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Ashok Leyland Ltd
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Ladies and gentlemen, good day and welcome to the Ashok Leyland Q3 FY '20 Earnings Conference Call, hosted by Nirmal Bang Equities Pvt Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Arora, CEO of Nirmal Bang Equities. Thank you, and over to you, sir.
Thank you, Stanford. A very warm welcome to all the participants on this call, and especially thank you to the management of Ashok Leyland for taking time out this morning to do this call. The management will be represented by Mr. Gopal Mahadevan, the Whole-time Director and Chief Financial Officer; and Mr. K.M. Balaji, Vice President, Corporate Finance. I request the management to make certain opening comments on the results. And subsequent to that, we can open the floor up for question and answers. So thanks, and over to you, guys.
Yes. Thanks, Rahul. Good day to all of you. Thank you very much for the interest in Ashok Leyland. At the outset, first, I would want to say that we normally have the investor call on the same day or the next day of the results. But this time, we had a strategic planning session going -- continuing with the Board. So we needed to complete that, and there was no time for us to hold a call, which is why we took it on the first day available to us, which was a Monday morning. So let me lead you through the numbers, which I'm sure all of you must have seen. So I'm going to just, very quickly, go through this so that we can have more time for questions. The total industry volume for the quarter was 53,681, which is about [ 39% ] lower than 87,518, which was in Q3 last year. On a YTD basis as well, the total industry volume was 1,76,200 and -- which was again 37% lower than the same period last year. So Ashok Leyland volumes were slightly lower. They were about 16,260 as opposed to 27,943, and it is slightly 42% lower. And so we did have a slight dip in market share, and I'll tell you why this happened. On a YTD basis, our market share is almost flat, it's at 0.6% lower. In terms of the revenues, we -- for the quarter is INR 4,000 crores as opposed to INR 6,300 crores. It is 37% lower because the TIV is lower. And our EBITDA was 5.6% as opposed to 10.3% in the same period last year. And so I'm going to now set a context to this whole thing. Why was our -- the reason why we deliberately decided to see market share is we wanted to clean the inventory in the system. As we are approaching to March, I think what was important for us was to ensure that we don't push dealer inventory into the dealership. As you're all aware, ladies and gentlemen, our market share is determined by wholesale and not by retail. So what has happened is that we decided that we will not push more vehicles into the wholesale because that will only create challenges for the dealers because then they will be piled up with inventory, and that's not the spirit behind how we operate. Even if you remember in BS III to BS IV, we were the only player in the market who had written to dealers saying that if that is an issue, we are going to pick up the tab as far as the sudden transition happened. So for us, it's important that we have a long-time sustainable partnership with our dealers. And to evidence that, let me give you some numbers. In June, when we were expecting that the markets will go up and this was not overstuffing in my opinion at all, we were expecting that after the stupendous win of the multi government, that things will start going up. But we did -- we saw that the economic downside continued, in fact, accelerated quite significantly in Q2 and Q3. But at that point in time in June, when none of us knew that this was the kind of downside that will happen, the total inventory, I repeat, because there is a lot of misunderstanding in this call, so I repeat, the total inventory with Ashok Leyland and with dealers was 27,500 units. I again repeat, it is not Ashok Leyland inventory, but the dealer inventory plus Ashok Leyland inventory was 27,500 units. Today, as I speak to you, the very same inventory in the pipeline between Ashok Leyland and the dealers, the total inventory in the system is only 6,500. So what we have done was methodically clean up the inventory. And we said it is better to see a little bit of market share than to keep pumping in inventory because come 31st of March, either the dealer or us will be cited with BS VI -- BS IV inventory, which will only result in losses. So the idea is not to look at short term gains, but to have a very clear transition plan into BS VI as we move forward. Now that has been one of the reasons why we have had this marginal market share reduction. The second reason was also that we walked away from deals in which we had to lose money over variable cost. There is no way we are going to sell trucks losing money over variable cost because that is not the intention. The better way to do it is not to produce and sell them because then to produce a truck, sell them at a loss, not total loss, I'm talking about competition selling, the trucks and buses, at the cost which is lower than the material plus variable, does it make sense to take all the trouble to produce and sell them at a loss, which is why we possibly were the only guys, again, who are transparent enough to share the plant shutdowns that we are doing, share it with investors because I think that's the best way to manage the company, be transparent, be clear about what your strategies are. Times are tough, but I'm sure that we're going to get out of this soon. The third aspect of it that I wanted to touch upon before you ask the question is our material cost is higher by about 4.5%. That is here or the reason is, I would say, threefold. The main reason, and I again repeat, the main reason, I'm sorry, I'm calling from home because I'm running a temperature, but I thought I'd take the call, is the main reason is that we have what is called as inventorization reduction. I just shared with all of you that we have reduced the inventory in the company also dramatically. When that happens, the overhead that gets absorbed on those inventory gets released into the P&L and material cost. So what happens is when the overhead gets released into the material cost, the material cost will get impacted by that. So that itself, the impact is something like about INR 250 crores to INR 260 crores for the current quarter. Nothing wrong with it. So why I wanted to mention that, while these are events that happen, but this is not on account of any sudden charge or on account of any untoward incident. It is purely because that, once you decide to reduce inventory, the overheads that are absorbed in that inventory, which are lying in those inventory, once you get reduced, will get into the P&L. The second reason has also been the mix. We have seen that the margins on ICV and in some of the bus STU tenders, the margins are slightly lower. So you would see an adverse mix, which has also played onto the -- into the material cost, but that is lesser of an impact than the overhead inventory. So I wanted to share this with you and set it in context. But most importantly, let me tell you that we are completely ceased of the problem. We have a special crossover team, which is looking into the impact of crossover into BS VI, which we are taking steps to ensure that we are selling the inventory as quickly as possible. We are not adding to the inventory, and we want to minimize the losses that we -- if we have into the BS VI transition. That is expect -- the K54 II initiative that I did talk about, we will hit the target of INR 500 crores for the current year, and we will see that the full year annualized impact for next year would be something like INR 600 crores and INR 650 crores. What I had shared with you earlier in the first quarter of the year -- or in the first quarter of the current fiscal was the VRS. We did go through the VRS, and we did shed about 250 people. Unfortunate, but we needed to do that because it was required to cut our overheads. And finally, we are also -- there are special teams, which are looking at cost of quality, looking at expenditures, which are unnecessary in terms of inter RSO moments or packaging and forwarding in distribution, et cetera. The level of digital that we are using in -- digital and data analytics that we are using is, by far, possibly the best in the commercial vehicle industry today, which is actually bringing our overall cost down, which is evidenced by the P&L. You would have seen that the overall overheads have come off. Our manpower has come off. Manpower has also come off because of the reversal of some of the bonus provisions that we had carried because the performance is going to be significantly lower. There was no necessity for us to carry these provisions, and we have reversed that. Having said that, also, the -- on the CapEx front, some of you had concerns at the beginning of the year when we said that we will be having CapEx of nearly INR 2,000 crores. As on date, we have total CapEx that has been spent is only INR 960 crores, and we are going to be far, far lower than the projected CapEx and we possibly will finish the year at about INR 1,200 crores to INR 2,300 crores maximum. And our debt level positions are also quite -- is quite comfortable. We are -- as of Q3, we are less than INR 2,000 crores of debt and last quarter, we were INR 2,736 crores of debt. Given a very tough quarter, I must state that we have done some very astute cash flow management, reduction of inventory, all of which has resulted in cash flowing in, and we are doing everything that is right to build a long-term resilience of the company. Having said that, now I'm going to hand over the floor back to you folks for questions.
[Operator Instructions] The first question is from the line of Ruchit Mehta from SBI Mutual Fund.
Just 2 quick questions, please. One is on the BS VI production itself. What percentage of current production, I'm saying as of this mid-February, would have shifted to BS VI? And what's the latest date by which you could actually shift BS IV vehicles into the market? I mean -- and I'm assuming here, you have those timeline issues of buying the chassis and going for body building and then getting the final registration in [indiscernible] done. And second, just a clarification, the 6,500 units that you said, it is as of today or is -- was it at the end of the quarter?
It was as of today. I will ask Balaji to give the break up after I finish this. We are doing trial production of BS VI because we are doing -- we are the only player who are not only doing BS VI, but we are doing MBP, modular vehicle program, Modular Business Program, as we call it. For us, this is going to be a medium-term strategic advantage, which will actually help us gain, I would say, customers over competition. We are very clear about that. And this will, in the medium term, when I say medium term at the end of 1 year or 1.5 years because these are large programs. And I think at the end of 1 year or 2, we would also see the benefits of commonization of parts coming in which will reduce inventory cost and complexity of manufacturing. Having said that, as I told you, the BS VI trial productions are on. We have already started [ seeding ] vehicles. We have already seen about -- nearly about 60 vehicles on the road. We have test driven another 10 of them, over 6 million kilometers. All of which, we possibly are the only ones who have tested to this level of distance. And we are well on our way for the BS VI introduction. The BS VI introduction will happen in April. I don't think we will be selling earlier to that. BS IV production will continue until March end as far as fully built vehicles are concerned, like for example, cab vehicles will continue for -- until the end of March because registration is allowed the end of March. FES, or the front-end structures, front end structures will continue possibly until end of February, unless the customer says that he or she is willing to take a front-end structure in March and be able to finish with doing the body building by -- before 1st of April. And Balaji, can you tell me the 6,500 is as of today, right?
Yes. This is as of today.
Yes. Can you tell the Ashok [indiscernible]?
Yes, 3,100 is with dealers and 3,400 is with Ashok Leyland.
Yes, very insignificant inventory, I'll tell you, because we have really been able to do a wonderful job in breaking down the inventory and releasing cash flows, which is the right thing to do. For us, it's important that you get the resilience of the company up, and we'll be ready for the new year, then try to figure out problems of the whole deal.
The next question is from the line of Prateek Poddar from Nippon India.
So just 2 questions. One is, sir, just 1 -- 2 questions. One is, could you just talk a bit about the sustainability of this K54, which we have undertaken when we go into the next couple of years as to how resilient are the cost structures now? That's question number one. The second question is, sir, with CapEx, which come down to INR 1,200 crores, INR 1,300 crores. And just looking at it from a medium-term perspective, how should I think about this CapEx? And what -- and also, in addition to this, what has gone into -- what cutting down the CapEx so drastically in the last 3, 4 months. I mean it's commendable that from INR 2,000 crores in quarter 1 to, say, INR 1,300 crores, INR 1,400 crores. I'm just trying to think about what went into this, and going forward, how should I look at CapEx maybe as a percentage of sales, an absolute amount or how would you like to think about as your organization scales up? These 2 questions, sir.
Actually, let me tell you, but you know me, Prateek, and most of the investors know it, I never like to overpromise or under deliver. It happens once or twice because of extraneous circumstances. But normally, it is better to be -- take a longer-term view and then try to chip away. We have been really looking at how to get CapEx down over the last few months that we have been able to achieve that. But having said that, as we move forward, I believe that we have also said, we have just finished our strategic planning process now and then we look at how are we looking at this entire business. We have said that we need to get this business into RAROC. And if we have to get back into ROC, we'll have to do 2, 3 things, and which we have discussed earlier in the past. One is to see that we de-volatized the company from the domestic truck business, even if it does ultimately well, which means we are extremely determined this time to grow our international, and more importantly, our LCV business. And the defense business also, we are taking some steps to see how to broad base, which I can't share on the phone, but we are working on the project now to look at how to broad base the overall profile of the defense business, so that I can participate in a larger addressable market. Parts business has been growing at 10%. I believe that it should be growing at maybe 15%. Again, we will come back with some clients in the middle of -- maybe a quarter or 2 from now as to how we are going to get there. But the idea is to see that we don't get into shrinking more because next year, the first quarter, second quarter is not going to be really great, but we're going to use this opportunity even to scale down the operations of the company even further. What we are trying to do is instead of doing something like cutting ourselves to the bone, what we are saying is why don't we resize the organization to the level it was, say, possibly 3 years ago. So that is the thought. So we are going back. So what I told the management was, hey, guys, let's go back to when we were 18,000 crores last, let us look at what were the resources we are deploying and let us take a 20% cut on that. So that has said, the organization thinking completely differently. Now when we are doing that, the sustainability of K54 will be even more next year because while we have looked at INR 500 crores now, the possibility will be at INR 600 crores, INR 650 crores on an annual basis when we have full 12 months. Our plan for next year is going to be extremely aggressive, even though it's not easy to achieve. Believe me, some of these goals that we have set ourselves are so aggressive that we don't know. It requires a [indiscernible] to deliver them, but I'm sure that we will get there. It's extremely aggressive in terms of overhead than on CapEx. On Capex, I think there, we will require CapEx and this LCV business. We will be launching the Phoenix. We thought we will launch it in March, but this may happen in April or May, depending on the Wuhan, the vehicle is ready. It's -- we are very, very confident about. That's what we are very confident about, the success of the vehicle because it's a vehicle of -- it's a very unique vehicle in its class. And actually, those is the only vehicle in the country today in LCV, which is not discounted. I don't know whether you guys know that. We don't sell those at a discount. So we are not planning to sell Phoenix at a discount also, and that is the plan. Now the point is it has got some very unique features aside of the decals, et cetera. It's got to walk through cabin. It's got the gear shift on the dashboard, which makes the driving very easy. It is comfortable for even tall people to drive. The delivery turnaround radius are all state of, I would say, better than competition today. So it has got a very unique proposal, and we will see our market share in LCV growing up. Now why is LCV important for us? Because we have again set ourselves a very big [ audacious ] goal. We have said that we want to be global top 10 in commercial vehicles over the next few years, maybe 6 years, 7 years, depending on how the economy pans out. If that has to happen, believe me, 50% of our volumes will have to come from LCV, which means we need to have LCV volumes clock-in somewhere around 150,000 to 180,000 or 200,000 units. So LCV investments will happen. So next year, if we decide to put some additional investment in LCV, that would be a separate carve-out. But other than that, our routine CapEx, I don't think will exceed anywhere between INR 400 crores to INR 500 crores per annum over the next 4 to 5 years. I repeat, INR 400 crores to INR 500 crores per annum over the next 4 to 5 years. We are making the company very asset-light. We are looking at our entire manufacturing strategy. Again, we possibly will ship some manufacturing and rebalance the whole manufacturing. There is a whole bunch of engineers that are thinking that's happening. That has been happening ever since Dheerja started. We have -- [ we need to cover ]. So he had -- his focus was on long-term sustainability. And we are looking at that, and we hope to achieve that over the next couple of years.
So sir, just to summarize it, is it fair to say that K54 is structurally bringing down the breakeven points of the company? And when you are going to the mid-cycle, the cost structure will not inflate again. In fact, you would be much leaner than what you were in the previous cycle. Is that a fair understanding? And also...
Yes, yes. I would say like this, what we are telling ourselves is in the next cycle, we don't want to have any kind of pain.
Sure, sure. That helps. And sir, on CapEx then, is it fair to say that worst case, I mean, INR 500 crores is maintenance, and then you will have these projects, which would be, say, as you just talked about Phoenix and all, so around INR 1,500 crores. Is that a decent number to go with for the next couple of years?
It won't be INR 1,500 crores also. I will come back to see, I'll tell you, I'm not able to tell the number now because much, it will be a lot lower than that.
And so this does not include investments, right?
Yes. The investments in subsidiaries is the main subsidiary where we have a challenge is in Albonair. And there, we spent about GBP 10 million per annum approximately. So that is about 80 crores, 90 crores. Now we are trying to turn around the company. The good news in that company is that we are getting orders. And what has happened is most of the bus manufacturers in London have fallen off. And we have been very successful on our Electric Double Decker launch. So we have, as I talked to you, we have this order from 90 buses in RTA in Dubai. We have got the Metroline Double Decker order. We have got another order in London and as we are also exploring orders in Australia. So these 3 are firm orders aside of the smaller offtake that happens. But the company is still from being profitable. But what we are trying to do is to reduce the cash inflow. Other than that, I don't see any investment happening in Albonair as of now, maybe 3 million, 4 million. But other than that, I don't see any of our other subsidiaries taking any cash.
Sure. So HFL...
No, HFL -- I'm sorry, I was just -- you're coming to that. HFL may require cash investment, and the reason why we're having cash investment in HFL is because to grow the book. It will be at [ INR 37,000 ] crores this year. And I wanted to -- I know none of you asked, I thought I'll take this opportunity to clarify. There is a 7% stake that Hinduja Group and Ashok Leyland has jointly decided to buy off Everstone. Apparently, there were some concerns in the market, please go back and refer in 2017. We had bought off -- Ashok Leyland had bought off 7% of Everstone because Everstone had invested into this in 2012, '13. And there was a -- in, I would say, we don't -- Ashok Leyland, I mean we go by spirit than on letter, while there is no written commitment to buy off the shares, but there was an in-principle agreement that in the event an IPO does not happen, an exit will be provided to Everstone. Now we did try for an IPO twice as you remember. Unfortunately, every time [indiscernible] had tried for an IPO, there was demonetization. And the next November, there was IFRS crisis. So then, just when the RFP had been filed with all facts. You would note that the RFP has been filed because it's in public domain. But then there was no sense in going for an IPO just for the sake of an IPO because this company is extremely valuable, yes? And so then we decided that we'll buy off the shares. And at the moment, given the situation, and it's a very good price, let me tell you, 2x book is -- when Cholamandalam is possibly at 3.74, 3.75x book. And so [indiscernible] financial 2x book is very good. Even if we say that it is 2.5x book, and this is 2x 2019 book, not 2020 book. So this is a fantastic price. But I'm afraid I played the prudent CFO and said, we will not buy the shares now. Let me see whether I want to buy something in the next tranche because I want to see the stable cash flow position before I invest into the shares because we have 62%. But it becomes like -- if I do make that investment, it helps because it can be part of my trade book in the event some other equity investor want to come in. But the reason we did that was only because we wanted to be committed to Everstone, and we have acquired the shares. At the moment, Hinduja Group London has offered to bail us out even though they didn't want to. So they have taken the first 2 tranches, I don't remember the number of shares. But that's all there is to the transaction. I hope this clarifies.
The next question is from the line of Binay Singh from Morgan Stanley.
Firstly, when you gave -- shared the number for INR 960 crores of CapEx for the first 9 months, what was the investment number for the first 9 months and for the full year '20?
Balaji, can you just share the number?
Really, the [indiscernible] for the first 9 months last year was, I think...
Current year, current year.
Previous year is...
No, current year, current year.
Current year is INR 400 crore. And similarly, just [ INR 950 crores ].
No, no, no. He's asking for the investment, Balaji. The total investment that has been made for the first 9 months.
The first 9 months, investment is after the only [indiscernible] INR 58 crores.
It is INR 58 crores for the first 9 months. For the first 9 months, the investment is INR 58 crores.
And the likely number for the year?
Well, we are not yet clear. We may have to invest another GBP 6 million to GBP 7 million, maybe GBP 7 million -- GBP 7 million to GBP 8 million, another INR 56 crores.
Right, right, right. So that's a pretty tight control. Secondly, when you talked about the manpower provisioning into the staff cost, what was that number?
Well, I can't share those internal numbers. All I can tell you -- because it's a very sensitive number for the internal purposes. All I can share is that the bonus reversals -- unfortunate, but we had to reverse the bonus that have been provided for, and this has also had the positive impact of the VRS that we have taken. So the VRS, once it is done, the monthly manpower costs will come up after you take the onetime charge.
Right, right, right. Because what I was trying to say, what would be like a sustainable -- because that's a very impressive number, like your manpower costs have come down...
No, it's -- no, to that extent, it won't be sustainable because I credit all of it for the past 3 quarters as that has followed into it. Here, all I can tell you is this gentleman, because don't build a model just purely based on this, and I know you guys have to build a model. But as we move forward in a trajectory, we are still working on, like I mentioned to you, the strategy of the company is to reorient the organization to an optimal manpower, which means we are looking at all functions and look at the whole structure of the organization itself. We are doing a complete rehaul. And we have set ourselves some -- so next year, you'll see us actually come out with some hope. I mean I'm not going to say anything now. Like I said, I never overpromise and under deliver on this. But we have set ourselves some targets, so let us see that it pans out.
Right, right, right. I'll really look forward to that.
But it's very sensitive. So we are doing everything that is possible and right. We possibly did let the middle line grow in the interest of growth because we did it. And I know that 1 year back, everybody was worried, including us, whether we will have the capacity to meet the demand. That was the question we had when we were at 85% capacity utilization. Now things have changed. But we've changed, we have to be nimble as an organization.
Right, right. Now could you also share the number for defense, payers like the revenue breakdown for the quarter?
Balaji, can you just share the defense and payers numbers for the quarter?
Defense for the quarter is 1% -- roughly 1%, and payers is 9% of the total revenue of INR 4,000 crores.
And how much will be LCVs and trucks?
LCV is again 14% and domestic trucks is 40%, 41%.
The next question is from the line of Pramod Kumar from Goldman Sachs.
Gopal, just a clarification on the employee expense because you said the bonus provisions, which was provided in the first couple of quarters is reversed out in this quarter. So is it a fair way to say that if I look at the 9-month cumulative employee expenses, somewhere like INR 200 crores, that should be like the run rate more or less sustainable one?
Yes, more or less, more or less.
Okay. Fair enough. And the RM cost, just a clarification on the RM side, you said there was a INR 250 crores, INR 260 crore hit because of inventorization of the -- right? But that would be 6% of the revenue. That's -- I don't think the -- it's not a one-off hit of the -- because accounting-wise, it should get set off by the time you reach EBITDA, right? Because whatever the overhead you absorbed in the RM side is getting compensated by lower staff and lower other expenditure. Am I right?
No, no, no. You're wrong, you're wrong. Because what happens is -- see, what happens is when you have, say, 10,000 units is inventory steady state, what happens is that in those 10,000 units, you would possibly have overhead absorbed in that. So the one -- so when 10,000 units are sold and 10,000 units are brought back as product produced, the standard -- 5,000 units are sold and 5,000 units are brought back as production and then you have 10,000 units as standard inventory, the overhead is residing in those 10,000 units of inventory continues to stay in this steady state. But when you suddenly happened -- and then what happens is the accounting is like this, you have manufacturing overhead, which is full -- stated fully; you have sales overhead, which is stated fully; and all other administrative areas, which is stated fully. In the inventorization, you have material plus manufacturing overheads plus plant-related admin overheads. All of it's getting inventories. So what happens is in that inventory is retaining the overhead, all those 10,000 units. So when that 10,000 units get reduced to 2,000 units, what happens is the material costs will be suddenly getting into a higher amount, right, because raw material, the -- on a steady state, raw material costs get steady. But now suddenly the overhead residing there comes into the P&L. And when that happens, your manufacturing overhead continues to be shown at the same level, which is why you have the impact.
So according to you, what will be the percentage reversal, which should ideally happen in 4Q now that this is kind of behind us because it can't be clearly 600 bps, right, on the top line?
Well, it can be 600 bps, but I'll have to figure out because what is going to happen is, by 4Q, my inventory will be 0, yes?
Yes. That's why you [ see ] overhead there.
I won't take a hit. Yes, I'll take a hit, you're right.
On the P&L. Finally, on the P&L, there's accounting, right? Then next year will be a clean slate in that sense once you...
Yes, yes, yes.
But [indiscernible]
[indiscernible]
[indiscernible] included the 4,500 vehicles, which are there in the inventory as of 31st December.
It's somewhat INR 225 crores to INR 250 crores. I don't remember the number exactly, but we'll tell that number out, yes.
And on the math side, sir, given the way you spoke about BS VI production still being on the trial stage and the launch is largely in April, it looks like March is going to be practically non -- there's not going to be much of activity at the plant level. Is my understanding, right, not only for you, for -- generally for the entire commercial vehicle industry?
No. No. It is not like that. Actually, the activity is very high in March because that is where the trial production is where you have the maximal activity plus MBP happening, right, modular program happening. So the whole production line is being tested here. So there's a massive amount of action going on.
No, but in terms of the specs activity?
Yes. The specs activity won't be high. But manufacturing, the testing will be huge.
And finally, on scrappage, Gopal. That's been one thing which is still not happening. But can you just explain to us what would you see the scrappage policy which would probably be a positive catalyst or if the -- or the lack of that could make it a nonevent in terms of any particular -- age criteria, looking at -- or whether it's voluntary or mandatory, anything which you can just like share your thoughts there?
See, I think these have been discussed. That's why I didn't even talk about it when the government has been mentioning about it. I think it will become very diluted then it has no impact. Because the guys who are going to get affected by the scrappage are not the large ones. The smaller ones -- and I don't know whether the government is going to be -- see, unless this scrappage policy is going to be very, very firm and mandatory, it will not have peak. So if they say that -- so what they will do, one of the suggestions that every year, you'll have to pay INR 40,000 additional as registration of something. For a guy who's got a truck, he would prefer to pay the INR 40,000 additional than to go and buy a new truck at INR 20 lakhs.
Yes. That's a fair point.
Right? So one really has to -- see, because the scrappage should have a purpose. If you say that old trucks should go off the road because they're polluting then, you can't neutralize that by paying INR 40,000. But we really have to wait and watch. For me, what is going to be useful for the industry would be a mandatory scrappage policy, which means that it should happen, and this should be the cut-off date and trucks should have to go off the road. The second thing would be an incentivized scrappage so that the guys are given -- the guys who have to scrap are given an incentive to scrap the older vehicles. Now if that is given, that will have a big plus for the large fleet operators who have been handling older fleets who can see that, okay, the return on new truck will be, net of the new investment, could be better. And then they decide to scrap the old vehicles. But the third and most -- largely the most important thing on this scrappage is going to be to have a good network of scrappage centers. That is important.
And finally, Gopal, any numbers on the Ashok Leyland Finance? A major part of our investment has further gone up. So if you can just share how the quarter went past in terms of loan growth, NIMs or on the profitability side.
I think profitability was good. I would say that at the end of the year, I'll possibly share it, in the fourth quarter, Ashok Leyland, the -- there are some constraints in sharing the number, but in the fourth quarter I'll share, things are going reasonably well. There are no major hits as of now. I would say that the overall -- we, of course, we have -- because 50% of the book is domestic truck, but still I think that things are under control because of the diversified portfolio. And they should be at a book of about INR 27,000 crores. So -- which is again about a 15%, 20% growth over the last year. So it's a very good growth. Company is doing well.
Next question is from the line of Gunjan Prithyani from JPMorgan.
Sir, I just wanted one follow-up on this -- the Leyland Finance that you spoke about. Is there any repossessions or any increasing delinquencies that you're seeing on the portfolio?
Yes, of course, we are seeing repos happening there. I wouldn't say no. But overall, what happens is when you look at the overall profitability of the company, it does not come under pressure. The company has been able to grow its book, has been able to do buy-in and sell-down, has got a diversified portfolio and are both high-yielding. So I think it has been able to manage its performance well. Yes, there have been repos and we do charge off the cost of the repos every quarter. But to that extent, it is -- I would say that the accounting is quite conservative also, more conservative than some of the other finance companies, well-rated finance companies in the country.
But would you be able to share the asset quality numbers in this call? Or you'll do it next...
Not in this call, but I will share it possibly in the month of March. But there is nothing to get too worried about on the asset quality at all. Let me tell you that.
No. It's essentially coming from just that most NBFCs have been talking about more stress on their CV book and increasing repossessions. So I'm just trying to get some sense from you on the health of the underlying market because clearly the volumes don't -- I mean volume trends have remained very depressed despite some manufacturers coming and saying that prebuy is coming through over the last 2, 3 months. So despite that, prebuy volumes have been so muted and we are having these incremental concerns around repossessions. So I'm just trying to understand if you can give us some sense on what is happening at the fleet operator level in terms of utilization levels or the fleet --
I would say that the company has had challenges more on the smaller first-time buyer, first-time user segment. There, we have seen the asset quality -- I mean where the repos have been higher. But see, I cannot only talk about one segment where the performance is bad because when you -- as an investor, you will look at the company as a whole. Like, for example, my truck business is not doing well. Of course, it's a major business. But my bus -- our other businesses are doing reasonably well, including my LCV. So when I look at the overall book, that is why actually their exposure, unfortunately, unlike other -- for example, if you take other OEs who are actually funding their domestic truck business, the exposure of Hinduja Leyland Finance, in the share of financing of Leyland, this quarter was only 7%. So we have kept it at an arm's length. We are not pushing it far. It is independently managed. But I will be able to share more greater details in the month of March. So far, we have not been sharing because it's privately held. And I would want this transaction to go through before I could share anything. There are certain issues due to which we are not able to share.
Fair enough. And did -- and more generally, if you see that the level of repossessions have increased in the market, does this have any bearing on the new vehicle sales going into next year?
I don't know because if that is the case -- see, next year, it won't have any impact because next year will be BS VI. So it's not going to be...
But in this prudent market the BS IV vehicles can get sold, right? I mean, those are...
No. You can't -- no new registrations will be allowed.
Repossessed trucks can be --
Reprocessed also, I don't think -- I'll have to check that out because one of the questions that came out was that reregistrations may not be allowed. I don't know how true it is. But there is another, what should we say, there is another school of thought saying that, no, that the owners will have to wait for scrappage or what. But I'm not too sure. But even if it is allowed, even let's assume that BS IV vehicles are allowed into the new year, I wouldn't get too worked up on it. I think -- you see, I'm looking at it this way. These are all short-term phenomenon which will happen and which will affect over the next 12 months. We will have to really wait and watch how the play happens. Even if things go really bad next year, let's assume, right, then we are reasonably -- I mean, we are making ourselves resilient as a company for that. But at the same time, we are also keeping ourselves ready for a demand uptick in Q3 and Q4 of next year. So in Q3 and Q4 of next year, we are readying ourselves for a demand uptick. Now that doesn't mean that we are keeping -- we are ordering material or we are keeping our workforce ready or anything like that. But the assumption is that at some point in time, there should be a demand uptick that has to happen. The challenge will be if the economic uncertainty continues so badly that things start to go down southwards.
Sure.
Well, the assumption is that at the current level of economic activity, things should only get better. So we will have to wait and watch. And I think you're right. I mean BS IV vehicles can be sold in the new year. Well, it can happen, but it is not happening so easily. Let me tell you that also.
Okay. Got you. And the second question I had was on the China sourcing. You mentioned about the LCV platform, that there could be some [indiscernible] there. But I'm just trying to understand what is the extent of reliance on China. And do you see any risk around that given the whole virus issue?
No. Actually, there is no -- this is not a Chinese vehicle. What we have done is only done the toolings. So the final set of toolings have to come. The manufacturing, every -- all aspects of manufacturing of the vehicle will be done only in India, 100%.
But any -- I mean for even your current portfolio, any component side risk that will...
That will happen for BS VI because companies like Bosch, et cetera, have their exposure to China. So Bosch is affected. Like, for example, if you remember in 2017, when fuel injection pumps fell into a shortage because the Chinese manufacturing units could not cater to the demand because of Bosch fuel injection pumps. So that is indirect exposure. But we don't have any major exposure to China.
But indirect exposure also, to just get clarity, it is not there on BS IV. It could be on BS VI is what you mean to say.
Yes. BS VI, it is there. Even for BS IV, it is there. Bosch -- I mean, the fuel injection pumps, there are so many other things that are -- which are actually imported by our OEs, suppliers and then provided to us. But at the moment, for BS IV, it's not a concern because volumes are tapering off. But for BS VI, there could be.
Okay. And anything you can share on the price increases for BS VI? Has the pricing strategy been decided? And how would it...
I wish I could because I don't know the number myself. We'll have to wait and watch what the competition is doing, and based on that, we'll have to fine-tune it. See, all I can tell you, and I don't want to whet anybody's appetite, but in GSIII to BS IV, we were the only guys who have raised prices by 14%, if you remember. Nobody else did. Bajaj then did not raise prices. TML had raised 2%, 3% or something like that, if my memory serves me right. Even Eicher have not done anything. We were the only guys who have raised prices because that is the rational thing to do. I think investors are very worried, why did we do that. But then we were able to sell the product. At the same time, we are now waiting and watching to see what is the overall demand condition, and then we will take the call suitably.
The next question is from the line of Kapil Singh from Nomura.
And to your current health circumstances, I wish you a speedy recovery, first all.
Thank you.
I just wanted to check on the overall demand environment, if you could share some thoughts as well. Just very broadly, what are you hearing? And what do you expect? Because there has been talks of some green shoots as well. So your thoughts on that, please?
See, I would actually -- I would classify this entire demand thing into possibly 3 buckets: One is sentiment. The second one is underlying economic growth. The third one is industry-specific. So if you look at sentiment, I think the sentiment is very low. So there is no incentive for people to buy anything, leave alone trucks. You're seeing even FMCG coming off. You're seeing all major industries coming off. CapEx has not been set up. The government is trying to do various things to incentivize, but it's not happening. Sentiment is at all-time low. And I think a lot of global trade, commerce and stock markets and cash flows rely on sentiment more than anything else. The second thing is underlying economic growth. I think at the moment, the economic growth has to be seen. But we have been seeing now 6 quarters of lower economic growth. Thankfully, it's not a recession. But we need to ensure that the economy is pump-primed, and some of the initiatives that the government is looking at in terms of reviving the industry has to be done very, very quickly -- not the industry, the economy. So the investments and infrastructure, the commitment of a lot of economic -- I mean I would say, in fact, more than the infrastructure, roads, ports, et cetera are being done. It's how it needs to be done. Immediately after World War I, that's what the American president had said, "Let us build roads." So it's important that the government starts to kickstart this investment-led growth. Otherwise, it's going to be very, very unfortunate. The third one is industry-specific. While roads, construction is going on, but I think what is happening is that most of the other industries have not seen anything happening. And also, you see a lot of collateral stuff happening which is dampening the industry. Like, for example, the telecom -- the way the telecom industry is going with -- challenges that the telecom industry is going through. So you've seen a whole bunch of things happening. So for us, when we are doing our planning exercise, what we have assumed is that maybe next year, you'll see Q3 and Q4 actually showing growth. Q1 is not going to be a great quarter. Q2 could be flattish. But Q3, Q4, we are preparing ourselves for a growth. And at some point in time, the demand will start. So we don't want to be despondent, but at the same time, we said if we don't use this opportunity to restructure our organization again and not just cut down costs, which means we resize the organization to something like an INR 18,000 crores organization or even lower, and drive productivity through using digital, using analytics, take out unnecessary efforts that we are putting into various things, keep -- conserve all the resources for product development and conquering new markets, then we would have an improved -- the overall, I would say, the service -- reduce the overall service cost to the customer and improve the dealer profitability, then we possibly would see a much more resilient company, which is what we are trying to do.
Okay. This is quite helpful. Secondly, I just had a clarification request on this inventory number of INR 6,500 crores. Is this including LCVs or this is only MHCVs?
Well, this is only MHCVs. LCV inventory is hardly, I think, 10 days. It's not at all a concern.
Okay. And you also mentioned that inventory has been...
The inventory is including dealers and ourselves.
Yes. Yes. Understood. What --
Our inventory is only 3,000.
Yes. And I also wanted to check. You mentioned that at the end of March, the inventory would be 0. So why is that we would not be doing BS VI shipments in March?
We are not looking at doing any major midyear shipments in March. See, well, it is 0. It is not 0 yet. It is virtually 0. We don't expect it to be huge.
Okay. So the shipments would be very less in March, basically that's what you indicated?
Yes. Yes. See, we are not going to pre-produce and keep everything here. We'll wait for -- see, 1 quarter, et cetera, it's all fine. See, there is no point in getting overexcited about something when things are uncertain. I want to keep the tight -- see, the whole main thing is to hold on to cash. We are able to do that. From INR 2,700 crores, we have brought the cash up -- borrowing down to INR 2,000 crores. So we need to keep our cash levels better.
No, I'm just wondering, if there is some improvement in demand, how are we going to service that if you don't have inventory?
No, we will see -- we will manage it here. For whatever information that we are getting, we will do that. And anyway, the plants are free so there won't be any difficulty in producing.
Yes. And Gopal, just a question on repossessions. I know, I mean, you can't share any numbers. But I think broadly, what we are hearing or the concern from the investors is that the repossessions, at what level are they? Are they at an alarming level? Or they are high but not really alarming?
They are high but not alarming.
The next question is from the line of Sonal Gupta from UBS.
Gopal, hope you get well soon. Sir, just a couple of things. One, on the export side, could you give us some color as to do we see -- how do we see next year for exports? Are there any markets or any specific -- like because, obviously, the domestic environment is uncertain. But exports, can we expect anything significant?
Next year, well, let's hope that we are able to grow our exports by 20%.
Okay. But this is on the actual --
That's our target. That's our target.
Okay. Sure, sir. But any specific market expectation or industry -- I mean like is it this country-specific? Or is it more like that you're entering some new markets and that's how it's going to work?
No, we are expecting a growth in African markets because there are a lot of tenders that are coming up there, which we have bid for. Second one is we are expecting the Bangladesh market to revive. It has been 0 almost this year. So the Bangladesh market will definitely revive. And Sri Lanka, also, we are expecting a couple of tenders there we should win. So that happens again. These are the 3 main markets.
Sure, sir. And just one small question. On the revenue, you have shared most of it. But can I get for domestic buses and exports also then overall revenue from the...
Balaji, can you give that?
On buses, it is 20%. Domestic buses, it is 20%. And exports, it is 9%.
Okay, sir. And sir, you mentioned in the, like, your opening or on some of your comments that you're working on the defense side to scale this up. I know you said that you can't share stuff on that. But anything that -- I mean, like because this thing has been stuck at like INR 400 crores, INR 500 crores a year for a long time. So anything that we see changing in the next year or so?
I don't know, to be honest. We have to see because it's all dead seas, I tell you. On this -- unfortunately, this is another unfortunate thing. I think as far as exports are concerned, to be honest, I think we kind of -- we possibly were too optimistic about ourselves in the past. But you would never have heard me say that. I was very -- I would always be a little more tempered down. But as far as defense is concerned, we have won nearly 30, 34 tenders. But -- and we have won the tenders. We have submitted the orders. I mean we have also completed those orders. But the initial orders will come only for 2, 3 vehicles. But now the government has to order. The government is not ordering. If that had happened, our revenues would have doubled. Unfortunately, that's not happening. So what we are now trying to do is, okay, we tried this. It's not working. We'll wait for the orders to come. But the next thing that we are doing now is we are trying a little broad base, the capabilities that we can have in terms of seeing a larger addressable market in defense, which is our overall plan.
Okay. So this has been -- I mean it's...
This is not a short-term plan. This will take 2 years at least.
Okay. All right.
And see, the idea is to tell 2 years or not because we want to push it away into the future. Unless I take the steps forward, I can't get it done. So we are looking at everything anew because we have to ensure that we devolatize the company, that's for sure. And we want to ensure that we are profitable and -- you see, we want to be like this where even if the industry volumes were to come down by 40%, we'd still remain profitable and that we don't get into such deep cuts in profits. It is becoming important for us because this kind of tidal wave of just feasting and fasting cannot go on like this because the company is getting into larger and larger revenue pools, but at the same time, it's still as susceptible as it was. The company is as susceptible at INR 9,500 crores as it was in the INR 30,000 crores. We can't have it like that anymore. So we have decided to cut it out now. I'm personally working on the strategy.
The next question is from the line of Nishit Jalan from Axis Capital.
Congratulations on good cash flow management, at least, in a difficult quarter. Sir, I have 2 questions. Firstly, on the debt side. We still have about INR 2,000 crores of debt. I have assumed this is largely related to working capital, basically your payables are coming down. We would not have any term loans or any long-term debt, et cetera, right?
No, we have term loans because I strongly believe in the -- what shall I say, I'm a little old-fashioned, and that has actually stood the company in good stead. So I keep long-term loans in long-term loans, and I keep short-term loans in short-term loans. So for me, out of the INR 2,000 crores of debt that I have, right, my overall, my total borrowing INR 1,903 crores, out of which I think we have about 80 million, 80 million is [indiscernible] -- INR 1,000 crores, if my memory serves me right. Sorry, I don't have the number, but I'm just giving you an approximate number. About INR 1,000 crores is -- about INR 1,300 crores of long-term borrowing and short-term borrowing is about INR 522 crores. And these do not come for repayment for another 2 years. I have deliberately kept long tenor because it's easier and it eases the pressure on the system.
I think -- okay. My question was...
It has got prepayment options so there's nothing to worry about. If we really get some cash, don't worry, we'll [indiscernible].
Sir, what I wanted also to understand was, is there a scope to reduce working capital further? And I would assume that payables right now would be really low because the production run rates are much lower than sales levels. So do you think that working capital will get further released in the next few quarters, and which will help us reduce our debt levels?
Yes. There are some sides on the asset side which we are trying to do because we are trying to liquidate the inventory, no? So that will help us a little bit to reduce the cash a little bit -- I mean, increase the cash flows a little bit more.
Okay. And sir, secondly, can you talk a little bit about discount situation right now in the industry? Have they gone up really high? And if you can throw some numbers as to what it is today and what it used to be in a normal scenario, that would be very helpful.
The discount levels are still pretty high. I mean they are desperate. So these are very average numbers. But it's like they defy any logic, to be honest with you. And they are at INR 5.25 lakhs on an average on a vehicle. And it's very, very difficult to -- they're about INR 5.25 on a vehicle. They have gone by about INR 25,000 on an average. But this quarter, we have witnessed some deals being taken off us which are going at INR 7 lakhs, et cetera. It's ridiculous too -- I mean, you kind of a vehicle like they're selling at INR 24 lakhs, INR 22 lakhs, INR 23 lakhs and say, "I'll give a INR 7 lakhs discount." I mean I don't make that kind of money. So it's very desperate. I don't understand the game of -- yes, I think competition is in the game of acquiring market share at any cost. We are in the game of certainly acquiring market share and growing the business. There is no doubt about it. But I don't want to make a loss. So for me, if it is marginally positive, I'm taking the deals because it helps me to liquidate the inventory. Do you understand? But at the same time, we have to ensure that we do pursue market share. That is why our market share drop has not been significant, if you noticed, because we have also taken deals at higher discounts, but not at a loss level.And for us, so let me tell you, market share is very, very important at the company. I mean that is why it's one of the most important metrics for our bonuses also. If we don't receive market share, we don't get bonuses. So for us, market share is very, very important. We want to grow. We want to be in a leading position. But we have to ensure that we're doing it in a methodical manner. That's all.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
No. So thank you -- I mean, thank you for your patience, ladies and gentlemen. I think we had some good discussion. All I want to tell you is that we are doing everything that is right. We're not going to do anything that is going to harm the company in the short term. I can only tell you that for us, being a significant player in the Indian domestic market is very important, and we would want to -- and our plans over the next few years reflect that. But particularly, we will continue to gain market share over the next few years so that we are in a position to challenge some of the larger players. Very clearly, we are not going to shy away from growth and leadership in the domestic market. And we'll ensure that we are in a more capable position by taking cost out of the company and ensuring that our products perform much better than competitions and the customer also gets a product that he wants to do more [indiscernible] business program. So these are very important, well thought-out strategies, which will help us to acquire customers and retain them as well. We are also growing the network in the north and the east, and you would see a greater presence in the year to come. We are also doing synergies. There are a lot of synergies between LCV and MHCV, and you will see that we would have common dealer families between both, which will actually kind of cross-subsidize each other and help the entire dealer family to grow as far as the company also to grow. LCV is another huge business potential for us, and we are very confident about the growth this business is going to post. We will continue to make investments into that business as we see growth happening. We are not going to put money first and growth later. The philosophy here now is show the growth, and we'll start putting money very quickly and scaling up very quickly. We hopefully will be posting more resilient and larger export numbers. We have completely changed our export strategy. We have actually reduced the level of activity in Dubai. We are bringing it back to Chennai because that is where the action is. And we're bringing senior leadership back here, and of course, now the revised structure with 2 Chief Operating Officers being on the Board, then we have a new CEO, all of this is actually going to help us -- all of it is going to help us to revitalize ourselves. And I think among CV players, we are still the best and the most profitable, if I'm right. I don't know. But I think that speaks wonders given the fact that we've still been able to maintain the EBITDA margin almost at the same level as the same -- last quarter. Despite having a INR 200 crores charge on account of inventorization, despite having heavy discounting, we not only have been able to just manage to maintain the EBITDA margin, we have also been able to improve the cash flow position. So remember that you got a great team here who's making the impossible possible.But of course, the market should help. The market should grow. We can't have -- I expect to have the same level of profitability as when the market was doing very, very well. But having said that, in the next cycle, that will happen. I'm sure that we are going to be far, far more resilient than we are today. And we are hopeful that Q2 and Q3 of next -- Q3 and Q4 of next year is going to be a correcting point, an inflection point for growth to happen. And we will be tight on CapEx. You have seen our CapEx numbers, originally INR 2,000, now INR 1,300 or so. Investments also have been brought down quite significantly. So be rest assured that you have a very prudent management team who is working on this. Thank you very much, and have a good day.
Thank you very much, sir. Ladies and gentlemen, on behalf of Nirmal Bang Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.