Ashok Leyland Ltd
NSE:ASHOKLEY
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
159.8
262.15
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Ashok Leyland Ltd
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to the Ashok Leyland's Q1 FY '20 Earnings Conference Call, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jinesh Gandhi from Motilal Oswal. Thank you, and over to you sir.
Thank you, Raymond. Good morning, everyone. On behalf of Motilal Oswal Financial Services, I'd like to welcome you all to 1Q FY '20 Post Results Conference Call of Ashok Leyland. Ashok Leyland is represented by Mr. Gopal Mahadevan, whole time Director and Chief Financial Officer; Mr. K.M. Balaji, Vice President, Corporate Finance. I would like to thank the management for taking time out for this call.I would now hand over the call to Mr. Mahadevan for his opening remarks. Over to you, sir.
Thank you, Jinesh. Good morning to all of you. Thank you very much for the interest in Ashok Leyland. So I will just share the key highlights of the performance and I'm going to throw the floor open for questions, which I'm sure will be many.So we had a total -- our -- the total industry volume actually went down by 17% to 74,371 and I'm reading all CM numbers here. This was, in a way, while it is -- the number has degrown, we must also remember that there was a base effect of last year where the industry had grown quite significantly. But having said that, I wouldn't want to kind of dilute it by stating that, that is the reason, but generally we are seeing that the demand has been challenging in the first quarter. This is one.As far as Ashok Leyland is concerned, I think we have gained market share. So on CM basis, if we were to look at it, our market share has grown from 30% to 34.1%. So we have done pretty well under the circumstances. Our strategy, as I mentioned to you, has been to grow market share and also look at our profitability, which is what we have tried to achieve in the current quarter. So despite 9% and nearly 10% reduction in revenues, our EBITDA margin was at 9.4% as opposed to the same period when it was 10.7%. So we have been able to withhold the EBITDA margin because of the operating cost reduction that we started. I had mentioned to you all of you that we have worked on -- we are working on the operating cost reduction, which I will share with you as I move forward.The second part of it is just to give you an overall volume breakup. In domestic truck, we have sold 21,095 units as opposed to 22,629. So there was about a 7% reduction. And as far as bus was concerned, we were pretty much flattish. We had 4,238 numbers invoiced as opposed to 4,217, a very marginal growth. So overall, on the domestic truck and bus side, we were lower by about 6% as opposed to an industry volume degrowth of about 17%, which is why we've seen market share grow.What I want to also share with you is that the composition exports has been a challenge. Let me also share with you that our export numbers are only 1,386 numbers as opposed to 3,800. We have seen the export numbers coming down. What I see at the moment on exports is that while export is very, very important, I think we possibly will see traction in the second half because we have a Sen bus order -- Senegal bus order to be done. There is receival of the Ivory Coast order to be done. There are couple of other orders, especially on the project side that needs to happen. But we are focusing now as a strategy is to ensure that we are getting more and more traction on the project orders because at the retail level there is gentle dampening that has happened in the traditional market, especially if you take UAE and Sri Lanka. Bangladesh is doing reasonably well. Nepal is also doing well. But other than that, we are seeing some challenges in the export market. This is one part.As far as Defense is concerned, again, this 9.4% EBITDA has come in without any defense kits being invoiced in the current quarter. So again, as we understand, we are expecting the defense orders to come in, in the second half and hopefully you will see that as an add-on to the profitability as we move forward. This is one more point that I wanted to share with you.Parts business has been growing, it grew at about 10%. Power Solutions business has been pretty much about 1% or 2%. I think LCV has done wonderfully well. It has grown by 12%. We have had 12,671 numbers being sold as opposed to 11,273 and market share in LCV now is about 18%, 18.5%. So we have climbed quite well, and I'm very confident that with the product offering that we have on Phoenix, it is going to be another important product for us as we are going to fill an important slot, and again, we expect that as we move forward LCV is going to keep growing even further. And it will be an important part for us in terms of an export strategy because it's important that we fill the slots and we start with smaller vehicles, then go to the ICVs and to the MHCVs, which has been the strategy.More importantly, on the expert strategy, I will dig in a bit. I know that we have not been able to achieve what we set out ourselves. There have been various challenges and, to be honest with you, in the last 2 to 3 years, the domestic market has been booming so much that there was a lot of allocation that was actually happening for domestic manufacturing also. This is one part. But more importantly, we found that we needed to have a lot more products available before we start foraying out into the new markets. I think in a quarter or so, we will have all the LHDs ready, so it's better to -- important to have the LHDs, RHDs, et cetera, and offer the full suite and then pursue the export strategy.Having said that, let me not oversimplify the picture that the international markets are going to be the -- [ it's not], because you see the global trends, there is a lot of challenges, trade wars, interest-rate easing by U.S. where money is flowing. There are challenges even in certain African economies, but we are -- the point is, I don't need to sell huge numbers individually in each of the countries for me to add up to a big number for Leyland. For us, the quantities can be even as low as 200, 300 a month. And if I'm able to kind of spread it out well, with the margins being good, then I actually start derisking the company. This is another part that I wanted to share with you.Other than that, of course, there has been this recent reorganization that has happened. Mr. Dheeraj could not join because he had to travel out of country on some other important thing. He was actually planning to take the call. I think now we have kind of reorganized, which I did mention that there is some reorganization in place. So now we have one person taking care of the truck and bus and manufacturing and sourcing together and then we have another Chief Operating Officer, this is Mr. Anuj, the second one is Nithin Seth, who is taking care of the LCV, Defense and International and Power Solutions business. So this kind of also reduces the number of direct reports. At the same time what happens is a lot of operating decisions can be taken on the ground instead of going up for everything. The -- and it is working reasonably well, and then, of course, I'm there so, the 3 of us are there along with other senior leadership team who are able to kind of take faster decisions.Now having said that, I also wanted to tell you that things are very stable in the company in the sense that the level of traction on all critical programs are happening well because I know there are -- there have always been questions about the CEO search. I think the CEO search is going on. Before you ask me, I just wanted to share with you. The CEO search is going on. But at the moment, let me tell you that there is no absence felt because -- of that because Mr. Dheeraj is playing a full-time role here. But more importantly, the senior leadership team has been taking decisions in the past and will continue taking so. There is no vacuum or there is no worry that you people have to have at all on these matters because for us it's a 0 worry. In fact, we are pretty well-knit in the decisions that we're taking, and I wanted to reassure you that this is -- things are pretty much fine on the internal management front. In fact, there are a lot of positive changes also happening.And then I'm coming to the cost reduction. So I had mentioned last time that we are -- we started quite well in advance anticipating that while we plan for a 10% growth for the full year, which is what I shared with you earlier. We said that no, let us take cost out. So I think we are well on track on the INR 500 crores of cost that we want to take out. We will achieve that by the end of the year. Even in the first quarter, if we were to look at it, the administrative overheads have come out. So there is a lot of action that is happening across the company in manufacturing, in contract outsourcing, some of the things which are not critical for manufacturing or capacity and we are only ensuring that only vital and capability building spends are being done. Otherwise, we are really having a relook at everything, every cost. Nothing is left unturned.So I think overall with all of these efforts, we have been able to grow our market share as I've shared with you last time that we will pursue market share growth. We have been able to maintain our EBITDA, while it's a tad short of double-digit. You must appreciate that given the volume degrowth that has happened still coming to about 9.4% is something that is -- that has been good.With this, I'm going to hand it over to Jinesh. I know I took a little more time than I promised, but I'm going to hand it over to Jinesh so that you folks can ask the questions.
[Operator Instructions] The first question is from the line of Pramod Kumar from Goldman Sachs.
Congratulations on a reasonably good set of numbers in this environment. My first question pertains to the industry demand outlook and how is Leyland planning their entire inventory position because we've heard more and more from far on the inventory overhang on the commercial vehicle side. And how are you planning the rest of the year so that you don't have much of BS IV inventory in 4Q? And also where are we in terms of utilization rates? Just if you can just throw some light on that, Gopal? That would be the first one.
Okay. Thanks for asking that, Pramod. See the point -- I'll tell you what we did. Okay. What we did was, when we started the beginning of the year, the assumption is that we will have a slight, maybe Q1 will be flattish or marginally lower and then we will see pre-buy happening in Q2 and Q3, and Q4 could actually see the inventory being cleaned out so one was not very sure. Even now, let me share with all of you, we are not clear as an industry -- absolutely clear as an industry whether on 1st of April vehicles will not be allowed to register or vehicles will not be allowed to be sold. At the moment, we are assuming in the company that vehicles -- new BS IV vehicles will not be allowed to be registered. That means we have to actually ensure that the vehicles are registered at the hand of the customers by 31st of March. That is better to have a safer assumption than an optimistic assumption.So we are planning that possibly by January end or so or February early, we will have to stop making sales of FES, which is the front-end structures, whereas we can continue to sell possibly till March the fully built vehicles because they can be registered at the hands of the customers whether [ they be bought from ] the dealers. Now this is the broad strategic plan. We're also very clear, we have had an inventory -- I mean, we have had a vendor meet. I don't know how true or false it is, but the vendor mentioned -- we had it, I mean, basically what we do is when we see challenges, everything happening, we try to be as communicative as possible. So in fact some of the vendors said we possibly are one of the OEs who have actually had a formal vendor meet to ensure that we do our planning together and well. So the basic idea of the management is actually challenge itself to ensure that we should have minimal damage in the transition from BS IV to BS VI, which means, we have to clean up the inventory, we have to ensure our vendors don't have it as well, we have to ensure that our WIP is also kind of well [ tact. ] So when that happens we have to trade off between some other OEM, let's say, they say "no, we will take an assumption that the vehicles will be -- can be sold till March and that registration will be allowed." We will take that decision as we come closer, but at the moment we are going to be careful that we don't have resulting inventory write-offs. Okay. We are very clear...
Current inventory and where the utilization rates, Gopal?
I'm coming to that. Okay. I wanted to -- because you actually asked a very large question. So I'm just coming backwards. Having said that, so what we decided to do was, we built up inventory in the month of June -- April, May and June because we said that in the event there is a surge in demand, we don't want to miss it because what we're doing is we're building up inventory of what we call as [ runner ] models, which means in the event it doesn't sell this month I can always adjust my production to the next month, which is what we have done.Now the reason why we have shut down plants, say, for example, I don't remember the number of days exactly, I know I'm on a call, 7, 8 days in Pant Nagar or we are going slow a little in other plants is, because since we have sufficient inventory, no point in producing more and also that incurring overheads in the factory, which is why we said let us scale down. So in the current quarter, the conscious plan is going to be to scale down the inventory levels which will release working capital.If we find, for example, there is a demand surge, so be it, then we will scale up production because in this whole thing, Pramod and the rest, what you can never win in all fronts. So it is better to be careful that you don't end up with huge amount of inventory at all levels so you possibly will see a scale down inventory. It doesn't mean we're going to scale down market share or attempt to grow market share. What we're doing is consciously coming down on production so you would see -- I can't share the number with you, but I can tell you that by September end, I expect the inventory levels to have come down quite low. Okay. So that will release cash. This is the second aspect.As far as the utilization levels of the plant is concerned, it is -- I'm not able to give a straight answer, but at the moment I will say that I've got a capacity -- let me put it this way. I've got a capacity of 15,000, 16,000 units a month. Okay? So if I'm going to sell about 8,000 or so, I'm at 50%, 55%. What happens is, I don't do it that way. In certain days, I'll be actually at maybe 50%, 60%, 70%, 80% production. Other days I may be like I'm shutting down. So the average utilization will be somewhere around 50%, 55% to 60%.
Sounds good. On the second question on the entire pricing environment, Gopal, is these kind of [ baffle ] says that your competitors are not exactly in a great shape. Their profitability is in a deeper -- is in a bigger problem. And they have some -- some of them have even balance sheet issues on the cash flow side. So why is the industry so hell-bent on destroying the pricing because I understand you have a higher ex-showroom price, you're taking up prices, but you're paying higher GST on that and then you're discounting? So I just fail to understand, this has been on for like several years now. And this is, again, on this cost structure, you're going to have a lot of BS VI. And if this discounting practice kind of continues, I don't see how the industry is going to kind of navigate [ at top tier]. If I can just get your understanding because everyone blames other player. So just your thoughts as to how you're looking at discounting here and whether there will be -- there is some hope that discounting could get probably some more disciplined going into the BS VI transition?
See, I'll -- you guys know me, I have never talked -- I never talk out of the arrogance of the performance or something because performance can change, but at the same time if you have been looking at our performance, you can very clearly see that from the double-digit EBITDA that we have been posting all through, okay, it has been steady, now we are at 9.4. You would have seen that, that signifies that we can't be leading the discounting war. Right? So we're actually doing the penetration strategy. So we are trying to penetrate more and more. So for example, I'll tell you, our ICV -- we have been grown in all segments other than the bus, for example. Okay. Now the other way what it is almost in all geographies, except I think it is in the East that we have had a slight degrowth, I'll just tell you that. So what has happened is, we have been actually ensuring that the -- that we wanted to ensure that I'm able to broad base my sale instead of trying to deepen my sale only in a particular account with discounting. At the same time, let me be candid. It is not that we will let a large customer just walk away because of a price. I will have to look at the cost of acquisition of a new portfolio like that and see what is the absolute margins I make. One thing we are very sure, Pramod, we will not sell at a loss. But the other thing you can all be sure is, we are not going to let a sale go also. That is why we have seen the market share grow.
Fair enough. So -- but you don't see the discounting kind of coming to an end or kind of getting more disciplined?
I don't -- it has not happened through good years, it has never happened through bad years. I have now been in this industry for nearly 2013 to 2019 is like 6 years. I have not seen one month where people have said, even whether it's a buyers' market or' sellers' market, I don't know some of the strategies that some players adopt is to discount their way into a market share, which we don't do. At the same time, we are not going to walk away from market share. We have been now consistently showing you that we have grown. Over the last 7, 8 years, we have grown from 25% to 33%. So we will -- we are not going to let go of market share growth. But we would still want to have a differentiated approach where we don't just leave money on the table. I would like to spread my network, spread my product. So what have we done? We have been continuously increasing our network presence, refreshing our dealership networks and then after that also [ ensuring ] products and growing in the ICV where we were not there. That is how we have been able to grow our market share and the volume. And we have to continuously work on product cost and we have to continuously work on middle line and ensure that we are able to drive profitability. It's not easy, but you have to efficient in all fronts.
I think that's good to hear. And by the way on a parting shot, Maruti just reported a 35% decline in domestic volumes. So hope things get better from here.
The next question is from the line of Kapil Singh from Nomura Securities.
Congrats on the good set of numbers, especially under the challenging circumstances. I just wanted to go back to the questions. Full year volume outlook, any thoughts you would like to share. Also on the dealer inventory levels, where would that be? And are things getting improving or you're not getting that sense right now?
Okay. Let me answer the questions. First, full year outlook, I don't know. It looks like it may be flattish at that rate it's going. See the problem of this and I don't want to sound despondent because I think being despondent and sad and worrying is useless. We have to see multiple strategies, how to work under the circumstances. But the point that comes up is, we're not having clarity on 2, 3 things here. The way BS VI is going to get transitioned, we don't know. There is also uncertainty about this whole GST. What is happening is, continuously there are talks about 28% being reduced to 18%. So some of the freight operators are deferring their purchases also. They're saying that, I mean, why would I want to pay 10% more GST. Let me see whether it's going to come down because there is a talk. We are not very clear. Now over and above that is a policy of uncertainty that has been happening now suddenly saying that we may increase the gasoline prices also -- I mean, the diesel prices because BS VI is going to be more expensive. We don't know how the whole thing is happening. But the core of the problem let me tell you, it is not a CV problem, it is not a pass car problem, I don't think it's a two-wheeler problem in that sense. It is more to do with the general economic condition. We expected that there will be a very growth-oriented kind of direction, but it's still not come. We're hoping that the government will drive it. The government will start putting in money on the infrastructure spend. I think basically the fix is actually on the economy. If that happens, I think we should not have an issue. Yes, there are -- this industry has weathered quite a bit of storms if you really look at it. One was we had other than the NBFC crisis before that demonetization was there, and this industry was predominantly on cash, we had an impact, then we had the BS III to BS IV happening suddenly, then we axle-load norms. And then we had so many codes coming in, in terms of bus body code and then after that cabin code, et cetera. So what is happening, there are still other inefficiencies also. You had to steel -- you know the steel price protection duty that was there, which had a direct bearing on this. So the industry has been able to weather all these storms and has been able to grow because of a certain amount of positivism and then there was a demand. Today what is happening is that demand is coming off in all industries.Unless that demand revives, it's very difficult to say, the pass car, [ liberal ] pass car, you take cement, you take steel, you take any other industry also unless the basic core sector industry starts to grow -- FMCG, look at FMCG what's happening. We have never seen that kind of a trend. So unless these basic industries are going to grow, the commercial vehicle trucks will have only that much to transport. That is why you see bus is not bad. Bus is stable if you look at the overall numbers. But the truck business will have challenges if the demand does not grow. So from a company's perspective what can I do, I have to keep on introducing new products, which is not very expensive, which means I have to introduce [ flux ], which is why we've just launched the OYSTER. So if you notice what we have been trying to do as a strategy is not to have a big bank. We have to counter and I'm not saying that will resolve the problem, but that will certainly help. So we went from Boss, then we went to GURU, then we went to GURU 1010 then after that we have had -- now we have had the OYSTER coming in. We are now going to have the LCV portfolio moving up to the Phoenix and then we have also been introducing various variants in the MHCV segment so that we are continuously making offerings and filling slots geographically and in the product portfolio. That is all we can counter with and we have to be efficient on pricing. But the longer-term outlook on the industry is that, unless the basic economy is going to have a fix and there is certainty on business development both from private sector and public sector, you're going to see choppiness.
Okay. And on the inventory level?
Yes, so, inventory levels, the dealers have about -- I'm not too worried about the inventory levels beyond a point. They would have about -- see what happens is, I tell you. I'll give month-end numbers. I don't want to share absolute amount in dealer numbers because you will conclude something else. All I can tell you is, this whole business is skewed to the month-end. So when it is at the month end, the dealer inventory is high. Okay? They will have possibly, typically if I were to look at the dealer inventory at the month-end before they do the quick invoicing, et cetera, that happens in the second, third, fourth, fifth, et cetera, the dealer inventory would be something like at least about half a month to 3/4 month's sale. Today, it is going slightly beyond that. We're not going to be pushing inventory beyond a point. So what we have decided to do is to scale down on the dealer inventory, but ensure that we are replenishing all the retails. I am monitoring my retails as well as my wholesale. In MHCV, it's a little more inefficient because of the chunkiness of the orders that come, but for LCV, I tell you, for every truck that is sold, which is retailed, we do one wholesale so that dealer inventory does not push up. Unfortunately, the MHCV business behaves differently. My take on this at the moment is that by the end of the second quarter, you would see not a correction, a rationalization of inventory, but at the same time we're not going to lose share. I mean the outcome of the rationalization of inventory is not going to be a share loss. We will push for our market share growth and growth in various geographies and various product segments independent of how we start rationalizing the inventory. There's a lot of effort that is happening now on the dealer inventory and even in our own inventory, to ensure that we are not unnecessarily sucking working capital.
Got it. And secondly, on the margins. Any outlook because you've talked about INR 5 billion of cost cutting. So which are the areas, how confident are you of achieving that and as well as commodity benefit to expect?
On a lighter note, but also on a serious note, every element of cost, including the telephone that I'm holding is being cut.
I hope not on this call.
Because I have already found it's an inward call so there is no cost to me. Jokes apart, I mean, jokes apart, it was a joke I know, but I don't think we have to be all numb and glum on this kind of a thing. We're doing all that is possible, but on a serious note we are looking at -- I'll give you [ thrift. ] We are looking at manufacturing, we are looking at selling, we are looking at distribution, we are looking at contract work that is being done, we are looking at IT expenses, we are looking at the usual suspects such as travel, communication, but we are looking at consultancy, we are looking at people productivity, we are trying to drive, we are trying to reorganize where, for example, if we need to have more effort in the front line, we need to have more effort for MBP, we need to have more effort for BS VI, we are trying to rationalize the part without recruiting afresh and we are -- our salary raise will also happen sometime later. We are looking at what we need to be giving, we will be fair. We have been an extremely fair company, but I think there are multiple things that we're looking at. But that is not one -- it's a project that I'm personally handling in the company with a core team and then there are about 30 single point of contacts across functions and locations. They meet up every day, there is a call that we're looking at how to do it and then people rush, take out costs. So it's like -- it's a massive effort.
Okay. And commodity side, anything you're expecting?
Commodity, it looks like there should be -- there are 2 things happened because before I say something, something else happens in the market. But generally we felt that the commodity prices are going to soften, right? Generally because of the global economic scenario, the problem is independent. For example, you have fuel prices softening, but then our prices have gone up. Right? Similarly what has happened is now the government has put in a duty for steel prices from Korea. There might be reasons for it, but I think generally there is a softening and I'm also positive that the government will take steps to ensure that the growth is revived. Generally, I think that will happen. Maybe certain -- they have certain strategies and we believe that they will see that entire the mobility industry, which is two-wheelers, three-wheelers, commercial vehicles, pass cars, maybe to a certain extent even tractors, I'm hopeful that they will be looking at this industry and we are doing some post correction policies. So I'm pretty hopeful of that.
The next question is from the line of Ruchit Mehta from SBI Mutual Fund.
Any comments on what the expectations are for industry demand when the DFC starts kicking in? We understand certain players like, for example, Maruti has started already using [ railway ] rates to ship cars from their Gurgaon...
Can you repeat your question because I was not able to understand anything at all?
Do you -- can you -- do you guys have some assessment of what can be the impact on truck demand because of the DFC kicking in, the dedicated fleet corridor?
Well, I'll tell you it's very -- it's quite long way off, but whatever I have said in the past will continue because these are a little bit of imponderables because there is no clarity on how the DFC is going to work. See, let me -- I'm not trying to skirt your question, okay? I'm trying to give an answer, but the whole point is, let's assume, there are 2 scenarios. One is the demand is going to go up for freight or the demand is going to come down for freight. If the demand is going to come down for freight, the dedicated freight corridor will only be a subtracter in the sense, some portion of it will go inside. If the demand is going to go up a bit, I can also see a multiplier effect because there will be convergence to the dedicated freight corridor and the road transport. Why I'm saying that is the government is investing nearly about 21 to 25 kilometers per day in laying roads. They're doing it for a particular purpose. The beneficiary of this, the single largest beneficiary of this investment in infrastructure is the truck business. The single largest benefiter. It's not pass car; it's not even bus. So we must understand that our cost of supply chain in the country is still very high compared to other global majors. So if that is the case, I think that we have a case where we will possibly see that the dedicated freight corridor as well as the road transport systems will continue parallelly and will continue to grow.I don't see each one snapping at the other end. There are a lot of logistics issues in a dedicated freight corridor also, but I don't want to push it down. There is a transshipment that has to happen -- see, ultimately an end customer is going to look at -- the end customer industry is only going to look at 2 things. He is going to see his inward freight cost and his outbound freight cost when he is selling to -- buying from vendor and selling to customers. The second most important thing that he is going to see is the time of delivery, which means what is the turnaround time. I don't believe that we have the systems and processes where the delivery is going to beat trucks, which is going to be door-to-door almost. Right? So I don't think it's going to go away so fast. So I'm not too concerned about the -- what should we say -- the dedicated freight corridor coming in.
Okay. Okay. And just qualitatively on the BS VI [ pattern, ] my apologizes if I have missed, you already answered this. In terms of what would have been the expected cost say 6 to 12 months back and what the current costing that you're seeing right now? Has there been any material reduction in the cost structures?
We are continuously -- see, we are working on the -- see, this whole thing of product development is such that you have to keep adding and subtracting not because of anything else. You have certain engineering designs, which have to be done, after that you test it, then you say if that can bring it down. It's never a thing that I have a Point A to Point B cost pattern, we keep doing it, especially in India, it doesn't work that way because you must also remember the BS IV to BS VI transition is the shortest in the world. We just finished BS IV and then we got into BS VI. It's 2 years. So we will -- let me assure you one thing. There are 2, 3 things that I want to be very clear about and that is how it is going for us or for anybody else. BS IV to BS VI is going to be a cost up. There is no doubt about it. Whether it is 15%, 13%, 20%, I will let you know only later part, but it is going to be in the range of that. Okay?
Okay.
The second part of it is, after that when things start stabilizing, you can be rest assured I can't talk about competition, but you can be rest assured that we will be continuously taking cost out of the product. We have no choice. It's a continuous improvement journey, you can't. But at the moment when you are launching a product, what happens is given the short time what you want to ensure is that you have a product, which is doing well in terms of performance. That's the first thing that we are committed to. That is the most important thing, right? After that, you can look at the other things. So you will construct a building where the building is strong, the walls are strong, then you can look at the bells and whistles and all that stuff.Believe me, we are at no disadvantage like some of you people think. We are all going to the predominantly same vendors. Over and above that, we have got Albonair to support us for a urea dosing system. So we hope that, that will be an asset for us as we move forward. And the development is very much on track, both for BS VI and MBP. The MBP is something that we have kind of put it on as a strategy because there are 2, 3 things that will be happening. These are certain things, you have to do now, which you'll start reaping the benefit of the later period. The variability and the offerings that will have will be far superior than competition. The second one is the manufacturability will be much easier. The inventory carrying cost will be easier. And when we start placing larger bulk orders on the same kind of parts, I expect the cost of the parts also to come down. Instead of having, let's assume that instead of ordering 10 parts, I'm ordering only 2. There will be economies of scale that will come in, right? So it's a much more strategic and complex manufacturing strategy that we have embarked on, but both the programs are doing well and on track.
Just a small clarification. On the dealer inventory side, was it 3 to 4 weeks that you mentioned or 3 to 4 months?
No. No. No. It will be about a month -- in some cases, a month-and-half inventory, not 3 to 4 months. Please let me clarify if there was an error. Let me clarify. It is a month, month and half, depending on the dealer. And it will be brought down by end of September.
The next question is from the line of Binay Singh from Morgan Stanley.
My first question is on the gross margin side. We have seen a nice gross margin expansion sequentially. Could you talk a little bit about what drove that expansion?
Well, the gross margin expansion has happened because of the -- what has happened is, overall in the current quarter, what we have seen is that, the steel prices have been flattish, one. The second one is the mix of the products have been a lot more favorable, but believe me this gross margin is without defense. Now if that defense kits had come in, my margins would have been even better. In fact, in comparison to previous year, this was not -- this was without the strategic export orders also. So on the domestic front, we have been doing 2 things. One is astutely managing the mix wherever we can; the second one is also to make price adjustments wherever we can to ensure that we are able to drive the margin up. And thankfully what helped us was that the steel prices were flat in the current quarter.
And on the mix side, we saw LCV share going up and we saw greater than 25 ton going up. So is that the 2 things that would have drove the better margin?
Absolutely. LCV is doing very profitably. See most of the things we have done, the LCV margin has been very, very positive for us. So whatever we kind of shared with you folks has happened, in fact, it is even better than what we shared. The EBITDA margins are even better than Ashok Leyland. The other thing is even HFL's operation, they have continuously got better and better and better. So it has helped us. So I mean, there are multiple pieces. So if you look at it, there has been improvement in LCV, there has been an improvement in foundries, the greater than 25 ton sales have been better, our warranty charges have been coming off a bit this quarter maybe -- our provisions have been a little higher, but overall, in real terms, we are actually taking warranty cost out and then we have been fixing out distribution and then the K54, the 2 that we call the cost reduction has also helped and some of them kind of when you say gross margin over material, there has been an improvement, but even in manufacturing and sales, which are variable we have been actually trying taking cost out everywhere. So overall, at the EBITDA level, you would have seen the performance coming in because of all these factors. Let's hope it continues in the next quarter, and we don't have discounting happening, I hope so. We will have to wait and watch for that. But our thing is clear, we want to take out about INR 400 crores to INR 500 crores. My guess is it's quite likely that we may be able to even post a INR 500 crores reduction in absolute cost across various expenditures. If that happens, that is good for the company.
Binay, just to talk about the numbers, there has been a 5% to 6% reduction in the volume, but if you look at the cost reduction, the other expenditure, it has come off by more than INR 100 crores. So roughly it matches with the overall INR 500 crores target, which Gopal has been saying.
Right. I know the cost reduction is clearly very impressive in this quarter.
And even the manpower cost continues to be at around the same level of INR 500 crores.
No. No. I think that's pretty impressive. Just could you share a little bit about the revenue breakup, like what was defense, was it like INR 50 crores or even less than that in this quarter, like some revenue breakdown of key segment?
Well, the defense revenues were a shade lower than INR 50 crores for the current quarter. There was nothing significant here because we'll have to wait for the government to order. Hopefully, they will order in the second half, that's the signal, but I can't tell this because we'll have to wait for the government to order. So there has been quite a significant drop in terms of defense revenues.Even exports coming off has been -- because what has happened is with the traditional billing has not happened. We have seen the exports dampening and I will have to wait for the balance supply of [ said ] bus and Senegal and Ivory Coast. If that happens in the quarter, that happens, there'll definitely be a bump up in terms of our margin.
Right. Could you share the revenue number for exports in LCV 2 segments?
I will tell you the export volume. The export volume that was there for the current quarter was -- I thought I mentioned it. The export volume for current quarter was 1,386 as opposed to 3,801, so it was a 65% decline. We'll have to build it up. I'm not too -- there is a market we have to kind of look at a different way of approaching it because the traditional market is there. So we are refocusing, we are actually redrawing the entire export organization and the strategy. Hopefully this time things will converge. It is not that last time we didn't think it through, but this time we have the products ready in the next quarter or so. We will also have redrawn market strategy. So all of this will start actually ensuring that we'll start building it by 100s and 200s in the market instead of trying to get very large orders. So the whole strategy is separate team for projects and there is going to be separate team for on-the-ground sales. So we're kind of bifurcating the whole thing now.
Right. Right. And lastly, Gopal, could you comment a little bit about the scrap [ hedge ] scheme that the government came out with recently? Do you think that's sufficient enough to encourage operators to scrap next year?
See I'm not too sure about what the scheme is going to be because initially what they mentioned was that they are going to have a scrap [ hedge ] where they're going to reduce the excise duty and also possibly give a financial incentive of -- there were multiple reports, 1 to 1.5 lakhs, et cetera. If that kind of a clear scrap [ hedge ] scheme comes in, it will be useful because what happens is that will induce the people who have got the old vehicles to scrap it, but the latest one that said was that if you were to surrender an old vehicle, you will get a benefit in the vehicle registration cost when you buy a new vehicle. Now it will work for some, it may not work for everyone. The reason is the guys who buy the new vehicle are not the guys who have the 15-year-old vehicle.
Correct.
So I'm not too sure that will be a great incentive for buying new vehicles. I think that the government is mulling over it. Let us wait for the final outcome on this, then we'll figure out. I'm sure that they'll come up with something that should be attractive to the industry.
The next question is from the line of Prateek Poddar from Reliance Mutual Fund.
Just one small question on CapEx. Are you looking to prune that? Also you have talked a lot about cost so just I'm curious.
See, let me put it this way. We are looking at whether certain things can be deferred, but we are not going to defer anything, which is not going to be -- which is going to impede my readiness. So all CapEx on my MBP, modular business program, MBP, the second one is my BS VI, the third one is Phoenix will continue. I'm not going to change that. So we have deferred some IT CapEx, but that will be about INR 10 crores, INR 15 crores. I'm looking at some nonplanned CapEx, which will take out, so maybe about INR 100 crores, INR 150 crores, INR 200 crores can get deferred. So we are really pushing saying, "hey, whichever is not vital, let us not do it." Now that is an exercise we keep doing even in good days. So maybe that will happen, but I think the earlier outlook that we shared at the moment, let us keep it that way because these are all capabilities and capacity building. I need to also ensure because otherwise all of us had this worry in March and February saying where is the capacity? You guys are at 85%, what are you going to do? We have to plan -- capacity is something that I can't keep adding and subtracting at my will. I have to add it in blocks. Like I said, a [ paying booth ] will cost about INR 350 crores to INR 400 crores. I have to add it in one chunk. I can't add it in bits and pieces. But what am I going in Hosur, the team has done a wonderful job in terms of augmenting the capacity possibly 4, 5x by innovative methods. So we are really trying to squeeze the capacity as much as possible.
And if I may ask just an extension to this. You talked about Project Phoenix, MBP and BS VI, these are in the sense not something which would get into the next year, right? Because these are onetime CapEx in my view. You can correct me if I'm wrong. So next year we could expect that the intensity would be lower than this year. Is that a fair understanding?
[indiscernible] Let us put it this way. I hope that next year we have some CapEx because that's the reason I'm telling that and I'm not being sarcastic or jovial about it. If you see demand growth happening, then I will add further for meeting the demand. I'm not debottlenecking the entire plant to another 70,000, 80,000 vehicles in one shot. That core production capacity will get debottlenecked bit by bit by bit as much as the traffic can bear with the headroom of 15%. What we are now adding is in BS VI and in MBP and Phoenix. Phoenix is a completely different vehicle platform, and of course, I missed our electric vehicle. We have to add some dollars -- we have to put some money there because we have to build capabilities. But at the same time, I'm not investing into battery technology and all that because our philosophy at the moment is that I don't want to put something where I get locked in with one particular technology because battery technologies are evolving very, very fast. So it's for us to be more nimble footed and flexible. What we're doing is building like, for example, we are -- I don't want to tell it in advance, but we're also expanding our bus fleet a lot. The entire fascia of the buses, we are bringing in commonality. We want to sell more fully built vehicles. The strategy there is changing. So these are capabilities where I can now take possibly a share out of a bodybuilder if necessary and bring it inside my factory. How do I ensure that I offer that as a standard offering, but in a very competitive manner? So similarly, we are looking at some expansion into -- let the product come, it's a little early, but maybe another 6 months, but we're also looking at how to get into the luxury coaches and stuff like that. But the whole strategy will be that you will have little -- incremental CapEx -- how do I get into kind of filling the slots, which will enhance my volume and share.
Understood. Understood. Okay. Okay, sir. And if sorry, you could attach a number, sir? Is it possible for you to attach a number to the next year CapEx?
Not at the moment. Let me finish this year. Yes.
But, I mean, whatever you've just explained to us, I'm assuming that it would be lower than what it is in this year, right?
No. No. Definitely. Definitely. We have said about INR 1,500 crores, INR 2,000 crores. We are not intending to spend that. In fact, I expect some of that CapEx. I don't know. I can share -- see certain things when I don't know, I prefer to say I will give you more details in second quarter because as I'm talking to you, I'm again having a meeting after this call with some of my -- the head honchos of all the CapEx divisions to find out how much are you guys going to spend. Finally, what is the number? So we are placing orders. Some of the orders we are now saying, can we deliver it to the first quarter. So some of them may slip over to the next year and then even maybe even you'll see a CapEx, I'll give an outlook only late in the second half -- at the end of the first half, sorry.
The next question is from the line of Ashwani Kumar from Reliance Mutual Fund.
See, my question was that, you are still selling, let's say, 6,000, 7,000 medium and heavy commercial vehicles. Now in this, which is the category which is still selling and where is it where maximum postponement is happening in terms of the customer demand?
See, I'll tell you what is happening now is, if we look at the all-India volumes, for instance, okay, the -- I would say that we have got a situation where we are having the ICVs doing well, okay, they've grown by about 6% to 10%. We have seen that haulage has gone up by nearly 50%, 47%, okay? Where we have seen a reduction actually happening is in the tractor-trailer segment. That is where we have seen the impact for the axle load in select areas. Tipper has also been a little off because of the uncertainties in the sector because tipper typically is not really affected very heavily by the axle load norms. So this is where -- these are the sectors where you're seeing the growth. Let us see whether there is a recovery in the tractor segment in the current quarter.
What does it require, in your opinion, the tractor-trailer recovery?
See, there are 2 things. One is the effect of -- one is the demand itself, the basic demand.
Certainly.
However, I'll tell you at the moment, Ashwani, and all the rest, whatever I'm sharing with you is just a broad estimate because we're continuously in touch with dealers, with end customers, large customers, et cetera, to see what is happening. So they have been saying there is uncertainty and the GST is creating some challenges. So if the government were to favorably consider this and it happens, then it can be a little bit of a boost for the demand. But uncertainty, if it is not, then that will also be better because if, suppose we were told there is no decrease, there is no decrease in GST rate, then people will start buying, is our guess.
And tipper is a bit surprising unless you say that because that is one thing, which was doing pretty well in the last few years and there the demand is not to be impacted by the axle load change? So do you expect the tipper demand to bounce back once the -- again the infrastructure investment continues in the next few quarters?
Please stay connected. We seem to have lost the line for the management.[Technical Difficulty]
So I think [indiscernible] I think the stability of the axle load will also start coming in. The thing that is required is that certainty of the taxation we hope the government will do. I'm sure that the government will come out with something for the auto industry. The third one is a little bit of GDP growth. These are all the things that are required. Otherwise, endemically, this cannot just grow by itself.
The next question is from the line of Ronak Sarda from Systematix Group.
Gopal, congrats on good set of numbers. Sir, my question is a clarification on the production adjustment which you highlighted. If I look at the [ CL ] numbers, the production is almost 5,000 units higher than the dispatches. So how does the profitability move when you get into second quarter, where you're adjusting your production levels? Will the lower production levels have a meaningful impacts on your operating leverage, or do the shutdowns and the correction in overheads take care of that?
See, I think that basically I -- the shutdowns are being done. The primary purpose is like this: The logic of a shutdown -- temporary shutdown, not full shutdown. I'm talking about a temporary shutdown, closure in parts, et cetera. Is do I -- should I just step up my inventory now and then close it for 10 days instead of doing the average production for -- or a low level of production for 10, 15 days? [ You understand ]. Because that can become more expensive. So the tradeoff that happens continues. For example, I can never shut down a paint booth. If I shut down a paint booth, I have to factor in what is the start -- the costs of restarting a paint booth, scraping off the hardened paint, et cetera, which is very expensive.
Okay.
But I have to -- and so for example and -- if I am doing an [ FSM ] or a engine line, I can always take a little bit of a shutdown. So the idea is to ensure that we don't lose on any kind of an upside on volume if it comes in. At the same time, does it make sense for me to run, say, 2 shifts for 10 days and then shut it down for 5 days? So that is an economics that is taken -- that's an economics that we take into account, based on which we do it section by section, not just by a plant. Within a plant, certain sections will be running. Certain sections won't be running.
Right. I agree. Okay. And sir, second was the -- I mean there was some news that Goa mining is also getting back on production, initially exports and then the mining would restart. So do you think that there's a substantial part for tippers to recover and obviously assuming road construction picks up as well...
[indiscernible] the demand of tippers. If it goes up, it's good for us. So let's hope that it happens. Because the overall TIV has been -- in tipper has been down by nearly about 10% on the western side of the country. So it will be good news.
[Operator Instructions] We'll move to the next question. The next question is from the line of Hitesh Goel from Kotak Securities.
Sir, basically for this year we are not expecting a major prebuy. Do you think there could be a drop next year also? Because if you'd look at a 7-, 8-year CAGR in terms of volumes, the CAGR of industry is not that great. So how do you look at that?
See, my viewpoint is slightly different in terms of what can -- in the sense that I'm not looking at these 5 years of growth and then 1 year of reset or 1.5 years of reset because this is, first of all, a technology jump from BS IV to BS VI, point number one. The second point is I still believe that the way the industry, I mean almost all companies, all industries, are operating today are completely different from what it was operating maybe 5, 10, 15 years back. Maybe 15 years back, that -- the philosophy was that we will set up capacities and then trying to kind of take the up end of the market. That's how most industries were working. And even today, certain commodity markets, they may have no other choice, but if you notice, today the investment is extremely nimble footed, right? And the way companies are managing their -- I know I'm digressing a bit instead of answering it specifically, but I typically like to give an underlying philosophy before we answer a specific question like this. So the second thing that you will see, even companies which are not in the transport industry, any company, they're trying to derisk their model of manufacturing by ensuring that there is a good, healthy mix of in house and outsourcing both in terms of manufacturing as well as people. So that people can scale up and scale down. So the philosophy of current -- today manufacturing, the scaling up and scaling down as efficiently as possible given that demands are also now -- demand cycles are going up and down very fast. The same thing is happening in the vehicle industry. So my answer to your question is like this: Given the backdrop of what I told you, I believe that, if there is a good growth in the economy, you will see commercial vehicle industry grow irrespective of whether it is BS VI or not. Yes, BS VI is in a way a little bit of a disadvantage because it's a higher cost. People have to get used to higher costs, but they will get used to the higher costs provided they are getting a higher [ revenue ratio ] and the return on investment is going to pay off. If the freight rates don't adjust and if the return on investment does not pay off, you will see people exiting the sector. The moment you get exiting sector, there is going to be a scarcity in 2 quarters. Immediately investment will come back. So the fact is this demand-supply push-pull will continue to -- until -- it's the new normal. My logic tells me that, if things go there is no way the freight rates can come down and [ that ] person is going to invest more in a vehicle and also supply at a lower freight rate and bleed. He is not going to do that because then he can't pay the NBFCs, right? So it's not going to happen that way. What I see happening is freight rates will have to reset. They will reset, but if you want demand to go up, that is going to hinge purely on the economic development and the GDP growth numbers. If -- next year, if the GDP growth numbers are not going to be healthy, then we have a challenge. Otherwise, I expect that the impact of a new technology coming in, typically like what happened in BS IV -- but it was a lot easier because the cost increase was not that much. We will see a dip in Q1, but if the demand is good from Q2 onwards, we can see something. What will be the growth next year full year, at the moment, I can't hazard a guess, but people can't stop buying trucks because they are just about 15% higher or 10% higher or 20% higher. They will have -- they will buy trucks if they know that there is a demand for trucks and that there is a return on investment.
The next question is from the line of Pravin Yeolekar from CGS-CIMB.
Yes. Gopal, this is Pramod here. 2 questions. One, with regard to working capital, what is the situation now and also the net debt?
Can you speak a little louder?
So what's the working capital now in terms of absolute number of days, and also the net debt end of June, if I missed it?
If my memory serves me right -- just give me a minute. I think working capital at the end of -- the operating working capital at the end of June was INR 800 crores -- sorry. It is about the operating working capital because -- our receivables, payables and inventory. I am not going to take into account advance tax paid and all that stuff. What is driven by production, sales and suppliers is about INR 670 crores.
And similar net debt.
Net debt is the total borrowing as on date is -- the net debt is INR 510 crores, INR 511 crores. It's not really significant even now.
Okay. And second question is considering the challenging times, where do you see your break-even point for broadly the MHCV capacity utilization, either at EBITDA or PBT? And how this changed over, say, last 3 or 5 years.
See, all I can tell you is -- from the break-even point, you must understand it's not an easy question to answer, so I can't give you a straight answer. You know why. As a company grows when -- see, when I joined the company, the company's turnover was INR 9,500 crores and INR 9,700 crores, right? It has driven to INR 27,000 crores, INR 28,000 crores. In such a -- certain circumstances, the break-even point cannot be lower. The break-even point can only be higher because the amount of fixed -- absolute fixed expenses and effort that goes into manufacturing is going to -- I mean, manufacturing the larger turnover is going to be higher. So we can't have a break-even point that is coming off, right? But given that what we are trying to do, I hope you agree with my observation. The...
That gives you more scope, in that sense, to bring it down and in these greener times, if that is the case.
That's exactly what I'm saying. So having said that, what -- that's why I said, when you're asking over the last 5 years, what happens is obviously the break-even point will go up here because we have to take more people, then more fixed expenses. So the recovery of -- there is more fixed expenses. Unless the contribution per unit is going to be significantly higher, say, doubles, then the break-even point can come down. Otherwise, what has -- actually has happened over the last 2 to 3 years -- what has happened over the year for Ashok Leyland? We have actually been -- the margins have been under pressure because of the discounting -- not pressured. They've either been flattish or maybe 1% up, 1% down like that. They've been oscillating in that band. Now after that, what has happened is the operating leverage [ has peaked in ], due to which we have been able to continuously post this double-digit growth in EBITDA numbers, which is exactly what has happened till last year. This year, when we said that, okay, let's assume that the industry is going -- at the beginning of the year -- I'm not giving an outlook now. When we said that, "Okay, let us grow this business. And let's assume that the business is going to grow at 10%," how do we budget for it this time? And we budgeted for it and said, "Now let us take a lower budget and overheads," because there could be a downside already. So this is -- on top of the expenditure that was lower budgeted, we also said now let us look at taking out cost, which is why our numbers are looking better than what they could have been if I had not taken those steps at the beginning of the year -- I mean, we had not taken those steps at the beginning of the year. As far as absolute break-even point is concerned, I mean, I don't have the number readily [ with you ], but month-on-month it keeps oscillating because of the sheer oscillation, but possibly I'll try to share that with you in the second half when things are lot more stable. The underlying philosophy, you are right. We are trying to reduce the break-even point from what it was last year.
The next question is from the line of Ashish Nigam from Axis Capital.
Congrats on good numbers. Just first question on what happens to unsold inventory as on 1st April 2020. [ Can it be ] something similar to what we did in BS IV, that we recall them back from dealers and we divert them to exports? Is that a possibility?
Well, let me first -- thanks for asking the question, but I have to change the -- your response. We didn't take all the deliveries and divert them to exports. Almost, I think, 70% of it was refitted with our iEGR engines because it was easier to do that. And we sold it in the market. It did take time. In the first quarter itself, we were able to redeem it, but some portion of it, we were able to sell it in exports. That is how we said we will do the plan on -- [ in March ], and that is how we executed. But in BS VI, to be honest, we can't do it that way because what is happening is it's not just an engine. It has also got the exhaust system, so you've got the [ DOP ], the diesel particulate filter, et cetera, which is to be filled then after the urea dosing system. So there's a lot of addition that has to be -- happen. Our strategy is very simple. We will keep certain inventory which is necessary for the marked export market. Otherwise, let me tell you, we have to see how to minimize the loss of BS IV vehicles because you can't do much with them. So we are doing some advance planning to reduce the impact of the potential loss that can happen in the event you have unsold inventory. And this is not only for us. Dealers also will be very -- what will they do with the vehicles, so we have to have some very astute planning. Believe me, it's not easy.
Sure. And what is the...
This is why what will be helpful -- see, what is helpful in such circumstances, and I am just hoping that the government will look at it that way, is if they give a last date of production instead of a last date for sale, or registration, then what happens? The industry knows, yes, on 31st of March, that is the last day on which BS IV can be produced. After that, you can't produce.
But the industry is still not clear whether...
[indiscernible] -- we are not clear. They are saying registration, but we'll have to see. See, we are making representations. In many cases we found the government to be reasonable, so let us see whether it happens.
Got it. And what is the financing situation at the moment? Is there further stress for the truckers and dealers because of the NBFC worries? And in that scenario, where does Hinduja Leyland Finance step in to give you an advantage?
So let me put it this way. Hinduja Leyland Finance ensures that there is -- they account for about 13% to 14% of our entire portfolio, right? So they give help in both strategic and FTU, FTB sales also, but we also are keeping it at an arm's length because it's a well-managed company with its own senior leadership team. So we do reviews with them every month, maybe every week, on ensuring which are the customers that we have to do, but there are some internal guidelines, due to which it is a safe NBFC in the sense there is -- it's a very good NBFC even in current [ thing ], no problem on financing. The portfolio is pretty good. The provisionings are not huge. So touch wood. Everything is going well in that company. They -- not more than 50% of their portfolio can be commercial vehicles of Ashok Leyland, and not more than 15% will be the share. We don't want to increase it beyond a point because we are not using Hinduja Leyland Finance as a absorber of discounts. We don't want to do that. So in the sense, I don't go say, "I'll do 100% financing. And then you -- there is no security required." You -- we don't give those kind of deals with customers because, I'll tell you, Ashish, I, we have found out one thing here. It's not to pontificate on a call: Better to do reasonably sensible business, and things will be good in the medium term. We tried to do all these very short-term things, then what happens is at some point in time there is a challenge in the balance sheet. Now I am not saying that we don't offer excellent terms [indiscernible]. Of course, we offer, but then we take the risk. We discuss about the risk, then we say whether there is a subvention required. That subvention is not only for HLFL. If I do it with any other company also, if -- suppose I have a critical customer, and the consumer says, "No, I need this kind of a rate. I need this kind of a thing," or there is a particular risk where he is overborrowed in the market, the lender is saying, "Hey, I have got overexposure. I don't want to do it," then we have to put some money into the table and say to the dealer and to the financier that, "Hey, I'll subvent your loss in the event it happens." That's a marketing dollar that I'm putting or a marketing rupee that I'm putting on the table, but as a philosophy, we want to be very sure that whatever we do in the P&L doesn't reflect into a balance sheet problem 2 years down the line. Better to bite the bullet now instead of reflecting on it 3 years down the line. I hope I have answered your question.But having said that, I just want to tell you that HLFL is a very strategic player for us. It's very important. That is why we have invested. We will continue to invest into the business because it doesn't require a huge amount of capital outlay. They are doing well. And it is a -- the book value of that investment is insignificant, and I wish I could have owned 100% of the company, but it's doing very well. And we will continue to ensure that we are doing appropriate business and use it as a strategic lever. Of course, the key accounts Hinduja Leyland people, along with our senior leadership team and marketing, are discussing across the table to close a deal. Of course, it happens, but we want to ensure that it is done in a prudent way. That's all I'm saying.
The next question is from the line of Sonal Gupta from UBS Securities.
Just, I mean -- just carrying on the financing side. Are you seeing any pressure in terms of customer finance availability, or really speaking, because of the NBFC issues, et cetera?
I'm sorry. I have to -- again I lost you.
Sure. Sir, I -- what I was asking is on the financing side. Are you seeing any pressure, because of the NBFC situation, in terms of customer finance availability? Or you don't think, given that, there is -- for you there is not that much of an impact.
See, we have not had -- it has not really happened because these are key guys who are there, okay? We have got HLFL. We've got Cholamandalam. We've got Sundaram Finance. We got Indusind Bank. We got Kotak. We got ICICI. Of course, some of them are not NBFCs. Some of them are banks. I fully understand it, but I am looking at people who are supplying money into this, right? And [ HDB Financial ], et cetera. Well, they are all doing -- I mean they are not starving for money. There are certain categories who are maybe in occasional pockets there is an issue, there is a stress, but generally what has happened in this kind of a thing, more than the supply of money, is that cost of money. So generally, because there is a worry, people have stepped up the margins in the NBFC sector, and there is a little bit of pressure on the margins. So -- on the interest specs from the buyer side. So that is happening. And this continuous when, see, NBFCs ultimately borrow from banks, right, or borrow from the public. That's how it works. That's our only 2 sources, right? And then the banks themselves have an appetite to lend to the NBFCs is a problem. It is not the NBFCs. So that is why I mentioned I -- touch wood, I don't have any problem with HLFL. They are more than sufficient. I have just walked out of the HLFL board meeting. So I know that the liquidity is very well managed. There are no ALM issues. In fact, they are only on the safer side. So we are trying to ensure. So I'm sure most of the companies that I talked about are also very good companies. Mahindra & Mahindra finance. So all of them are good companies. So I don't see an issue for them -- for availing credit from the banks, but the whole process has become a little tight because money has become very uncertain. And then there are exposures to corporates, which is creating problems in the mutual funds. See, this is not a stand-alone NBFC problem alone. So if you really look at it, the mood of lending is affected by a lot of factors, not just in NBFC. So when an IIFL has gone up -- gone into trouble, what happens is general mood comes off for the appetite for lending to NBFCs. So NBFCs are also getting worried. "Hey, what happens if I don't have a supply of oxygen, say, 6 months down on the line? So let me borrow and keep. And let me be rationing it out to good customers through this thing." So that is the effect, but if you ask me, the deals are still happening. I -- it is a challenge. It is, of course, a little tighter than what it was 1 year back, definitely. There is no doubt about it, but hopefully, things will ease out.
Sure, sir. And sir, could you share the average discount number for this quarter?
Well, I can share the average discount number, but the -- just give me 1 minute. It is -- well, it is ranging last -- I think it is ranging in about anywhere between INR 3.5 lakhs to INR 4 lakhs, but this is -- again, I'll tell you this is a "head in the boiler, feet in the freezer" average, yes, in the sense it's got all kinds of trucks. It's got ICVs. It has got MHCVs. It has got 49 tonner. It has got buses. It has got a whole bunch of stuff, but generally let me give you the thing: The discounting levels are still high. I think that is what is the key take. So we have to manage by taking costs out of the product. I have to take out my operating costs. And I have to keep changing the mix and getting a good mix of large fleet operators and first-time buyers and first-time users to ensure that my discounting is -- average discount comes off.
We'll be able to take one last question. We take the last question from the line of Jay Mehta from Edelweiss.
Yes. Sir, Chirag here. Congrats on good set of numbers. My -- sir, first question is on this -- an MD and CEO position [ for us ]. Can you share some thoughts about when can we expect that getting finalized? In case you answered it, apologies. I joined the call late actually...
I am not able to understand your question at all. It's very hollow.
Am I audible now?
Yes, yes.
Yes. I am saying and -- can you share some thoughts on when can we make an announcement on adding a new MD and CEO for the company? Any thoughts on that? Where is the process? What -- and is there any update about...
I mentioned here at the beginning I think we'll have to wait and watch in the sense that, that is the -- see, let us put it this way: Let me [indiscernible] -- okay. One...
Yes, sir. Sir, second question -- yes.
No, no. As far as the CEO hire is concerned, there is no uncertainty in the process. The process is being -- efficiently being followed and it is being monitored by the Board, okay? There is no uncertainty in the process at all. We -- there is a lookout. I think that's happening. Now as far as -- that is one part. When will it happen? I don't know. I think that's a Board decision. We'll have to wait and watch. The second part of it is -- I can answer is, is there an impact because of the CEO search and -- in the management of the company. The impact is 0. There are 2 things on the CEO search and the impact of when it will happen. I think the right -- the Board is following the right process. They want to -- this is a reasonably large company. It's a reasonably complex company, so they need to get a good leader. Whether internal, external, we don't know. The second part of it is that is there an impact because there is an -- this thing. I don't think so. In fact, things are going well. The integration in the team is good. The decisions are happening. There is nothing that is being -- that is getting impacted because of this at all. All the major programs are well on track, okay? So our cost reduction is well on track. We have gained shares. So there is nothing that's getting impacted because of this.
Sir, second question was on your demand guidance that you are still hopeful that this year would not be -- could be flattish kind of a year. What drives the confidence of -- so that's -- and what are those changes that you're looking at in the system that you will be confident that the bounce back will be sooner and faster?
No, no, there is no bounce back. Like I told you, there is no -- I am not telling it with confidence. That's why I told -- again let me clarify. When I make any estimates, these are not based on absolute confidence. These are based on the visibility that you have, right?
Yes.
So when you talk to dealers and customers. What I mentioned in the call was the feeling that we get is that demand may start picking up from September onwards and slide into the third quarter. So if that prebuy happens in the third quarter, we possibly can see a flattish quarter. I'm not saying there is a growth -- I mean, flattish year. I am not talking about a growth year. If suppose the demand is not so high, then we can see. If the demand is not so high, there can be a de-growth year also. Now if you ask me what is the percentage, I don't know. It could be 2%. It could be 5%. It could be flattish. It could be 1% higher. I am not able to gauge a number at the moment.
Sir, a relative question was on freight rates. What we are observing is that, adjusted for diesel prices, generally freight rates are holding on. This is very different that we are seeing versus the previous cycles where we -- just to fill the load, a trucker used to compromise on the freight rates. So how do you read this?
But freight rates have come down marginally, but you see the problem is that they will have to hold on. Beyond a point, you see the freight rates -- after the reduction in diesel prices which has happened, there was a significant reduction in freight rates. So beyond this, I don't think it is going to happen. And see, the thing is like somewhere there is a complementary demand that is happening. So you are seeing that a lot more demand is happening on, say, some of the -- even though the FMCG sector is down, the FMCG commerce sectors are complementing the traditional basic goods sector in terms of freight.Now I'll have to go to this thing because it's a -- I need to now leave because there is another videoconference [ I'll have to get to, my gentlemen ], so can I now excuse myself and allow Balaji to take over, please?
[Foreign Language]
Yes, thank you very much. We'll take that as the last question...
Yes, [indiscernible].
Yes, sir. I would now like to hand the conference over to the management team for any closing comments.
See, one thing which I would like to tell. I find that the analysts are taking up effective tax rate of 20%. They have been taking the cue from the last year numbers. What I would request is that this year -- last year, we had the benefit of the LCV JV merger as well as the Pantnagar -- or the direct tax benefits. While the indirect tax benefit continue, the -- Pantnagar's direct tax benefit has ceased, with effect from the current financial year, so the rates which you take note should be more than 30%, 34%. So don't follow the same trend of last year and then take a cue and then take 20%. This is all I want to say.
Thank you very much.
Yes.
On behalf of Motilal Oswal Financials Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.