Ashok Leyland Ltd

NSE:ASHOKLEY

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Ashok Leyland Limited 2Q FY '23 Post Results Conference Call hosted by Batlivala & Karani Securities Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities. Thank you, and over to you, sir.

[Annamalai Jayaraj, analyst]

Thanks, Julian. Good afternoon, everyone. On behalf of B&K Securities, welcome to 2Q FY '23 post results conference call of Ashok Leyland Limited. I also take this opportunity to welcome the senior management team of Ashok Leyland Limited. We have with us today, Mr. Dheeraj G. Hinduja, Executive Chairman; Mr. Gopal Mahadevan, Whole Time Director and Chief Financial Officer; and Mr. K. M. Balaji, Deputy Chief Financial Officer. I will now invite Ashok Leyland management for the opening remarks to be followed by question-answer session. Over to sir.

[Dheeraj Hinduja, executive]

Thank you. Good afternoon, ladies and gentlemen. It gives me immense pleasure to be in touch with you, and I thank you very much for the interest shown in Ashok Leyland. I will quickly run through Q2 performance as well as some of the latest developments. I'm extremely happy to share that Q2 FY '23 continues to be good, aided by strong performance in domestic truck sales with a 32% market share. This is almost a 10% increase over our market share during the same period last year. This is the third consecutive quarter of 30-plus market share for Ashok Leyland.

In Q2, MHCV truck volumes have grown more than 1.5x of the industry growth, AL growth at 102% versus TIV growth at 39%, resulting in Ashok Leyland market share improving to 32.3% as compared to 22.2% in Q2 of last year. Sequentially also, in Q2, AL's MHCV truck market share has grown by 1.2%. Our market share has grown to 32.3% in Q2 from 31.1% in Q1. EBITDA for Q2 was at INR 537 crores, 6.5% as against INR 135 crores, which is 3% in Q2 last year.

LCV, which was on a growth phase, has been marginally impacted by semiconductor shortages. But for Q2 volume were still higher than last year by 28%. International operations sales have registered a 25% year-on-year growth in Q2. Q2 domestic aftermarket sales grew at 26% over the same period last year. The Q2 operating profit was at INR 303 crores as against a loss of INR 116 crores in Q2 of last year. Working capital has increased by about INR 300 -- INR 650 crores during the quarter, primarily due to increase in activity levels.

Consequently, our net debt has increased by about INR 400 crores in this quarter. Debt equity is at 0.4x versus 0.5x during the same period last year. During the quarter, we have launched 4825 tractor with H6 4 valve engines, AVTR 4220 and 4420 Tractor, 4120, 30 foot and 32-foot, Boss 1920, cargo 6x4 ready-mix concrete, 1920 with G45 FES expanding our range. I'm extremely confident that with these launches and the continued expansion of network, we will sustain the market share gains achieved in the last 4 quarters. The growth in MHCV truck, TIV in Q2 and LCV trucks is supported by the improved freight availability and growth in end user industries.

In addition to pent-up replacement demand, freight rates have held up, coupled with healthy freight availability supporting the fleet operator viability. Domestic commercial vehicle industry volumes to witness growth in FY '23 in line with economic recovery, post volume recovery in FY '22. FY '23 is set to register 22% to 24% year-on-year growth as per CRISIL, though volumes will still be lower than the peak -- previous peak of FY '19. MHCV trucks are expected to grow by 21% to 23%, buses by 103% to 105%, and LCV truck by 18% to 20% as per CRISIL.

On a longer term, CRISIL expects commercial vehicle demand to grow at a robust 10% to 12% CAGR for a 5-year period between FY '22 and '27. Historical data shows a high pace of revival in commercial vehicle demand in the past. Demand for CVs to remain robust in the long run. CRISIL expects bus segment to outperform in the long run over a low base. This will add to our volumes and market share as Ashok Leyland is the leader in buses historically.

With further demand growth, we are expecting pricing to become more rational. The softening of commodity prices, in particular, for steel should impact the margins positively in the coming quarter. Ashok Leyland, even while growing market share sequentially has been raising prices owing to higher input costs. What is good to see is that retention of such price increases is better.

LCV, both Dost and Bada Dost are gaining inroads and have been growing stronger by the day and volumes are limited by the availability of semiconductors. Both these products hold immense potential for exports and a perfect fit in our addressable market.

Aftermarket and international businesses continue to perform well. We are also putting efforts in reducing costs, both product costs as well as overhead.

Switch, which is an important initiative for us, I would like to reiterate our commitment to developing Switch as a global electric vehicle company. So far, we have been successful in establishing a name and a platform as a credible EV manufacturer in the industry. You are already aware that in India, we are growing our sales pipeline quickly and delivering a competitive product range. In the U.K. and Europe, there's headroom for growth. Amidst challenging economic environment, we are taking out our plans to utilize these growth opportunities fully by placing higher-quality cost-effective product.

Regarding funding for Switch, we are in active discussions with investors, and it is taking longer than expected as we would like to choose the right partners.

Finally, before I open the floor for questions, let me share the financials in brief. Revenue for Q2 at INR 8,266 crores, which is 85% higher than Q2 last year. Manpower cost in Q2 is higher than previous quarter by INR 82 crores due to increment bonus settlements and performance bonus provisions restatement. EBITDA is at INR 537 crores, which is 6.5% in Q2, up from INR 135 crores. Profit after tax after exception for the quarter was at INR 199 crores versus a loss of INR 83 crores in Q2 of FY '22. Operating working capital for Q2 was at INR 490 crores as against the negative of INR 167 crores as of June '22. Increased activity levels have necessitated increased working capital during the quarter.

Net debt was at INR 2,677 crores in September '22 as against INR 2,281 crores in June '22. Debt equity at the end of the quarter was up 0.4x. Capital expenditure for the quarter was at INR 103 crores. Cumulative spend for first half was at INR 618 crores -- sorry, INR 218 crores. CapEx spend for the full year is estimated to be INR 600 crores.

I now open the floor for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Pramod Kumar from UBS.

[Pramod Kumar, analyst]

Sir, my question is regarding some ICDs, which have cropped up again. Can you please help us understand why we are doing those and the rational for continuing to lend within the group and we also have debt on the balance sheet. So if you can just explain that bit, please?

[Gopal Mahadevan, executive]

Pramod, this is actually because we have to mention it that way. This is actually a short-term loan that has been given to our own subsidiary Switch and nothing more than that. So the entire amount of INR 200 crores has been given at kind of helping them execute some of the orders that they're getting. Switch has got great orders in place. The BMTC, the BEST, double decker plus the existing orders. So that's what it has been given for. It has not been given for any other group companies. It's to our own subsidiary.

[Pramod Kumar, analyst]

And -- but Gopal, I'm just trying to understand the funding bit here because we've been talking about raising money at Switch for almost a year now. So what is the way out if you're able to find any private equity investor at your terms? I believe it's more about the terms and the restrictions which come with those funding, right? So is there a plan that you may think of eventually funding this yourself by raising equity at Leyland's level?

[Dheeraj Hinduja, executive]

Pramod, I think like you rightly said, there is interest in electric vehicles from many private equities and sovereign wealth funds as well. We have been delayed, as you point out, but we do feel that this delay one should not affect the long-term potential in this sector.

And secondly, I think it is only right that we should get the right terms, conditions, valuations, et cetera. The EV sector globally, as you would have seen, has taken somewhat of a beating because many companies had raised capital at a substantial valuation. We have taken a very cautious approach. I think our business plan is very credible. And I would say that we do have opportunities of closing the funding, but I think it would be in the interest of all investors, stakeholders to ensure that we do tie up with the right partners.

[Pramod Kumar, analyst]

And related to it, and the last question, given the expected price inflation on the diesel vehicles because of RDE and the fact that CNG demand is now tapering off because of runaway CNG prices, so is there any timeline or thought process on accelerated rollout of EV, especially in the light [indiscernible] categories because that's where the electrification is kind of picking up very rapidly. So Dheeraj, it would be great if you can just share your strategy here as to -- if any timelines on a number of product launches or categories, which you would like to address using the EV format?

[Dheeraj Hinduja, executive]

Yes. Actually, this is something we had spoken of last time as well. We will be launching the electric versions of the Dost and Bada Dost in the middle of 2023. And you're right, we see increased requirements from many courier companies, logistics companies within cities for last-mile delivery, they are asking for electric vehicles. But I don't feel that when you look at the overall volume between where diesel is today, let's say, between 400,000 to 500,000 LCVs, while the electric vehicles are making a headway, I still believe it's a long way until you really look at affecting the diesel market.

So yes, there is growth. There is potential but I do feel that it will be a slow rise and it will be more a B2B business to begin with, rather than retail.

[Gopal Mahadevan, executive]

Just to add to what Chairman said, Pramod, we will be definitely there in a multi-player approach. So our investments in EV, which is why we are very, very careful about the investor that we want because this is a long-term play, whatever we see in the business with today is what we are going to have in the future. So we have decided, like Chairman said that we would want to get the right kind of investors and rest assured that just as we have got on to the EV bus business and have been doing well, we have very clear plans for LCV as well.

[Operator]

The next question is from the line of Jinesh Gandhi from Motilal Oswal.

[Jinesh Gandhi, analyst]

My first question pertains to the pricing trend in the market. So you alluded to the fact that prices have been increased and retention has been better. So can you quantify that in terms of what kind of price increases we took in 2Q and 3Q up till date? And how are the trends on discount?

[Gopal Mahadevan, executive]

In Q1, I think, Jinesh, we have been actually raising prices. That's why -- I mean, I just wanted to give, if you look at our EBITDA in relation to the market, you would see improvement even though we are playing in the same field, right? And this has been because of a conscious effort of 2, 3 things. One is price increase, where in Q1, we did about 1.8%, 1.9%. In Q2, we did another 1%. And very recently, we have announced almost another 1.9% price increase -- 1.5%. So we have been consistently raising prices, and we will continue to do that.

But at the same time, if you notice, we were the only large player to have gained market share in Q2. We were the only player in MHCV to have gained market share. So this has come very, very astutely. And why this has come is also because we have been assets, as you know, Chairman and I had mentioned in our previous calls, we have been refreshing the network very intelligently, bringing in partners who are confident of actually scaling up in some of the regions up in North, East, Central and West.

And I don't know whether you folks have noticed that again, not only have we grown significantly. Not only have we raised prices, we have increased market share. And more importantly, we have increased market share in all geographies. Northeast, West, Central, South, we have actually increased market share all through. So this has been a very -- what should we say, a very planned and systematic approach of growth instead of just looking at either market share or profitability. Like Chairman repeatedly says, we want to grow, certainly, we will grow, but we will grow profitably.

[Jinesh Gandhi, analyst]

Got it. And are you seeing discounts coming down or at least stabilizing given the demand environment in the CRM?

[Gopal Mahadevan, executive]

It has been almost stable between Q1 and Q2. marginal differences have been there. But we are trying -- see what we are trying to do is to not participate in increasing it any further because you see 1 of the other points that I wanted to also share with you, which is another kind of force multiplier for us is the excellent performance of the AVTR range of products.

So when we are meeting customers, the feedback on the product is not neutral. It is positive. People are extremely happy with the robustness of the performance of AVTR range of products, the mileage that some of these SKUs are offering and -- which is why we are also able to get a slightly better realization. We had mentioned in 2020 that we will slowly start seeing the benefit of modularity and the technology that we are offering, and we're seeing that on the ground happening today.

Hopefully, discounts will start coming off as the industry realizes that this has been an industry which has seen good cost increases from BS IV to BS VI and the steel price increases which have happened, which are now slowly coming off. So hopefully, we are expecting that discounts should kind of square off now.

[Jinesh Gandhi, analyst]

Sure. And there was a sharp increase in our staff cost on Y-o-Y and Q2 basis. Is there any one-off or just it's in line with the level of activity, which we had?

[Gopal Mahadevan, executive]

Staff cost is what we did, and we have decided that we have internal plans for a bonus, which are performance linked. So we have actually kind of increased those provisions as well in the current quarter.

And the second one, so we -- that has stepped up. We had been very -- not conservative, we had taken a view in Q1, but we believe that things are getting better. And we wanted to ensure that we start providing for it in Q2 itself instead of waiting for Q4. We'll make any adjustments that are required in Q4 depending on the achievement of the internal targets.

The second bit that has happened is, obviously, we have -- our teams have been supporting -- working hard over the last 2 years, even 3 years without any raises. So the leadership team felt strongly that we needed to give salary raises to employees this year because it has been nearly 3 years of hardship.

The third one, which Chairman had mentioned in his opening comment, was also on the settlement of workers that we needed to do. So that has also got accrued. Otherwise, we have -- 1 thing that we are very careful about which we are investing heavily in technology as well is improving manpower productivity and ensuring that we're not adding to manpower.

[Jinesh Gandhi, analyst]

Sure. And lastly, any indication of RM cost influence in 2Q and what you expect in 3Q?

[Gopal Mahadevan, executive]

So I'll just give you a quick thing and Chairman, you may want to add also about the initiatives that we are doing on the procurement side from the strategic side of it. Steel prices approximately had risen by about INR 5 per kg in Q1 and we actually saw almost INR 10 decrease in Q2, INR 5 vis-a-vis what existed on first of April, and then it came down by INR 10 in Q2.

Let's -- it looks like prices are softening further, which is good for us. And we'll continue to monitor this, but we are expecting that steel prices should continue to soften as we move in the second half as well. So now Chairman, would you also want to add about what we are doing on the manufacturing product performance.

[Dheeraj Hinduja, executive]

I think the key thing is that margins need to keep improving and as Gopal mentioned, products are performing very well, and that is what's leading to the market share gain as well. But there is a lot of initiatives internally where we're looking at cost reductions, again, as Gopal mentioned, improving productivity.

Naturally, material costs, we are -- with the volumes increasing the economies will start kicking in as well, hopefully, with some of our larger suppliers. So we do feel going forward with the softening of some of the commodity prices, this should help as well.

And of course, with the LCV volumes, we do have an initiative, I mean, on the value engineering of the products itself. So all I can say is that in many, many initiatives going on internally by the senior team to ensure that margins on the product would be much healthier.

[Operator]

The next question is from the line of Kapil Singh from Nomura. Mr. Kapil Singh, you are unmuted.

[Kapil Singh, analyst]

Can you hear me now?

[Operator]

Yes, we can.

[Kapil Singh, analyst]

Sir, I have two follow up, small ones. On the employee cost, are you saying that the Q2 level is what will sustain going ahead? Or is it the H1 level?

[Gopal Mahadevan, executive]

Well, we'll figure it out there because I think what will happen is LBC, It will be somewhere -- the truth is somewhere between Q1 and Q2. The reason is we did a catch-up in Q2, right? So Q2 has taken possibly the full impact of the catch-up that needed to be done. So we will see some softening in Q3. So the numbers will be somewhere in between Q1 and Q2.

[Kapil Singh, analyst]

Yes. And second, on the commodity costs, because the RM to sales have seen an improvement of about 100 bps or so, right? Hello?

[Gopal Mahadevan, executive]

Yes. Sorry, Kapil, just wanted to say that the manpower cost absolute while you look at it. The other thing is we are also expecting the growth in the industry, right? So we are going to -- we possibly will see growth in the top line as we move forward into Q3 and Q4. So when you look at a percentage to revenue, we believe that, that will actually come up. I thought I would clarify that. Otherwise, absolute manpower cost is 1 part. Yes. Okay. Back to you.

[Kapil Singh, analyst]

Yes. So when I look at the raw material to sales, it has seen some drop nearly 100 bps, but you took our prices by 100 bps and you also mentioned that the steel price during the quarter came down by INR 10, so I imagine the benefit should have been larger? Or are you carrying inventory, and therefore, you've not got the full benefit of that drop in steel price?

[Gopal Mahadevan, executive]

I would have been disappointed if an intelligent person like you did not ask that question, but the point of view also has the answer for it. We have inventory of raw material and WIP and FG. So that needs to be sold out. And that's 1 of the reasons why we have not seen. And see you must also remember another thing. While the team is pushing to a favorable mix, which is -- you know this business a larger the vehicles we sell, the more is the margins, right? But as an industry, you will also see that ICV is catching up quite a bit.

So we need to ensure 2, 3 things. We need to ensure that we're serving our customers for the entire suite of products they want. We have to ensure we're gaining market share equitably in all the regions. The third 1 is we also have to ensure improved profitability. So what has happened is the opening stock, which was there, obviously had to be sold out. And we need to -- our guys in procurement side have to continuous to peer into the future to see whether we need to buy more, should we defer purchases, et cetera. But at the end of it, in this quarter, you're not seeing the full benefit of it because of the opening stock. Possibly things will look better in Q3 and Q4, definitely.

[Kapil Singh, analyst]

Great. And sir, 1 question I had on the debt as well and CapEx actually has along with that. So earlier, we used to talk about CapEx being somewhere around INR 1,500 crores and some investments of INR 300 crores, INR 400 crores as well. So when we look at the business going forward, what is the steady state of CapEx and investment that we should look at, say, next 1 or 2 years? And also from a debt level perspective, there is some increase in working capital as well. How much of it do you think you could realize by reward by end of the year? And by when do you see yourself turning debt free?

[Dheeraj Hinduja, executive]

We have never had CapEx levels of INR 1,500 crores. And I think going forward as well, as I mentioned, INR 600 crores is what we foresee for this year. Majority of the CapEx that we have envisaged happened already with the AVTR, the BS VI. And so going forward, I would expect our CapEx to be in that range of INR 500 crores to INR 700 crores. Because the product range is already in position and the incremental CapEx that we move forward with will hold us well for the future product ranges as well.

On the working capital, Gopal, would you like to comment.

[Gopal Mahadevan, executive]

Yes. See, I would only mention 1 thing. While we will continue to endeavor to improve our working capital and the debt level positions, I think our working capital situation is not at all bad. The working capital situation is actually pretty decent for the industry that we are in. We are having a -- what happens is we are also having -- when the market is growing like this, we need to keep some [indiscernible]. So we keep our inventory levels slightly higher because if there is an upside in sale, we need to be able to kind of provide those volumes to the sales and marketing team, if there is a quick upside that comes in.

The second is, as we mentioned, as the revenue numbers actually start going up, you will see that the receivables start to go up a bit because we are not getting back into cash and carry immediately. At the same time, I just want to kind of assure you at the senior leadership level, one, I mean, among the various metrics that we keep almost looking at on a daily basis, receivables and inventory is 1 of them. And we are ensuring that receivables are monitored efficiently. We have no concerns on that.

But we need to ensure that we are paying out the rope to our dealer partners to actually make the sales in the market, and that has also helped. It has been a positive effect. The working capital that you're seeing has also been 1 of the reasons that has helped us in actually enhancing our market share.

Having said that, we keep a close watch on cash. Our debt, as Chairman had mentioned and Balaji had mentioned, our debt to equity is just 0.4% and possibly by the end of the year if things go as planned. we would see a significant reduction in the debt levels. All of it, by the way, is only short term. We don't have any long and short-term mismatch as we keep our long-term funding separate and the short-term funding separate but you would see possibly that our debt levels will come off quite sharply by the end of the year if things go as planned.

[Kapil Singh, analyst]

Sir, this INR 600 crores includes the electrification CapEx also? And what is the investment plan for next 1 or 2 years?

[Gopal Mahadevan, executive]

Yes, I'll just quickly share it and hand it over to the Chairman. As far as electrification CapEx is concerned on the buses and the light commercial vehicles, all of that is housed under Switch. So this INR 600 crores does not include that. We have, as Chairman had mentioned, we are actively pursuing capital raise and possibly will share some news. But we are not factoring in any further support to Switch and the current government in the INR 600 crores. And all of that will be short term, by the way.

But as far as other CapEx is concerned, we are now actually pared it down. If you remember, we had started the year with INR 750 crores. I think the team has come back and said that possibly, it's more a realistic number of INR 600 crores. But as on date, in the midpoint of the year, hardly INR 214 crores. Chairman, yes.

[Dheeraj Hinduja, executive]

Yes. Just to add on. As we have said for Switch, the requirement over the next 2, 3 years is close to $200 million to $250 million and this would be for a range of buses and LCVs. And within the overall CapEx since you asked about electric vehicles, Ashok Leyland would be looking at electrification of its truck range over the LCV range. So the ICV and upward products that would fall within Ashok Leyland.

[Operator]

The next question is from the line of Amyn Pirani from JPMorgan.

[Amyn Pirani, analyst]

My first question was a clarification on the upcoming BS VI Phase 2 norm. So a, what is the kind of cost inflation you are anticipating? And b, is the implementation similar to what happened during BS IV to BS VI in the sense that will you have to clear all the inventory at the dealer end, which could lead to a few months of destocking and wholesale coming down? So if you can clarify that first?

[Gopal Mahadevan, executive]

I mean, let me clarify the latter part of it first. [indiscernible] 1 thing here, this is not stuffing the pipeline. And we have said that in the past. So we never stuffed the pipeline. Stuffing the pipeline happens when your wholesale inventory is more -- I mean, where the retail sales are lower than the wholesale sales, right? In our case, the retail sales will be equal to wholesale sales. In sum, really, the retail sales are more than the wholesale sales, which causes a concern for us. Because then what happens is there is no sufficient inventory in the pipe.

And you see the other thing that has happened, while we are looking at this, the working capital has also gone up, why? Because earlier, we used to have regional centers for distribution. So suppose a dealer wants a vehicle, all you had to do was to ask the regional center and then the vehicle will be shipped almost overnight to him for him to make the sale. We used to carry the inventory not on their behalf, but that is -- we had a distribution which was different pre-GST. Post-GST, what has happened is if you look at the overall cost benefit analysis, we, at some point in time, had said that no, we will actually kind of close most of the regional centers and actually start selling to the dealers from the factory, which means there is almost at any point in time, there is an 8- to 10-day WIP work in transit to the dealers, which is to the account because you're cutting an invoice, right? That adds to the inventory, which is shown as receivable, actually, it goes to receivable part.

The second part of it is the dealer also stocks up a bit because he is not sure about the immediate serving of the requirement given the distance that is there. What we are doing now is having seen the efficiencies that GST has brought in, we are really looking at whether we should have central distribution point. So that will kind of help to keep the working capital more in inventory than receivable because once you cut an invoice, then it goes into the dealer receivable.

To answer your question, there is nothing that we have to worry about de-stuffing at the moment because our retail sales are same, if not higher than wholesale.

And your first question was on the OBD2 requirement that is there. We are working on this, but I think we'll have to come back to you a little later on exactly what the cost impact is because we are working on options on this, yes.

[Amyn Pirani, analyst]

And my second question is that the feedback that we're getting from the ground regarding -- 1 of the reasons why our markets has improved over the last 2 to 3 quarters, is that as your BS VI offering has ramped up and I think partly you answered it in the AVTR question also, it seems that you are able to offer a lower cost solution on the BS VI side. So first of all, I just wanted to get your sense, is that correct?

And b, how have you been able to achieve that and how sustainable that is?

[Dheeraj Hinduja, executive]

You're right. As customers are increasing the use of the AVTR product, they're recognizing that the total cost of ownership and fuel the mileage that they're getting is much better than competitor products. And I think this is a result of the overall development that happened during the BS VI process itself. And you look at the consumption of not only the diesel, but the ad blue as well. So combined together, we are seeing much better economies of fluid consumption than the competitor products.

[Operator]

The next question is from the line of Chirag Shah from Nuvama.

[Chirag Shah, analyst]

Sir, I have joined slightly late, so apology if I'm repeating the question. Sir, anything on the defense revenue plus engine driven in the quarter? And how it has moved sequentially Q2 versus -- Q1 versus Q2?

[Gopal Mahadevan, executive]

Yes. Balaji, do you want to give...

[K. Balaji, executive]

It's not revenue side, Chirag. It is around INR 50 crores per quarter.

[Gopal Mahadevan, executive]

But just to share with you, Chirag, the reason why it's happening is not because of any concern, this is a very government Ministry of Defense offtake driven business. So we are expecting that the offtake will start in the second, third and fourth quarter, yes. So this is -- see, what we will do from the defense side, we are far, far well positioned -- more well positioned than we were 2 or 3 years ago because 3, 4 years ago, we had only the VF check kits or the Stallion kits which were there.

Now today, we have multiple products available, including the medium bullet-proof vehicles, light bullet-proof vehicles. We are transporting -- we have got vehicles which will transport missiles. We have got vehicles where 2 of the large infrastructure providers, I can't name them, have chosen Ashok Leyland as the vehicle which will carry the transportable bridges, the retractable bridges. So there is a lot of technology that has come in and both in armored and non-armored trucks.

So once the government starts to make these orders, we believe that we are going to be pretty well positioned to serve it, and you'll see a defense revenues actually getting better. Chairman, would you want to comment.

[Dheeraj Hinduja, executive]

Yes, I was just going to add, as Gopal said, we do have a good order book. And the indications are that effective Q3 onwards, we should be able to start delivering. So you will see by the year-end, the defense volumes and revenues would be much, much higher.

[Chirag Shah, analyst]

Actually you answered second part of my question. Sir, my question was -- also was that for the specialist products now as an industry, everybody has been waiting. Any update or clarity that is emerging that now the difference -- these revenues will start flowing in? Our earlier expectation was somewhere in '22 or '23, the revenue from defense wherever you have seen technical approvals and trial runs have been done would start slowing in. Is it on course or there is any delay, any update if you can share, it would be helpful.

[Gopal Mahadevan, executive]

See, what has happened, Chirag, we've -- as a country, of course, there is for a defense business. I mean security across the parameter of the country is actually pretty needed.

The second bit of it is that the government has been tackling COVID and its aftermath over the last 2 years. So while they have been actually looking at defense, the procurement has not really started. Now what we have seen the recent announcements also is that the government has been talking about the defense preparedness of the country. But I mean, as a normal strategic initiative, I'm not saying that there is anything to get worried about. But we believe that the procurement will start as Chairman has mentioned, we are expecting that the procurement will start happening. But these things are not something that we can predict so accurately. We can only predict a trend and we can continue to invest in the business, which investments are not very high, by the way.

So what we are doing is we are offering various vehicles for applications and we're keeping it ready. We are getting it certified by the Ministry of Defense, and we're keeping our offerings ready. We have won the tenders also, but now we'll have to wait for the offers to come. Obviously, the government will place these orders because otherwise, they would not have been floating these tenders in specs, yes.

[Chirag Shah, analyst]

That's what we are trying to understand when can we expect that? Because I understand that it's -- to government and beyond the point, even if you can ride on that. I believe that, sir.

Sir, second question just was on commodity, if I can just squeeze in. So if you look at our gross margin, and we saw [indiscernible] raw material, if I use that, we are back to where we were in Q3. Now is commodity basket similar to Q3 levels for us, Q3 F '22, I'm referring to. Or it is more driven by mix? If you can help us understand that.

[Gopal Mahadevan, executive]

So what do you mean by commodity basket?

[Chirag Shah, analyst]

The entire commodity, steel, your aluminum plus some precious metals, whatever goes some engine plastics, whatever goes into your -- in making the vehicle. Because our gross margin as a percentage, Q3 was around 22%, and we are again at around 20% in Q2.

So what is driving this? Is it because commodity basket has gone back to the level or it is more of revenue mix, which is right?

[Gopal Mahadevan, executive]

It is a mix of 3. There are 3 factors which have actually will determine our margins, or maybe 4 factors. The first factor is commodity prices. If they are coming off sharply, then you will see the benefit of it coming in. But then the second thing is what is the level of inventory we carry not only in raw materials but also in WSA and MC. So nearly about -- see, if you -- in this industry, you will carry at least 1, 1.5 months of inventory, not in absolute inventory, not in finished goods, but in various forms, including potential orders that we have placed with vendors, right? I mean we can't remade on them, right? So that will happen. And in good -- in times of inflation, this also helps, right, we have seen that there is a lag in our commodity price increase. So this is the second factor.

The third is, as Chairman had mentioned, the various initiatives that we are taking on VAV across products to ensure that we are taking cost out of alternative material or design, et cetera. which again is a medium -- with a continued improvement initiative that happens, right? The fourth one, which you rightly said is mix. So there is a confluence of factors that determine the commodity cost.

As I had mentioned earlier, we are looking at it on a vehicle wise basis. Are we improving the raw material cost. We are looking on a vehicle voice basis, are we improving the net realization after discount. So while discount is 1 factor, we're saying, are we raising prices higher than the discounts to ensure that the net realization improves. While we are doing that, so on a vehicle platform basis, we are actually improving. What happens is if there is a mix change. I suppose we sell a little more ICV in a particular quarter. Obviously, the mix will have an effect, it's a confluence of all 4 factors here.

[Chirag Shah, analyst]

And sir, lastly, on the industry volume growth, according to you, when does the base effect start kicking in? And what is the normalized kind of volume for industry you would be happy with for '24.

[Gopal Mahadevan, executive]

Sorry, can you repeat what did you say? What kicks in?

[Chirag Shah, analyst]

Base effect because as of now, we also had a favorable base for volumes. Hence, we are seeing a very accelerated volume growth. So from when the base effect of volumes start ticking, especially for medium and heavy vehicles, and F '24, what is the kind of volume growth that you would be happy with as of date? I know that number could change from here on. But as of date, what kind of volume growth is what you would be looking at for '24 for industry?

[K. Balaji, executive]

Chirag, if you look at, if I may take on that question, if you look at the last year, only Q1 was affected by the COVID. And Q2, there was a gradual increase in the total industry volume. In Q1, if I recall, was around 30,000 vehicles. In Q2, it was around 43,000. And Q3 was 64,000. And currently now, at the -- in the first 2 quarters, we have been doing at around 75,000 to 80,000 vehicles per week -- per quarter. This is the situation, then you can judge where we are with reference to the numbers which we have talked in the last year.

So the base effect going forward may not be impacting in a bigger way. So the last year volumes, especially in Q4 was 94,000, in Q3, it was 64,000. So you will not see the base impact going forward in a big way. Over to you, Gopal.

[Gopal Mahadevan, executive]

The only thing that we are saying in reports here were in that at the end of this year as per forecast, the industry would be close to the previous peak, which was about 390,000 or 395,000, right? And it won't be at 395,000. That's not what I'm saying. But somewhere, maybe close to that, what it actually means is the demand maturity curve is actually catching up quite fast.

The second one, we must remember is that the size of vehicles have also gone up in comparison to what it was in the past. We have a lot more 49 tunnels, 40-plus tunnels, et cetera, which are actually having -- which is coming into the overall industry. I think we must also remember this is happening. You are right, and so is Balaji. That is a base effect in Q1 because last year, Q1 was very low. So we've seen that happening.

You are also seeing that this year -- I mean, this quarter, again, the growth has been there, but not at the same high level as Q1 of -- in the Q1 period. So we should also be kind of clear that in the medium term, this industry is set to grow if the Indian economy is going to grow because there is a multiplier effect vis-a-vis the GDP growth that we are expecting in the country to happen. And that's how we should actually plan our model.

[Operator]

The next question is from the line of Pramod Amthe from InCred Capital.

[Pramod Amthe, analyst]

This is with regard to working capital, sorry to repeat this considering that interest costs are going up. So it seems like almost like you added INR 2,000 crores seem to the working capital side. How much of that is towards the raw material inventory and how much is towards finished goods.

[Gopal Mahadevan, executive]

It is reasonably spread out here between raw material, FG and receivables. The point is we don't provide that level of granular details. All we can tell you is that our working capital situation is very much under control. It is not in a scene where we have given you 2 data points. One is we are ensuring and we have always ensured that in [indiscernible] is that our retail must be equal to wholesale or retail should be higher than wholesale. Maybe a one-off month may happen where we have kind of wholesaled a bit in the last day and the retail has not happened. But we keep track that we are not pushing stuff into the dealership pipe. That's very important, right?

And the second thing is we also are ensuring that our receivables position is strong. We review the receivable position. We ensure that the collectability of the receivables is fine and the aging is fine. And of course, as we mentioned, we do have -- we are keeping a little bit of inventory to ensure that we are ready to serve the market and even -- because there can also miss sales, which is awful to have just because we didn't have the inventory. But I don't think there is any concern on the inventory side that you should get worried about. Balaji, how many days of sales is a net working capital?

[K. Balaji, executive]

Roughly 5 days of...

[Gopal Mahadevan, executive]

It's not significant at all. It's just 5 days, yes. The net working capital.

[Pramod Amthe, analyst]

Yes. Gopal, I appreciate, especially I've been managing and year-end, you bring it back to literally a cash situation. The reason to ask is once you launch the AVTR platform, right, so there was supposed to be a lot of commonality of components and hence, mix and match can be much easily done and catered to the marketplace. That was supposed to be 1 of the key reason to go for a modular. And hence, the expectation that your working capital intensity should go down and whatever INR 300 crores, INR 400 crores you pay off in a year, should also come in as a handy for you to fight out in the marketplace. So has it been achieved? Or you feel there is still a long way to go?

[Gopal Mahadevan, executive]

No, no, it is being achieved. It's not a long way to go. See, these things take time. So you must remember, AVTR was launched -- it's a good question. AVTR was launched on April 2020. April 2021 was nothing. It was a complete washout. '21 - '22 first half was a total washout. So only now '22 - '23 second half, are we, see this also takes a little bit of prior audits hard. So if you really look at the launch of AVTR and the fantastic performance that the range of products are having in the market, the real play on the ground has been less than a year. If you really look at it, that has been the thing when the volumes have started to be kind of flow down into the market.

The second thing is you see AVTR brings in not only the raw material -- you're right, we will have fewer number of vendors, which is happening. We'll have fewer number of parts, which is definitely happening. And let me tell you this, while you have not asked it, the modularity will be a strategic advantage for us when we are actually looking at even alternative fuels like hydrogen. Because what happens is the basic structure of the vehicle is, it is adaptable, without a cost or a significant cost.

So you will see those benefits coming on the RM side or on the WIP side. But you cannot say that AVTR will result in lower FG or lower dealer stock because that has got -- that is sales strategy, okay? It's not a manufacturing strategy. So modularity is more manufacturing quality and serving the customer with various options that are available and which is why, again, AVTR is doing well because today, we are able to offer vehicles that the customer needs more than what he wants. We tell him his needs on a hub application segment basis, and they are very happy with the solution that we are able to provide. Balaji, do you want to say something?

[K. Balaji, executive]

Yes. On the working capital side, Pramod, we also have to take a look at the falling metal cost scenario. If we -- we cannot stop hike, but at the same time, we cannot also run on a depleted stock levels. Depleted stock level will lead to loss of sales. At the same time, now, if we do a high stocking, then it becomes an issue, especially in the falling raw material price scenario. So we'll have to be extremely careful, and it is being managed very well, Pramod.

[Pramod Amthe, analyst]

Second 1 is with regard to the demand front. Considering that you are a very strong player in the tractor trailer segment, which caters specifically to the export import segment. There seems to be some weakness on the export front and that things are changing much faster on the weakness there. So how are you seeing the demand specifically to that segment and does have an implication for your product mix and profitability?

[Dheeraj Hinduja, executive]

In the export market, as you correctly point out, there are certain challenges as a result of the global theme. But we are seeing, in fact, many of the Middle Eastern markets [indiscernible] exceptionally well, and we -- that is a segment that we're stronger. And we are also introducing new products into those markets. We've extended the network throughout the African continent as well. Over the last 6, 9 months, 15 new distributors have been appointed. So overall, we feel that we will end the year much better on the exports front than last year and volumes will continue to grow as a result of enhanced network and new distributors and many more products getting introduced for the export market as well.

[Pramod Amthe, analyst]

I was also looking for your tractor trailer segment, which has exposure to more of export goods or import goods to that extent.

[Dheeraj Hinduja, executive]

Tractor trailer. You mean the demand for the track trailer in India?

[Pramod Amthe, analyst]

Yes, exactly because it caters to a lot of port traffic and export import profit.

[Gopal Mahadevan, executive]

It's been growing well, yes. I mean, that's why I said, we have been looking at it geographically and product-wise, also. So if you look at our tractor trailer segment, we have actually looked at our market share there in that segment, approximately, I'm giving you some numbers, has been about 10 basis points -- I mean, 10 percentage points more. We moved from somewhere around 18% to about 26%. We have been doing well, I mean across [indiscernible].

[K. Balaji, executive]

And in fact, the overall share of tractor trailers in the overall MHCV segment, that has also gone up -- that has also gone up from 9% in 2021 to 13% now.

[Operator]

The next question is from the line of [ Vipul Kumar from Sumangal Investments ].

[Unknown Analyst]

Sir, what is the share of spares business in our revenue?

[K. Balaji, executive]

Yes, share business will be around 7% -- 7% to 8%.

[Unknown Analyst]

7% to 8%.

[K. Balaji, executive]

8% of the overall revenue.

[Operator]

Due to the time constraints, we'll be taking the last question. It is from the line of Raghunandhan from Emkay Global.

[Raghunandhan N. L., analyst]

Sir, my first question was on tractor trailers. As you indicated that the company has been successful in gaining market share and slowly inching towards the 30% mark. Dealers indicate that Ashok's 4-cylinder vehicle has done well versus competitors' cylinder vehicle. So just want to understand how do you see this market share gain trajectory because we used to have more than 40% share in FY '19. Do you see the recovery towards those levels?

[Gopal Mahadevan, executive]

Yes, we'll see. I mean, I'm not too sure about the 4-cylinder, 6-cylinder that you mentioned. But certainly, you see the -- all I can tell you is this predominantly across the spectrum of products. but certainly across all zones, we have been gaining market share in the current quarter, and we will continue to pursue that growth as we move forward here.

It's very difficult to say 1 segment 1 particular thing, whether we will continue to get a particular target like 40%. But certainly, we want to ensure that we are getting into a higher and higher presence in the market, which means we have to enhance -- our broad strategy is this instead of just talking about purely MHCV market share. Our broad strategy is to pursue our domestic growth and share of business, but profitably.

The second 1 is to grow our LCV business because LCV is a very, very important vehicle across the world. The third -- across, I mean, for export numbers elsewhere because globally, for every MHCV sold, we have about 3.5 to 4 light commercial vehicles sold. So it's a very important thing for us.

The third 1 is also to ensure that we grow our international business. That's going to be very, very important. So we will pursue all 3 strategies, yes.

[Raghunandhan N. L., analyst]

On industrial Hinduja Leyland Finance, so basically, the segmental results have been improving quarter-on-quarter and year-on-year. Can you talk about the trend in collection NPA, also the timeline for listing?

[Gopal Mahadevan, executive]

Yes. You see as far as the listing bit is concerned, maybe I'll ask...

[K. Balaji, executive]

Listing is expected, of course, based on all the regulatory approvals, probably around June of 2023.

[Gopal Mahadevan, executive]

Right? And as far as Hinduja Leyland Finance is concerned, it is continuing to perform well. Its total AUM is around INR 31,700 crores. It posted an income of INR 1,620 crores and a PAT of INR 215 crores, approximately about 13%. And it's GNPA is at about 6.3% and an NPA of about 4.4%. Numbers are pretty good.

And just as what the Chairman had mentioned about the IPO that we are looking at post the merger with the NXTDigital, which the company is looking at. The company has also already raised capital of nearly INR 910 crores from qualified inflation buyers. So there is no capital request now that will come up from HLFL to us.

And secondly, they have sufficient capital for that growth. And you must remember that is another subsidiary called Hinduja Housing Finance, which is a HFC, which is doing exceedingly well, growing very fast. And we also have another joint venture between both Ashok Leyland and Hinduja Leyland Finance, which is called as Gro where it's looking at solutions, both digital and financial, which we believe will be a multiplier effect for both our businesses, both for Hinduja Leyland Finance as a finance company and Ashok Leyland as OE.

So the erstwhile solutions business of Ashok Leyland has been transferred to grow, and we have actually added some of the financial solutions, including freight financing, et cetera, into that. And you're going to hear a little more about that in the future.

[Operator]

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

[Dheeraj Hinduja, executive]

I would like to thank everyone once again for your interest. As we said, we are very much on an upward trend in this industry. Our products continue to perform well across all segments. The market share has grown in each and every zone and new products will be introduced on a quarterly basis. And we do feel that the growth that we have seen in the first 2 quarters will continue going forward as well. Thank you very much.

[Gopal Mahadevan, executive]

Thank you.

[K. Balaji, executive]

Thank you.

[Operator]

On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.