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Ashok Leyland Ltd
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Ladies and gentlemen, good day and welcome to the Ashok Leyland's Q3 FY '18 Earning Conference Call, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Raghunandhan of Emkay Global. Thank you, and over to you, sir.
Good afternoon, everyone. I would like to welcome the management and thank them for giving us this opportunity. We have with us today, Mr. Gopal Mahadevan, the President, Finance and Chief Financial Officer and Mr. Balaji K.M., the Vice President, Finance.I would now hand over the call to Mr. Mahadevan for his opening remarks. Over to you, sir.
Thank you, Raghu. I hope you are able to hear us all -- hear me Ragu -- are you able to hear me?
Yes, sir. We are able to hear you.
Okay. Has Balaji also joined in from Chennai?
Yes, sir. I'm there in the call.
Thanks. Morning, everyone. Thank you very much for the interest in Ashok Leyland and taking time for our investor call. I have Balaji also joining me. I'm calling [indiscernible] and Balaji is there in Chennai. I think I'll just give a quick highlight and then hand it over to -- for the questions.I think one of the most important things that I just wanted to share with you is that as you all know, the industry seems to have kind of turned the corner in Q3. I mean, the demand that was there in Q3 was unexpected. So we were in -- you remember in June 2017 the total industry volume was about 32% lower than the same period last year. And even in September, as we spoke, the TIV on a cumulative basis was lower than last year by at least about 12%, but now as we speak in Q3, the total industry volume has been 9% higher in absolute numbers. But if you were to really compute it in terms of tonnage and the number of actuals, I believe that the industry is moving towards higher tonnage vehicles and we possibly have seen a growth of 16%, 17% in tonnage terms.Ashok Leyland itself has grown about 41% in volume in the current quarter. We did about 31,437 units as opposed to 22,344. Our market share for the quarter on CM declared basis was 33.4% as opposed to 33.7%, so it's marginally lower by about 0.3%, but on a cumulative basis our market share is 33.8% as opposed to 32.6%. So we are about 1.1% higher than last year. I think this exemplifies that the iEGR solution that the company has embarked on, aside of the SCR solution that the company could also provide, has actually kind of helped us in this growth. I mean, it's been very well accepted in the market. iEGR is doing well in all the tonnages and we are happy that we have been able to help customers to have a product whose total cost of ownership is lower than what competition can offer.In terms of revenue for the quarter, we are 58% higher. And in terms of PAT, if you were to look at it for the quarter, we have been at about 178%. And our EBITDA for the quarter was 11.1%. Our total debt, for the first time I think in the history of the company in a December quarter has been negative at INR 543 crores. But, frankly, while I'm not going to celebrate on this, because there has been lot of customer advances that came in, in December, in anticipation of -- not in anticipation, but more for requirements to be fulfilled. But as we move forward, I think our working capital, all I can tell you is that our working capital is very well in shape and we would -- I believe that we would be at about 6 to 8 days, which is best-in-class in the industry. And we continue to post double-digit margins, despite the price impact of raw materials. I think steel prices continue to escalate, while we have been possibly the only player who has been revising prices quite regularly. We have done that in April with a 12%, 13% price increase and I think a lot of people were concerned that we seem to have taken prices up while the rest of the competition did not. But we had to do it, because when you move from Euro-III to Euro-IV, the costs do go up.The second point was, in July and subsequently in November also we did make some marginal price increases, because there were raw material cost push effects, which we needed to pass on. But of course, we are staying competitive, we are continuously working on our costs and all of this has actually culminated in an EBITDA of 11.1% for the quarter. So -- and the most important thing, which I should have possibly mentioned at the beginning the call were 2 things, one is something which is very close to my heart, is I think the Deming Prize that Ashok Leyland, the Hosur plant got. We are the only commercial vehicle manufacturer in the world to have got 2 consecutive Deming prizes. Last year we had it for our Pantnagar facility. This year we are having it for Hosur. This kind of exemplifies the efforts that the company is taking in kind of getting its quality up consistently. The second most important thing is, of course, this is a special quarter for us, because this possibly is the highest Q3 volume ever in the history of the company and possibly the highest ever revenues in the history of the company as well.But yes, let's -- now I'll hand it over to MK to -- for the floor for questions.
Sir we can begin with the question-answer session, right?
Yes.
[Operator Instructions] We take the first question from the line of Jay Kale from Elara Capital.
Sir, my first question is on the demand side. Are you seeing in the last few months the economy activity-led demand also pick up, or was it just pre-buying? So if you can just throw the kind of demand that we are seeing and how sustainable it is? That would be my first question.
Yes, I think, [ obviously ] we are seeing a lot more demand. I think there are a confluence of reasons, and frankly, the challenge that we have is actually putting a percentage to, or a factor for each of these reasons. One of the first things is in the northern states, especially in Rajasthan, in U.P. and other states as well, we are seeing that rated load legislations are coming in, so which means the overload which was happening in some of these sectors, including cement and steel, people now -- fleet operators would need to invest in more vehicles. So this is one reason. So very clearly this has increased demand. Now in states like U.P. the level of infrastructure spend that is happening, the activities that are happening, road building, construction has also kind of significantly scaled up. So there is a little bit of demand push that is also one of the reasons why we are seeing the demand from fleet operators going up. If you -- I think we are clocking one of the highest ever in terms of road building. We possibly doing about 24 kilometers a day -- anywhere between 20 to 24 kilometers a day and I think that is another significant factor, which is leading for the growth in the higher tonnage vehicles. The third thing is, as I had mentioned earlier, but this is still to be wait and watched, so I'm not saying that I've got it right or something, but I think the GST impact has kind of settled down. We had the -- last year we had the demonetization and then we had the BS III to BS IV, then we had the GST. I think a lot of this uncertainty has kind of settled down. The movement of goods between states has possibly improved. People are seeing that trucking operations, the productivity are getting better. So we are seeing investments happening. The fourth one is a lot of end customer industries, if it's FMCG, food and beverages, chemical industry, you have MNCs, a lot of them -- oil companies, a lot of them are insisting that their fleet operators, supply chain partners, would need to upgrade their fleet if they need to stay relevant in for the business. So I think this is a confluence of factors which has been driving up demand. And then on the eastern side of the country, I think the mining activities have also started to take off. This has been happening over the last 2 quarters, and that has seen a demand for tippers also going up.
If you can just quantify the Pantnagar production and whether -- what is the status on the incentive that we didn't have last quarter, If you can just highlight something on that?
Well, I can't share the exact incentive benefit. All I can tell you is that, yes, we have -- the profitability of the company has been achieved, despite the Pantnagar benefit getting reduced by about 30%, 40%. But Balaji can give the production in Pantnagar. Balaji, can you share the production after I [ finish this ]. But let's wait and watch; we have made representations to the government. I think we should see light at the end of the tunnel, because this is a commitment that the government has made, based on which investments have been made. So we have the benefits going up to March of 2020. The government has promised to look at it, but we will have to wait and watch how they react. But we have represented to the government that the investments in Pantnagar have been done based on the fiscal benefits that have been promised at the time of the investment.
Okay. And just one last, if you can just throw some light on the defense part. How do you see that going? I mean, are we seeing some slowdown in orders or how should we look at the defense portion, say, in the next 2 years? Is it in line with your expectations?
I think as far as defense is concerned, from an Ashok Leyland perspective, there are 2 parts. There is the stable orders that we have from VFJ and those would possibly continue. We are not seeing any slowdown on that. But I think we also have, as I mentioned to you, have about -- as I speak, the number of tenders where we are pre-qualified is about 21. The revenues of that would be anywhere between about INR 750 crores to INR 1,000 crores. We have started executing some of them. We've got various kinds of vehicles, including mine-protected vehicles or medium bullet-proof vehicles, MBLR, Multi Barrel Rocket Launchers. So there are -- and then there are different kinds of vehicles even within them, which are beyond a 4-wheel drive, they could be 6-wheel, 8x8, 12x12s etcetera. What I see happening in the medium term, you can see a lot of reports on the defense procurement that the country is planning to do. There are also requirements from the Army to refurbish their existing [ fleet ]. So I'm positive about the defense business. I think there's a lot of potential that it holds for a player like Ashok Leyland, who has been one of the larger logistics partner. But I think where I'm not able to put a -- put one fix on it is the exact timeline, because these are tender-based businesses. So at some point in time, the Indian -- the defense ministry would have to acquire land systems, they will have to acquire for transportation solutions, not only for people, but also for artillery. So -- and we can -- we have the capability to work with multiple vendors who are manufacturing artillery. So we are building our capabilities there. And I think there is a little bit of a medium term than a here and now quarter-on-quarter story. But as far as the VFJ business is concerned, it is pretty stable.
Jay, the production for the PNR in Q3 is 11,000 vehicles.
We'll take the next question from the line of Pulkit Singhal from Motilal Oswal.
Just wanted to understand -- I mean, so in Jan we've seen possibly some market share dip for Ashok Leyland in terms of numbers. Is there some production constraints out there, or are you just not participating in the discounts that are happening in the industry?
I think, see, it's more a supply chain constraint than a production constraint. So what happens I'll tell you. The challenge that all of us -- all participants -- it's not -- this is not an excuse or anything, but [ suddenness in ] demand for 3718 lift axle vehicles was suddenly so huge. You know that these are special vehicles, they are not -- this is not just a standard chassis. So these are lift axle vehicles. And then when you have higher tonnage vehicles going in, the whole supply chain system has to be worked on. So we have had a marginal dip, but if I had more vehicles, I possibly would have been able to sell. But we are trying to fix the problem, because it's not just production constraint at Ashok Leyland, it's more a supply chain constraint at the supplier's -- at the supplier's base. So sometimes -- well I can't take up specific names, but there are certain parts which get kind of rationed between various manufacturers. So the demand was there. I would have said that we could have possibly sold a bit more in January, but there were some constraints. But one of the things that I also missed mentioning was the LCV business, in my initial introduction. I think they have done a wonderful job. I think the whole LCV business is profitable now on a consolidated basis, between the 3 LCV companies, as well as Ashok Leyland operations. And I think even in the current month, I think the LCV volumes have been pretty -- very satisfactory in January. Yes, please back to you.
So the supply for -- I mean, so there is a supplier issue, but is that only true for Ashok Leyland or the industry itself on that 3718?
I think it's true for the industry also.
Okay. And can you talk about the discounting trends? I know it's high, but I mean, incrementally is it kind of stabilizing or getting better? How do you look at it?
It is not high, it is disturbingly high. I mean there is no reason [indiscernible] amount of demand to actually be discounting and we have -- we find it very difficult to kind of digest this. But we have to participate in the market to stay relevant. So our strategy has been, over the last 4 years, if you ever look at it, to persistently keep raising prices, and then managing the net price realization, because somewhere there is a satisfaction at the customer end when you get a higher discount. So we will have to raise prices and then we have to give a higher discount and that is the basis on which we are going about it. The discounts have been higher. I think the discounts are peaking, there is no reduction in discounts et cetera. I think it has become a price game for some of the players, because they want to do customer acquisition through discounts. We are very clear that I'm not going to take any order in which I have to leave money on the table. I need to make margins. I'm not saying that we will walk away from customers, but as a sense of where -- it has to make economic sense for my customer, it has to make economic sense for Ashok Leyland to do the transaction. So what we are doing to make the business have economic sense for the customer is to build vehicles, and I'm not telling this for the sake of just kind of speak, but generally, I mean, we are working very hard on reducing the total cost of ownership for the customer.
So lastly, when in a disturbingly high discount scenario, we have a pretty pleasantly high net realization growth of 11%. Now, if you could just help us understand that. I understand the product mix is getting better, but does this particular quarter have some higher contribution from non-truck revenues, like defense or spares or something?
No, in fact, defense revenues -- correct me if I'm -- Balaji -- were slightly lower. So we had exports in this quarter to Ivory Coast, but I think it predominantly it's been the truck mix that has helped us. So we have not had anything which is singularly responsible. In fact, if you were to look at it in comparison to the same period last year -- Balaji, I don't have the number readily, but I'm going by memory -- is that -- in the same period last year we had INR 50 crore coming in from the VFJ price escalation, which went straight to the bottom line, which actually was not an advantage that we enjoyed in the current quarter. And I'm talking about quarter 3 last year. So last year had a favorable impact in terms of the VFJ, whereas we didn't have that same thing in the current quarter. So the profitability that we have been able to achieve has been for 2 reasons, is the higher mix of products. We have somehow been able to ensure that the NPRs are slightly better. The third one is operating leverage. Very clearly, if you look at it, we have had a 54% or 55% increase in revenues and the PAT impact has been significantly better.
Correct, correct, sir.
Sir, Just let me squeeze in a last one. So any demand outlook, because all these factors that you mentioned in terms of demand, some of them seem to be structural. So any outlook in terms of demand growth for the industry?
Well, the demand seems to be firm and this is typically it's a -- fourth quarter is typically good. But what I'm not going to talk about is ratios, because last year the base effect was there, because that was a BS-III to BS-IV pre-buy that has happened, but January has not been bad. Let us wait for February and March. We are reasonably positive. See, I had given an outlook and then frankly, when I give an outlook it's not like -- it's cut in stone. Whatever visibility that we have is what we share. I had mentioned at the beginning that we possibly will see the year ending with a 10% increase in volume. It is possible that, that number will be hit, because the reason is, we already are there at that number. We are 9% YTD, but we must remember that Q4 of last year had a high base effect. But even with that base effect, are we able to maintain a 10% growth, we'll have to wait and watch. It looks like it can happen.
We take the next question from the line of Kapil Singh from Nomura Securities.
Few questions on -- you mentioned about operating leverage. So just trying to understand what is the kind of capacity that you have, and especially because fourth quarter you will be stretched, so from that perspective. And going ahead, when you look at next 1 to 2 years, if this kind of growth sustains, what is the kind of peak production that the company can do? Second, related to that, what kind of cost escalation is required to achieve that in terms of CapEx or manpower cost? For example, when we go from 3Q to 4Q, you may have, let's say 10% to 15% higher production. Does that require significantly higher manpower costs or other costs, or it can be done at the same level of costs broadly?
I think, instead of -- let me answer it this way. Yes, we are -- we are quite -- we are at about 80% or so of utilization. So -- and see, a lot of this I can't answer in absolute terms, you know why, because the mix of production if it goes to a 3718 is different from a mix of production if it is a 27 tonner. So it's not equivalent. So we look at it in equivalent units. All said and done, we will have to beef up capacity as we move forward, because we are -- at the moment, we know when we peer into the glass ball, what I can say is that we expect at this moment that '18, '19 would also be a growth year, because we would see a lot of infrastructure spend coming in by the government. And then we have '19, '20. If the BS VI implementation is going to happen, we expect that there could be a BS VI pre-buy that will happen in '19, '20. After that in '20, '21,we will have to wait and watch when BS VI comes in as to how the demand will be. But that's quite far away. This is one. The second one is, yes, we will have to augment capacity. The management is [indiscernible]of the demand from -- on capacity, and we will be -- we are already doing a lot of debottlenecking. I don't think we are going to do a big bang capacity expansion, setting up a ground field plant or something like that. We have facilities available, we are debottlenecking in certain areas where we believe that would kind of release capacity. The third thing is with respect to your question on whether it will -- with the fourth quarter, would there be a higher incurrence of expenditure. Of course, there will be higher incurrence of expenditure, because if the production is going to be more, we will have to wait and watch, but the production overheads will be higher. I mean when sales are more, the sales overheads are going to be higher. But what we look at is not absolute quantum, but as a percentage to sales. So as long as a variable cost as a percentage to sales is maintained or slightly lower, and then -- after that the gross margin kind of kicks over to an operating leverage. That's how you get the entire profitability getting planned. So I don't see anything of concern in terms of anything specific on production overhead or sales overhead, manufacturing overhead. I think we are well in control and we don't see any issues on that.
Sir, the reason to ask this question was because when I go from Q2 to Q3, there is very minor increase in employee costs, but your revenues have seen almost 17%, 18% increase. So is this area, which is largely fixed in nature, at current level?
[ Predominantly our ] variability is very low.
Yes, that is what I was trying to understand.
Management has done a wonderful job in terms of actually improving the productivity of the force.
Okay. Okay. And, sir, your thoughts on discounting as well, have we peaked and what are the kind of price increases you have done in Jan, if at all? Do you see, you will be able to pass on the increase in commodities for Q4 and going ahead?
See, I will tell you, it's a very [ dire thing ]. I answered this question, but in the interest of time of other people also. But all I can say is that we don't lead this discounting game. But once you give a discount, the customer then would say, hey, Mr. company X is giving this discount, so what is the price that you are going to give? So we work with the customer on a net price, we work on a total cost of ownership. We have raised prices in January again, I think, by 1% to 1.5%. Possibly the only player to do that. I'm not too sure whether other players have done that. We are trying to remove the effect of the raw material price increases. It's a very, very -- believe me, it's a very, very difficult thing to do in a market where it's ripe with discounts. So to answer your question, can I guarantee? I can't guarantee. But at the same time, you folks know me. I mean, I'm very open on these issues. But the basic idea of the company is to see that we keep improving our gross margin and operating leverage. I mean, that's why we have had so many quarters of double-digit EBITDA margin, except for the June quarter where the volumes have fallen out. So we have been pretty consistent on that and that is the goal of the management. We want to ensure that we grow the business, but we grow it profitably.
[Operator Instructions] Next question is from the line of Chirag Shah from Edelweiss.
Two questions to Gopal. One on the gross margin. So we have seen sequential dip in gross margins. Is it because of commodity cost pressure that already in P&L or is it because of product mix?
When you say gross margin, can you please define it?
Sales minus raw material.
Sales minus raw material cost?
Yes.
Yes. I mean, you're talking about sequential as in September to...
Yeah, Q3 over Q2 of '18.
See, it's a factor of commodity price [ increase ], as well as also the mix of products that can happen. So you see -- and what happens is, in some cases, some of -- this is more accounting also. So what happens is, in certain cases, the costs come out in the other expenditure which is looped in, because some of the variable expenses come over there. But when we look at the gross margin internally, what we do is we club all the variable expenses, including manufacturing, sales and productive -- labor costs and then look at what is my gross margin. At that level I will tell you that we have been able to maintain the margins on a sequential basis.
Yeah. And what is the kind of cost impact -- commodity cost? Is it possible to quantify to some extent, what is the kind of commodity cost pressure we have seen and what is likely in Q4?
All I can tell you is that we had a commodity price of approximately about INR 154 crores. Balaji, am I right?
Yes, yes.
For the first time.
Cumulatively I know. Not for the quarter. This is cumulatively for the first 3 quarters.
And does it reflect a reasonable part, or a large part is yet to come? Because many other companies have indicated that the commodity impact is not yet seen in the quarterly P&L. It is likely to come from Q4 onwards.
No, I mean, steel prices have been going up. How can it be that they have not seen it, because...
Maybe their contractual arrangements are such that there's a lag effect probably for them.
No, no. I mean if they are doing it, I think it's wonderful. But no steel company is going to supply steel at constant prices for 9 months.
Fair point. And second question was on your market share. Now, of late we have seen on monthly basis market -- we gain market share, we lose market share. So incrementally, if at all, you have to -- I know you focus on profitable market share and keeping that in mind, what all things you will have to do, is it more on product, is it more on distribution, is it more on internal efficiency? So what will drive market share for Ashok Leyland from here on?
Yeah, I will tell you, I mean, this is an important question, but it's like -- I keep telling this. Market share is like a thermometer reading of 98.6. It doesn't mean you are healthy, it doesn't mean you are sick. So while market share is a good thing to have, we will have to look at the entire performance of the company. Second, the network is actually pretty well laid out. You folks know that -- we were at about 350 points of presence about 6.5 years ago and today we are at nearly 2,900 points of presence. So we are a pan-India company. If you look at our share of business in north, east, west central, we are very close to about 30%, somewhere around 25%, 28%, 29%, 30%. So our presence is pretty pan-India. And a lot of networks we have added. Most of the networks we've added is in the non-south, because we were pretty well entrenched in the southern side. So I don't think there are any network issues. On the contrary, actually that has been a strength for us actually to be posting the market share gains that we've had. The other thing I just wanted to set in context is, you must understand that we have added about 10 -- approximately okay, I'm saying that we have added 10% market share over the last 5 years. That's a huge number. So on a quarterly basis, if I see some dip and then going up, coming down, like you rightly mentioned, on a monthly basis, I'm not -- while I do note that number, I'm not going to -- my entire strategy will not be rotated around that number. What I will be looking at is in terms of a product strategy, a network strategy, I will have to look at my technology strategy. Have I -- am I -- is my offerings correct? What is my -- what is the innovative offer I'm doing in aftermarket, in maintenance cost etcetera, and how is my dealers doing. So there is a whole lot of complexity involved in this market share gain. What I can tell you is that we are not saying that we have achieved this market share and we are happy sitting there. No, we will certainly try to grow our business. But we will have to look at a lot of other aspects before we take any steps. You are right. There are deals in this quarter where I have walked away from, including one large account.
Fair point. One last housekeeping question. Depreciation has gone down sequentially. So is there anything over there, because from INR 141 crores it's become INR 135 crores.
It is just that -- that why I said. I mean, maybe when we add CapEx, in a couple of quarters it will start going up, but [indiscernible].
We take the next question from the line of Sunil Kothari from Unique Investments.
Sir, my question is, this new change in this budget on -- import duty structure change on auto component import. What's your view and how we will be affected or not or something on this import duty change in auto components?
Well, actually, I need to study the impact of this. I have asked my tax guys, because I have been in London, there is a times zone difference and I have been stuck. I'll have to return. I don't think -- when I sat with our guys, they said that there is no material impact, but they're waiting for the notifications to come out. So I will have it only...
Are we reporting anything up to now?
Not anything significant. We are not a major importer at all.
And sir second point is, some comments on the Hinduja Finance performance, if you can throw some light. And IPO plan, just now we read --
I'm not able to comment anything on that, because at the moment we are looking at various options for it. All I can say is that the company has been doing well. It's a very good performer in -- it's -- we're very, very happy with the performance of the company and at the moment that's all I can share with you.
Great. And sir, last question is, there was a lull in aftermarket sales and spares and all these things. So, now it is -- it has stabilized and how It is performing?
It is performing very well. I think about 1.5 years back we used to struggle to do INR 70 crores, INR 75 crores, because the penetration was little lower. The team has cut itself a very big task of having a penetration of going up to 50% over the next 4 to 5 years. Currently, we possibly are at about 20%. But all I can tell you is that the guys are doing a wonderful job. They have now consistently clocking about INR 100 crores to INR 110 crores every month. There is not 1 month since the beginning of the year -- I think since when the aftermarket revenues have been lower than INR 100 crores.
We take the next question from the line of Priya Ranjan from Systematix Shares.
One question is -- I mean there are 2 questions, one is on industry capacity, at what level do you see that probably when we will see the discount will be coming off, where we are --
At what level -- sorry -- what will come off?
The discount level will come off, because if the industry capacity itself is going to utilize it around 80%, 85%, then there will be no room for giving discount.
So unless [ he's ] very desperate to gain further market share.
No, desperate in market share is fine, but if our industry capacity utilization itself becomes 70%, then whether you're desperate or not, you will come out of the discount.
I don't think so. See, I'll tell you, it's very difficult question to answer, because I don't foresee a situation where the industry capacity will be at 90% on a consistent basis. I don't think -- I appreciate your question, but I don't think it would be like that. And secondly, what happens is, there are various opportunities that will come for the commercial vehicle industry also. One is -- I know it's not a direct answer to your question, but what we will have to look at is at some point in time we are expecting that the government should look at the cash for clunkers scheme and that could possibly put in about 500,000 to 700,000 units of demand into the system. The second one is, I think as we are getting more and more technologically savvy in this thing, including we have now of course got fully built vehicles coming in, fully cabbed vehicles, of course we have had [ air blowers ] coming in from January. When all of these are happening, I think there is a lot more regulation that is helping us to consolidate production in the organized sector. But with respect to -- so there are opportunities which I see happening over the next 3, 4 years, which will augur well for the industry. But will that actually help discounts reduce, I'll have to wait and watch, because frankly, pricing is today being used as a strategy for gaining share and we will have to see when that kind of ebbs out. I'm not able to put a date to it at all.
And my second question is on your market share. It has been kind of stable plus/minus 1%. But when we look at the segmental market share, you have slightly lost, I mean you have lost the leadership in 37 tonner, but you have gained in 25 and 31-tonner in the multi-axle side. Similarly you have lost in, say, more into the tractor trailer side. But you have gained more at the lower end, say, 12-tonner, 15 -- 9-tonner and all. So how should we read it? Is it more because the products has -- acceptability of EGR is more at lower tonnage of vehicles?
No. We are doing pretty well on the 41 and 49-tonner also. But what happens is, especially see, we started -- we introduced the 3718 Lift Axle. But again, there is a lot of pricing involved in that. So there are deals where we are walking away from on the 37-tonnner. So I'm not going to sell below my variable cost. As far as the ICV market share is concerned, you are right, and I think it's a very good observation that you've had. I must appreciate you for that. The ICV strategy of the company, about 4 years ago our market share is -- Balaji, if I'm wrong -- was about 12% to 15%. Today we are at about 28%, 29%. That's happened because we had a very clear ICV strategy. We brought in a premium product called BOSS, which is doing well, a niche segment, it's possibly a unique vehicle in this segment. The second one that we did was very recently launched, about a year ago, GURU, which has been doing very well. It's a rated load vehicle, 3 cylinder, lower cost, option for carriers who are not looking at overload. And then we have just had a completely refurbished cab on our other ICV vehicle also. So we have actually seen a lot more penetration coming in. So what we keep doing is -- we will come back with our own strategy on some offering that we may have. In fact, we have had a 3718 [ I ] that has been launched, which is India's first vehicle with unitized bearing, or the only vehicle with unitized bearing. Unitized bearing, as in, it doesn't have to be greased at all. It's a lifetime greased up thing. And the second thing we are offering superior tires there, which will offer better mileage. And I think we will see a little bit of clawback on the 3718 market share. But we are trying to do it a little differently than saying, okay, I'll give you INR 50,000, INR 1 lakh more and buy my vehicle. So we are not doing that.
So the market -- I mean, now the 37 is -- in multi-axle side, 37 is probably, I think, 60%, 65% of the market, which was earlier reversed. I mean the 35 and 31 was the [ 6% ]. So do you --
Nobody expected this kind of a demand on 3718 in Q3. I mean this was unprecedented.
And sir one more question on this -- regarding that. So can we put additional axle on MAV side to get it more a 42 or something? Is it possible technically?
Well, I am not an engineer, but I think that's a possibility. But I do know [indiscernible] company.
[Operator Instructions] Next question is from the line of Pramod Amthe from CIMB.
Two questions. One, what's the status of your BS III inventory liquidation, how much you have done? One. And second, what's the mix of your recently launched SCR versus iEGR in your portfolio?
It's predominantly EGR and it will be I think more than 70%, 80% should be that. Second one is, as far as the liquidation of the BS III to BS IV inventory is concerned, we had about 10,600 units, 10,600, 10,700 units. I think as on date we possibly have about [ 500, 600 ] units which are waiting to be exported, nothing more.
And second with regard to the ASP discounts.
I must say it's done a wonderful job. I mean, because it's not about the guy -- I mean the manufacturing guys, please understand, they have done a wonderful job. There is a lot of planning that was involved in terms of swapping -- we did export about 1/4 of that number. But the balance, just to kind of share, because you also need to understand what are the things that the team has done is, to swap an engine and then put in a BS IV engine, even when production is chugging along at full capacity is an amazing feat the guys have done. Wonderful.
Second, with regard to you ASP discounting trend. We understand that tactically to maintain your market share you are participating in the short term ASP discounts. But some of the recent contracts are spreading over next 2 years delivery. And are they coming with a similar type of discounts that scales us substantially? How do you look at such deals?
What is ASP?
The discounting -- ASP discount, average selling price discounting which your giving.
Average selling prices, he means
.Average selling price discounts, okay.
No, the deals are now getting elongated with delivery timelines of 2 years. So in that context, do you see them ever coming down? It looks, with these deals it will not come down at all.
See, I think we have kind of -- I know everybody is keen to discuss about our discounting. You see, frankly I'll tell you, we look at the problem slightly differently. I mean, not that we have licked the problem or solved the problem. We would not want to have discounting in this thing, so we are not leading the discounts, by the way. That is known in the market. Okay. You visit the dealerships and you will know who is leading the discounts. The point that comes up is, so what we've said is, yes, if the market is like this, I'll have to give discounts. It's like you want to buy a car in December, you will get discounts. Everybody is discounting, right. Now it goes on to January also. So it is prevalent in the commercial vehicle industry, lot more than in the pass car industry. But the point that comes up is, I need to look at what is my net realization and my net gross margin on the vehicle that I sell. I've got an X amount of fixed overheads, right? And I've got -- I have to ensure that to meet certain EBITDA targets that we have set for ourselves, how much do I need to sell the thing and at what volume. So it's a mix of the net price realization of the vehicle, the mix of the vehicles that I sell, the gross margin that I get, the gross contribution that I get on this total sales for the company, net of the fixed expenses, what is the EBITDA that I'll make, which will also give me an ROC. So it is a lot more, you know. So we do give a lot of flexibility to the operating teams. We are now today disseminating information quite significantly to the lead -- our guys in the fields, to the zones, the regions, the area managers. We are giving them flexibility to manage a portfolio, because you win some, you lose some, but overall we need to see 2 things. One is, on an individual transaction I cannot make a negative contribution, that's not permitted. I don't make negative contribution on an individual sales, never, unless there is a mistake by any chance. But I'm just saying it never happens. The second thing is, they can manage their portfolio, they can manage their customers. So there are large customers whom we can't afford to lose, but we may end up losing them if they are going to ask for a price, which is lower than my variable cost. I can't do that.
We take the next question from the line of Kapil Singh from Nomura Securities.
Sir, during your opening comments you mentioned that defense business, the additional tenders won are 21 and they are about INR 750 crores to INR 1,000 crores in revenue terms. I just wanted to understand, is this the overall life cycle revenue or this is the annualized revenue that you're looking at from these tenders?
It's a mix of both. We've got about INR 900 crores to INR 1,000 crores, out of which possibly the annualized revenues could be somewhere around about INR 550 crores to INR 600 crores. The reason why I'm not again able to answer this is, if the government does not re-tender again. They've said that they are going to re-tender every year. But you know there is a procedure, it's slightly more complex. Once you get into a [ club ] and you become, L1, you can be L1 for every year tender. But suppose the government does not, then my annual revenues will come down. You get it? So I don't want to state something which is not, but I would say that about another INR 500 crores, INR 600 crores of additional revenue would easily come from this on an annual basis.
Okay. So currently our FY '17 or '18, if you can tell us what would be the defense revenues broadly, in FY '18?
I can't now -- at the moment, I can't -- I don't give those revenue breakups, Kapil. So I'll have to be constrained, because -- but they would be, I think, slightly better than last year. That's all I can say.
Okay. Second, on LCVs, you touched upon it, their profitability has improved. So we are seeing market share gains coming through almost on a monthly basis. So what is the volume target or market share target that you have here? And --
I can't give you the market shares I get. All I can tell you -- of course, it's not that we don't have it and we are doing blind. We are not doing the business blind, but I can't give you a thing, because these are purely internal, and if you notice, we have never given a market share target even for the main MHCV. But I think what the team -- team has got is a pretty big hairy audacious goal. They've got a target that they've set for themselves. We have just started to do this whole business independently, it's just about a year since we've acquired the entire LCV business and I think that it has been a wonderful turnaround that has happened. And I think the last month, January, of course, is the first month, so in the sense, where we have reached again -- after a long time -- the 4,000 -- Balaji, how much did we do in LCV in January? 4,300 or 4,600?
Yes, 4,500 vehicles we did.
And then we had introduced DOST Plus, which has been doing very well, it's an upgrade on the existing DOST. So we have now a volume line and a value line product. We also had -- we still have the DOST rigid front axle for heavy -- for specific loads. But we will be improving, therefore, and we will be adding to the portfolio over the next maybe 9, 12 months, about 6 variants of it, and including some export variants of LSD. So I think there's a lot of promise that this LCV business holds. That's all I can share at the moment.
And sir, profitability of the LCV business, has it reached the overall company levels in terms of margins?
Well, the gross margins, I'll tell you are as healthy as the domestic truck business, the MHCV business. Now the trick is in getting the operating leverage up, up the scale, so that then the EBITDA margins also start coming up to the company level, it's not very far away.
And sir, CapEx targets, any?
As I said, LCV is going to be a very integral piece in our export initiatives also, like there are markets where LCV can make deep inroads.
Okay. Sir, CapEx number if you can share for --
I think Balaji -- about INR 500 crores this year also?
Yes. Actually it will be -- CapEx and investments if you put together, then it will be INR 650 crores sir. INR 650 crores to INR 700 crores, that will be the...
Pretty accurate.
Adding the investments also.
Yes, CapEx will be -- no -- CapEx will be a lot lesser, because we have made some investments into HLFL also very recently. We may have to put in some further money etcetera. But it's going to be reasonably in control. We 're not going to have any big bang CapEx-es coming like that. Some investments in Optare will be there, which we have completely provided for, but we would need to have some residual investment done to support the company for its running expenses, but it's not going to be significant, maybe [ GBP 7 million ] or so that we have been putting on an annual basis. I am not saying from now to March. Let me clarify, it's not from now to March, but on an annual basis, so that may continue. But I think Optare is also kind of getting some orders etcetera. So we are positive about the company also. They've had this New Zealand order for about 114 buses that have come in and that's [ 20 million ] which is going to be executed by May.
Next question is from the line of Chirag Shah from Edelweiss.
Mr. Gopal, I had a question again on defense. As I understand, there is a regular business of VFJ water bowsers and then over and above that we have this new tenders where we have technical qualifications?
They are for trucks as well as -- then there are some CBUs, Completely Built Units, which are done both in India and as well as exports. And then you have water browser business also.
Okay. So of this new technical qualification that you indicated, [ 21 ] kind of number, then nothing much of that would be in current revenue. It is all which will come from [ '20 ] or something like that, is it right?
Not '20, it will come on '18, '19, then '19, '20.
So it will start from '19 itself. And if you can help us, how the ramp-up happens. So if there is a fixed, say, INR 500 crore revenue, you get every year or it will start with a lower number and it will scale up to a INR 500 crore kind of a number for individual project maybe. If you can help us understand, so it will -- how to look at this part of business.
[indiscernible] because I just had a review of the defense business also as to when the government will start ordering. A lot of this is going to depend on ordering. So for example, if the ordering starts in say June, July, August, then that INR 500 crore number may be about INR 300 crore next year and then after that ramping up to INR 500 crores. But if the ordering happens, say, sometime in the far end of next year, then you will have very little in the next year and then after that, it will start. At the moment, I'm not able to give that visibility, because until the program starts, I'm not able to give a -- believe me, if I get to know about it, I'll share, but at the moment these are good estimates of what will happen. I expect that -- the ramp-up will happen, then I think we should see about INR 300 crores, INR 400 crores talking of immediately in next year. But [indiscernible]
And second question -- sorry, sorry.
I'll keep you posted, I said.
The second question was on spare parts, so post GST, as you are now stabilizing, how do we see that number for us? What is the aspirational revenue that we are looking from the spare parts business? Because we are generally low on spare parts. When we compare with our peers, we are still on the lower end, as a contribution to overall revenue?
I don't know, whether we -- as far as MHCV business is concerned, is it so. But when I benchmark it against my own LCV business we are low. But LCV is a new business. So LCV penetration is somewhere around 70%, whereas the MHCV penetration is about 20%. Our target is to take it up to somewhere around 40% to 50%. And given other things -- there are so many moving parts when I give you this kind of a statistic, but directionally, if what we predict happens and everything happens in the same bucket, you understand, you know what I mean, then we would want our spares revenue moving from about 5% to 6% currently to about 12% of revenues. And, you see, we are also working on other solutions business also. I mean we have mentioned that the basic idea that we are looking at is how do I -- so that's why we have had this launch of the [ 4 ] digital solutions that we did. One was the [ service mundi ] then we had the [ lay cart ] which is for ordering parts through the system itself through a website and then we have, what's called as e-diagnostics, which actually gives -- we have started fitting those boxes, by the way. So telematic systems inside the truck now. So it's not that I'm just kind of speaking and not doing much about it. There's a lot of activities that's happening there. E-diagnostics helps the fleet operators to understand what's wrong with the truck, do a quick diagnostic. And then there is something called an i-ALERT also, which we are now activating which is -- which gives real-time online information to fleet operators as to where their trucks are, what is the performance of the trucks, how is the engine performing, temperature, oil consumption, air pressure, et cetera.
We take the next question from the line of [ Mayur Malik from Indianivesh Securities ].
So I just wanted to know what is really happening on the electric bus front, how ready are we. And I heard that there were some orders that were really coming out from the state transports. Are we really -- are we looking to do something there in the near future?
Yes, very much. I think there's a separate electric bus -- electric vehicle SBU that has been set up that is headed by a every senior person and we aren't -- we have a technical arrangement also for swappable batteries, which we are -- which possibly we will place in the -- let us see in the coming expo. We will be just looking at with some mobility. And the second thing is of course -- see, we are looking at various options. See, the electric vehicle technology, you must remember, is not something that has been carved out in stone age. It's very much evolving. I'm reminded about the solar technology that were coming in early about 5, 6 years, 7 years ago when you had multiple options on solar technology, even in -- you had thermal, you had PV et cetera, and within PV you had so many options. But similarly, what is happening is, you've got long-range options, where you have a single charge, which will take you about 200 kilometers. Then you have got fast charging technologies also which would take us to medium range. Then you have swap technologies, where the cost of the battery and the size of the batteries are significantly lower, but you keep swapping them for short range. So we are actually plotting ourselves for each of these options, because I'm sure that there will be long-range solutions required, as well as swap technology is required. So we are very much on EV, it's very much there in our plans. We are working with -- working on tendering for some of the state government orders and you will hear from us soon.
Sir, have we done a tie-up with anybody, particularly for the lithium batteries and stuff? I mean just trying to understand, because what I hear is some competitors are [indiscernible] already supplied buses to a couple of state transport corporations. So have we really delivered any vehicles so far, or we are almost on the finalization stage?
One competitor has done an experimental order, but you see, we have tie-ups. I think we have very recently also done an announcement with a company abroad for tying up with battery technologies. See, what we are not doing is, tying ourselves with one person, because then you have a challenge. So we have to work for a win-win situation with a potential partner to look at various options, because even in lithium ion there are multiple options of batteries. Lithium ion is only -- is a type of a battery, the type of electro chemistry. That's all. So there are multiple options that are there. So when we are working with some mobility, the type of batteries that they will use is distinctly different from our fast-charging battery, which is different from a long range battery. Like, for example, what is being used in in our Optare business. So we must remember that we have been doing electric vehicles, we have built capabilities in Optare also. So you will -- we are not making some of those announcements in terms of tie-up and then kind of doing it, because we are doing it a lot more quietly, because the proof of the pudding is putting the vehicle on to the customer. So we are very much on track on that.
We take the next question from the line of Saurabh Kumar from JP Morgan.
Just 2 questions from my side. One is, what's your outlook for the --
Can you speak up a little louder Kumar, I'm not able to hear you?
Sir, just 2 questions, one is what's your outlook for the bus segment going into fiscal '19? And second is just if you can provide a breakup of revenue for the quarter?
Yes. Break-up of revenue I will give it to Balaji. As far as the bus segment is concerned, overall, if you were to look at the TIV, the TIV for the quarter was lower by about 27% on a -- and coincidently on a YTD basis also it has been so, because I think a lot of state transport undertakings have not ordered. You know for us, we are looking -- I am not saying we are not doing state transport undertakings. We are doing state transport undertakings. They form a very, very, very important component of our overall bus portfolio. But we are also focusing on the private sector and providing solutions for that. We have still to kind of scrape the opportunities in the school bus segment. So we are very positive on the Sunshine school bus that has been launched last year. There is lot of positive traction. You will know that it's India's first frontal crash-protected, rollover protected bus, absolutely safe for schoolchildren. So we have products there. And then we are also working on MiTR, which is again our 27 seater, from the LCV which is actually also -- can provide tremendous value to our customers. We are also trying to see what we can do with the Oyster range of school buses -- I mean buses that has been launched in Middle East, which has been comparable in terms of feel -- fit, feel and finish and NVH, with some of the global players. We've done blind testing of these buses also and nobody was able to differentiate. In fact, they thought our buses were far, far superior. But having said that the focus very clearly on the entire bus strategy is to look at how do we capitalize on the fully built regulations that are coming in, how do we make deeper inroads into the private sector, even as we tender for the profitable STUs, let me put it that way.
But STU ordering should come back next year you think, or --?
I think they showed. I think there was a little bit of gap, there was a lot of funding that was not available. Some of the STUs are -- most of the STUs are bleeding, by the way. So they don't have funds. Right? So, in fact, we have suggested some alternative methods of -- even financing, but it's difficult. I appreciate from their perspective that these are government institutions and it takes a little bit of time. There are workarounds that are possible for STUs to invest into fresh buses. So we are working with some of them.
Okay. And just the breakup of revenue if you can?
Revenue, as far as the domestic [ MHCV buses ] are concerned, it constitutes 75% and exports MHCV constitute 10%. So all these 3 put together constitute 85%. The rest 15% is from LCV, spares, defense and foundries.
Thank you. And that seemed to be last question for the day. I now hand the floor back to the management for their closing comments.
Thank you very much for participating in the call. I know there were a lot of people, but 1 hour wasn't sufficient. We will see whether we can extend it next time onwards, because I also have a -- I'm just rushing to the airport to catch the flight. But all I can tell you, ladies and gentlemen, is the management is putting its best efforts in augmenting growth, both in the domestic and export markets. We are very focused on our costs. We have taken a lot of them over the past 3, 4 years. But we are very particular about it, we will continue to hang on to our working capital, because we believe that that's the best way to do business and not tackle working capital. While we will have to invest in CapEx over the next 3, 4 years, believe me, they are not going to be lumpy CapEx-es which you're going to see that will -- that will crease our brows. Overall, I mean, it looks that '18, '19 should also be positive. So we are preparing ourselves for that internally. Our thrust on the aftermarket revenues and the exports, LCV, and defense will continue. And here is wishing all of you the very best.
Thank you very much. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference. Thank you all for joining us. You may disconnect your lines now. Thank you.
Thank you.