Commercial vehicles manufacturer, Ashok Leyland, on Wednesday said the company will not push vehicle sales through heavy discounting to achieve volumes in the market.
In an exclusive interview to CNBC-TV18, Gopal Mahadevan, chief financial officer, said that Ashok Leyland believes that 8-10 percent growth for FY19 is very much possible even with the new axle load norms.
Watch: Will have to take more price hikes to pass on higher material costs, says Ashok Leyland
Mahadevan said, "The plan of the company is to grow profitably. So the plan is not to lose market share, but to grow profitably, which means that we will take deals, which makes sense for the customers."
Edited excerpts: You have managed to clock in 10 percent margin despite higher raw material cost. Have you been able to pass on all the raw material price increases with the two percent hike?
We did take the price hike. We were the only player to take a price hike all through for about nearly one and a half to two percent in April and that helped us to neutralise the effect of raw material prices. I must also complement our sourcing and manufacturing guys, because there was a lot of astute planning in raw material buying also. So, there was some amount of bulk buying that we did to ensure that we are able to take advantage of lower prices as prices kept moving up.
Third thing is, in this chase for volumes, we are clear about two things. One is we are not going to resort to heavy discounting to achieve volumes and we would pursue profitable growth. So, this is very important for us and the second thing is, we also don’t push credit into the dealerships and try to get the offtake higher. So for us, we wanted to ensure that we are managing the working capital very astutely. We still have Rs 1,200 crore cash in the balance sheet. The net cash is Rs 1,200 crore. We ensure that our margins are better. So, this has been the 12th or 13th sequential quarter out of 14, where we have had double digit earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins. We will have to raise prices if raw material prices continue to go up. There is no other choice, because ultimately you have to do business, but do it profitably as well. Hopefully, some of the pundits say that in the second half of the year, we could see softening of steel prices. If that happens, it will be helpful for the industry.
It maybe too early but can you sustain this double digit margins for the full year?
Let us hope that, because that is our target. We want to ensure that we have a double-digit EBITDA margin for the full year. We have stated that as one of our core targets. We have long-term and medium-term targets about EBITDA margin, return on capital employed (RoCe) and debt to EBITDA. So, we want to ensure that we grow profitably, generate cash and also return highly on the capital employed. So, I think all these aspects have to be factored in on the performance.
So the operational performance has been fine but channel checks indicate that you may have lost market share in the medium and heavy commercial vehicle (M&HCV) segment to Tata Motors. Is that true and what is the company’s current market share now?
Market share for the current quarter is 30.2. This is on M&HCV segment and we have fallen approximately by about 4.5 percent. But on light commercial vehicle (LCV), we have gained market share. So LCV has done wonderfully well. It has posted a 34 percent growth in volumes and we have moved from 15-16 percent and both the products –DOST and DOST Plus are doing wonderfully well, especially DOST Plus, which was launched about six-seven months back and the other two vehicles both Mitr and Partner also the volumes are going up now. So very positive about the LCV business.
As far as M&HCV is concerned, I think just to add – I don’t want to be repetitive on this, we could have showed up market share by giving more discount and also pushing stock into the system. But we had decided to abstain from this strategy at all. We said that we have to grow this business profitably and if we were to do that, if we had to walk away from deals, which were very clearly unprofitable and giving negative margins, we decided that we will have to let some other business go.
The focus was – at the end of it, finally you must remember, it is not just about a pure market share number, because that is just one of the metrices, so the tendency is to look at the metrices, which don’t go well. But if you were to look at our volumes, they have grown by 60 percent. Our revenues have grown by 47 percent, our profit after tax (PAT) has grown by 233 percent. So one has to look at the performance of the company on multiple metrices and not just purely market share.
Is it possible for you to lose more market share since you just said that you won’t be resorting discounting like the rest of the industry?
The plan of the company is not to lose anything. The plan of the company is to grow profitably. So the plan is not to lose market share, but to grow profitably, which means that we will take deals, which makes sense for the customers. The customer comes first, but it also has to make sense to us.
There is a confluence of factors, which affect market share. The demand in north-south-east-west, the market share is a weighted average mix. But having said that, all I can tell you is that we will pursue growth. It is not that we want to not pursue growth. We will pursue growth, but we will pursue it profitably and business has to generate cash.
I don’t want to pursue growth at the cost of generating cash or at the cost of profitability, because that kind of growth has no purpose. But believe me, our company has grown market share quite visibly over the last five-six years. We have grown from nearly 24-25 percent market share to 33-34 percent. So, we are very much on a trajectory. So, if you were to look at the trajectory of market share and market growth, we have been well above industry average and we will pursue that strategy. Rest assured on that but yes, there are quarters, but this is not a quarter-on-quarter performance that we can analyse and the quarter does not explain this strategy of the company. What we look at is the company’s performance for the whole year, the medium-term and in those plans, let me assure you that we are not looking at ceding market share.
There is an expectation of 8-10 percent volume growth for the full year, for FY19. Now that we have got the new notifications and axle loads, is there any change in your assessment of demand?
If we believe that GDP of India is going to grow, the economy is going to grow. I think that is going to augur well for the commercial vehicle industry. Like I mentioned, we will have to wait and watch how this new norm pans out, because we are only seeing one part of the norm, which is saying that the axle load has been increased. The other part is, if the government is going to be very serious about monitoring the new norms and ensuring that these are implemented, in an overload country like India. You possibly may also see certain segments of the industry grow purely, because of these norms but we will have to wait and watch. So to answer your question, I believe that 8-10 percent growth at the end of the year is very much possible.
Will you have to invest more or will the cost of production go up due to the new axle load norms?
I do not think that investment is going to be huge, but the cost of trucks will definitely go up. What is that number, we will have to wait again, because it is just two days since these norms have come, so one cannot put a number to it specifically. But I would say that anywhere between two and three percent, the cost will definitely go up, because you will have to put in larger tyres, there will be some changes that will be required for the chassis, the drivetrain and possibly steering wheel also. So, the whole point is like this, if it is going to be prospective, these changes have to be done to ensure that vehicles meet the norms and are safe.
If the government decides to extend these norms to the existing vehicles also, one must address the point of safety, because if some of the vehicles are not overloaded and they suddenly permitted to carry 15-20-25 percent or extra load, the safety of these vehicles will also come into question and how the roads will get impacted is another point. But I am sure that the government must be thinking through all of this before it provides clarity on subject about applicability of these norms for existing vehicles also. I think his is very important; safety is prime in all of this. So when we are going to have these vehicles recertified, I am sure all players in the industry would want to ensure that these vehicles are absolutely safe and meet the norms completely.
Last quarter witnessed very heavy discounting in the pursuit of volumes by players. So, discounting continues to be very high. In some places, even the credit is extremely high, so there is a lot of intense competition in the market. So, one needs to choose the right deals to ensure that you are growing profitably.
You spoke about the competitive intensity being high, your peers like Tata Motors have given fair amount of discounts. Give us a sense of what the discounting levels currently stand at?