Ashok Leyland, India's second largest commercial vehicle (CV) manufacturer, on Wednesday said that infrastructure is driving high demand for trucks in the country.
In an interview to CNBC-TV18, Vinod Dasari, managing director, said that shares of Ashok Leyland and all the other associated companies dropped substantially after the announcement of new axle norms by the government.
Watch: No impact on 60-65% of vehicles due to new axle norms, says Ashok Leyland
Dasari said, "We will have to put in somewhere in the neighbourhood of Rs 1,000 crore in the next couple of years and half of that is for capability building."
Edited excerpts: Q: Since the last time we spoke, there have been a few clarifications that have come through but in all in all, do you think that all the confusion has been cleared or do you expect any more clarifications from the government?
Let me provide the clarity that I was trying to provide to the media as well as to the investors, because they are somehow spooked by this new regulation that came. I hope by now, everybody realises that 60-65 percent of the vehicles don’t even have any impact of this, because they are volumetric like oil tankers or car carriers or white goods and so on. For the balance 30-40 percent, the assumption was that they were already overloaded anyway, so I don’t see any impact.
But nevertheless, assume that they were not overloaded and now they will overload to the new level, which was previously 25 percent is now only 15 percent. So I expect the impact to be about 3-4 percent only. That is the first thing I wanted to clarify.
Second, is it still not clear whether existing vehicles are allowed. As far as we know, it is vehicles that have been produced but not sold, which are allowed to have this norm, because vehicles that are in operation, there is no way for the original equipment manufacturers (OEMs) or the insurance companies to allow for a higher norms than previously regulated. OEMs have written to the ministry saying that existing vehicles that are already in operation, we will not be able to guarantee the safety on them, because the customer might have modified them.
So, there is lack of clarity on vehicles that are in operation. Yesterday, the regulation that came showed clearly that the vehicles, which are produced and yet not sold, that we are okay with and it doesn’t require Automotive Research Association of India (ARAI) approvals, so I am happy with that. That is the clarification that has come.
Previously, people had sought 25 percent increase and the entire industry would fall. First of all, it doesn’t affect about two-thirds of the market and even on the balance, it only affects by 15 percent in the worst case which means 3-4 percent impact for the full year. Nevertheless I remain bullish for the full year as we had talked earlier.
Q: You had earlier guided for 10 percent volume growth for FY19, would you look to revise it higher given that this confusion is now out of the way, there is hardly any impact and also we have seen improvement as far as demand is concerned?
Just this confusion that was created dropped our share price substantially and for all the associated companies including banks for some reason, because it was just the confusion, it doesn’t mean 20-25 percent drop in the market. It translates only to about 3-4. But last one week or so, I have travelled extensively throughout the country, met all our dealers and all our frontline people and I must say that the demand is very strong. Usually 20 percent of the demand in our industry comes directly from infrastructure, indirectly maybe about 30 percent. Right now, it is about 40 percent and we cannot meet that demand. Just our company would have lost at least a thousand vehicles a month, because we weren’t able to produce fast enough even though we had forecasted a higher demand. So, infrastructure is driving a huge demand.
The second part of the demand is that because of gross domestic product (GDP), now with the festive season coming in and the government having reduced the Goods and Services Tax (GST) rates on white goods – by the way, white goods, ecommerce, car carriers, cars and scooters, all get transported only by trucks and none of that get affected by axle loads. So, as such I expect an increase in demand.
In fact, I was revising the growth norms from about 10 percent that I had previously stated to you that I think we will grow at least by 15 percent. I am not shooting for headline, I am telling you what I heard in the market. If you want a headline, next year we will be 30-40 percent growth in my opinion.
Q: For Ashok Leyland, what might this translate into topline, headline revenue growth for FY19, maybe some sort of a band that you can give us to work with?
You guys always try to pin me down to a number on revenue and margin. The revenue growth will be faster than the total industry volume (TIV) growth by almost a factor of 1.5, because it's no longer relevant just on the number of trucks, because the types of trucks we are making are bigger and bigger and you will see two launches happening from us. The first one will be end of this quarter, which will be the world’s first five axle truck that can now lift four tyres. It has never been done anywhere in the world before. So, we are launching that, we have showcased that. So that will change the industry dynamics quite a bit and give us a substantial revenues and hopefully market share also.
We are also launching a whole range of high horsepower tractors. This is required for the infrastructure demand and this will continue for four-five years, I don’t think this is like a short-term thing, pre-election thing that people had said. Nobody can build a road that fast. The number of contracts that I am seeing is huge.
Q: I want to revisit what you said – the growth guidance for the industry from 10 percent earlier, you are saying it could be 15 percent in FY19 and you are saying 30-40 percent growth is what you are expecting for the CV industry in FY20 or is that over the next two years?
No. In FY20 alone. If you look at all the markets where they have gone to Euro-VI and look at the pre-buy. The pre-buy that happened for India for BS-IV, that means the year before we got into BS-IV, is very small compared to the pre-buy I expect before BS-VI comes. Remember BS-IV increased the cost by 4-5 percent whereas BS-VI will increase the cost by 10-15 percent. As such there will be a tremendous pre-buy. All the countries in the world have had 30-40 percent pre-buy before BS-VI. What is happening interestingly as I met the customers across the country, they are saying when it was BS-IV pre-buy, there was so much demand you guys ran out of capacity and you increased prices. I said obviously if the demand surpasses supply we will increase price. So they said why not buy it now because now we will be allowed to use the vehicle at least for 20 years and I do not have to deal with the BS-VI cost increase and all the potential price increase of pre-buy. I think that is also going to add to our demand but that is difficult to state how much – that’s the icing on the cake.
Q: In order to service this new demand or this fresh incremental demand especially that you are seeing from the infrastructure space. Would you at any point look to increase capacity?
I think we are already doing that. In May, we had to take a shutdown of our plant because we doubled – where we 70 percent increase in our paint shop capacity, we have added quite a bit of capacity over the last one year in the higher models, a lot of work has been done with supply chain. So capacity internally will not be a constraint. There will be some capacity constraint on certain models. We already face today a very truck where the supply chain is a constraint. So we are resolving all of those. Like I said earlier if I had a supply chain capacity, I think I could have easily sold 4,000 more vehicles in the first quarter itself. We have resolved that in July and you can see our July market share jumped back up to 33 percent or 34 percent, I forget exactly how much it was, but in the first quarter if I had sold those 4,000 vehicles, I would have had my market share also because those are customers wanting, waiting for our vehicles, they have paid for us and since we were trying to serve that demand we also lost out a bit on the export orders too.
Q: How far away are you from putting in fresh money on the ground because the sort of business outlook you are talking about is very heartening for your shareholders and I think for the economy in generals. So fresh capex when?
We are continuously putting in capex. I had previously said that we will have to put in somewhere in the neighbourhood of Rs 1,000 crore in the next couple of years but half of that is for capability building; we are launching a whole new range of LCVs, completely new range of LCVs, today our LCVs is only 2.5 tonne, so we will have a full range. For the first time our LCVs will be LHD also, so I can export, which is a much bigger market, there is a huge upside for LCV. I think our LCV should be about five times where it is. So we are putting in for that, we are putting in for electric vehicles, we are putting capex for modular vehicles, we are putting capex for Euro-VI. So about 60 percent of our total capex will probably go for capability building, 40 percent will go for debottlenecking and adding more capacity to our plant. I do not think we will build a brand new plant but we will certainly enhance capacity.
Absolutely. We acquired the LCV shares from Nissan in October ’16 and we have turned around the company, it was loss making. Now it is one of our most profitable business unit, it’s growing at a CAGR of about 25-30 percent and this is by having only one or two models. What I expect by April 2020 when along with BS-VI will come this new range of products called the phoenix range, it’s our code name project, it will be the new avatar of Dost and an entire range from 2 tonne to 7.5 tonne, we will not make sub-2 tonne but I assume the volumes will be substantially higher and this will be for the first time. Today I cannot sell Dost in Middle East for example, so that will give me an opportunity to increase that also. So I am assuming a substantial increase in LCV demand for Ashok Leyland where we have continued to gain market share even with just one model.
For the LCV segment particularly this month has also been exceptional for you. I mean your LCV sales have gone up almost 50 percent and now you are sitting at 4,200 units per month. Do you think in the very near term this kind of run rate is sustainable?