the region in the month of November.Below is the verbatim transcript of Gopal Mahadevan's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18. Anuj: Have you seen on ground situation improved a bit after the initial knee jerk reaction to demonetisation? A: With respect to demonetisation I believe that the initial negative effects are slowly waning out. We should expect that things should get better in next couple of months. So on ground we are seeing some traction happening and hopefully in Q4 we are looking forward to pre buy because of Euro IV implementation from April 1. Sonia: November was not the best month for the company. Are we right in understanding that Q3 could be a washout and the uptick could be seen only in FY18 onwards? A: November was not a great month for the industry but Ashok Leyland was the only medium and heavy commercial vehicles (M&HCV) manufacturer who grew in that month compared to all other players. The Q3 cannot be a great quarter given so many moving parts in it including demonetisation and what we also call as rebadging for the coming new year of 2017, but let us wait and watch what Q4 has to offer because we believe that there should be certain amount of pre buy that is expected in Q4 because of Euro IV rollout from April 1, so internally we are planning for a slightly better Q4. Anuj: Do you still hold on to your double digit volume growth guidance for FY17 or would you like to scale it down? A: I do not think we are going to give any guidance at the moment because there have been so many things that have happened in the economy of late. I think one should wait and watch how the Q4 is. The Q4 promises to be a good quarter, as I mentioned earlier, so if that happens maybe there could be a marginal growth but let's wait and watch. Sonia: Since you are saying that the situation has improved a bit, has the industry and Ashok Leyland gone for any kind of higher discounting for your products in order to push sales in the slow market because that is something that we had seen in the past. So have we seen any discounting this time? A: Ashok Leyland, as a policy, never leads in a discounting game. We do not like to purchase market share. We never have done that and we possibly will never do it. If you were to look at it, Ashok Leyland is the most profitable commercial vehicle manufacturer in the country and even in the last quarter we had a healthy EBITDA posted. We would continue to focus on profitability and return on capital employed while we do have to match pricing but we certainly do not chase pricing. So for us, we do not sell products by discounting - that has never been our philosophy.Anuj: Some truckers associations have told us that the long haul truck operators have come to a standstill. Is that true and if that is will commercial vehicle (CV) manufacturers take a hit? A: India is one of the larger cash economies in the world and when all the cash gets sucked out, suddenly you can expect that there will be certain amount of disturbance, short-term, that occurs and this is exactly what has happened. It has happened in truckers because a lot of transactions happen through cash, not because its unaccounted cash but because it is easier to handle so wages of drivers, petrol expenses, lube expenses, any of the other expenses that a trucker incurs, is done in cash. However, when the cash gets sucked out and there is no availability of cash in the market, most certainly the industry does get affected, but things are settling down a bit. There is a lot of recovery that we have seen, not only here but also in other industries, so we will have to wait and watch. I believe that in the next couple of months things should slowly pan out. Sonia: What is the situation in South India right now where you have the highest market share? Have we seen any reduction in fleet movement especially for sectors like metal and mining for which most of your trucks are used? A: We did see some blips but we are expecting some recovering in Q4. South India, where we are one of the largest market share holders, had seen some dips but we saw a bit of recovery in certain sectors in the month of November. The Q4 should see some improvement as we move forward. Anuj: Everyone tells us that economy is pushed by nearly three-six months due to demonetisation but do you see the momentum coming to the industry post six months or could there be further delay? A: I believe so. I do not know whether it's one or two quarter issue. It is very difficult to predict certain things but the whole country is also waiting for the announcements that the government would make in the Budget, a lot of expectations are hinging on the Budget announcements. If that were to happen and there were some favourable announcements which will trigger the growth in the country, we could see a much faster growth kicking in. Having said that the company\\'s growth also hinges on the general economic growth, so if we see the growth coming back, it would augur well for the commercial vehicle industry because in simple terms the commercial vehicle industry transports the growth. If we see the growth coming back, it would do well for the industry as well as for Ashok Leyland, who has been a leading player in the country.