Ashok Leyland Ltd

NSE:ASHOKLEY

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, good day, and welcome. Edelweiss Securities cordially invites you to participate in Ashok Leyland -- Q3 earnings conference call of Ashok Leyland. [Operator Instructions] I now hand the conference over to Mr. Chirag Shah from Edelweiss Securities. Thank you, and over to you.

[Chirag Shah, Research Analyst]

Good morning, everyone. On behalf of Edelweiss Securities, I would like to welcome you all to Q3 F '21 Post-results Conference Call of Ashok Leyland. Ashok Leyland is represented by Mr. Vipin Sondhi, Managing Director and CEO; and Mr. Gopal Mahadevan, Executive Director and CFO. We will start with opening comments from management and followed by Q&A. I would like to hand over the floor to Mr. Vipin Sondhi for initial comments. Over to you, sir.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Thank you, Chirag, and [Foreign Language] and good morning, ladies and gentlemen. It gives me great pleasure to be in touch with you all once again through this post-result conference call. And I thank you very much for the interest shown in Ashok Leyland. Let me quickly run you through the Q3 performance. Happy to highlight that after witnessing volume degrowth for 8 continuous quarters, the MHCV truck total industry volume has registered a year-on-year growth of about 16% in quarter 3. While the industry bus volumes continue to lag, owing to social distancing and lockdown still in position, they are expected to recover with the gradual easing of restrictions. During Q3 FY '21, year-on-year, our MHCV truck volumes have grown at almost twice the rate of the industry. Our truck market share for Q3 FY '21 has thereby improved to 28.1% as against 24.9% in Q3 FY '20. Sequentially, over Q2 FY '21, our MHCV truck volumes have more than doubled in Q3 FY '21, which is in line with the sequential TIV growth. Our modular AVTR trucks, which we've spoken to you earlier, have been well accepted by customers with positive feedback on their performance and fluid efficiency. Demand for the LCV is growing, driven by e-commerce and growth in industrial production. Our LCV domestic volumes have sequentially improved by about 46% in Q3. LCV volume for Q3 at 15,991 numbers, that 15,991 numbers, is higher than last year, which was 12,574 numbers by 27%. Bada Dost, as you would have remembered, we launched in September, has been well accepted by the customers in the market, and more than 2,500 vehicles have been sold in Q3. YTD December '20 sales is 2,833 numbers. Our exports, MHCV and LCV together, at 2,941, that's 2,941 numbers, have almost doubled in Q3 sequentially. Q2 FY '21 was 1,491 numbers and is 24% higher than Q3 last year, which was 2,371 numbers. The budget, all of you have seen it, that's the Union Budget presented by the Finance Minister on the 1st of February, focus is growth, focus is creation of employment and will accelerate us towards our vision for an Atmanirbhar Bharat and the $5 trillion economy that the Prime Minister has announced last year. The important thing is the thrust on public investment in infrastructure and health, of course. This infrastructure investment, in our view, would set up a virtuous cycle for generating demand, bringing in private investment, creating jobs, further income generation, leading to consumption and savings, which is good for the economy, and what is good for the economy is good for commercial vehicles as well. The fiscal deficit at 9.5% for FY '21 and targeting 6.8% for next year reflects the intent of the government to drive an investment-led growth, but simultaneously ensure that the fiscal deficit comes on a glide path downwards. The budget, having given an impetus to infrastructure across road, rail, ports, et cetera, is -- will have a multiplier effect on the economy, and we are all aware of that. The vehicle scrapping scheme, which the Finance Minister mentioned in her budget for the auto industry, says that CVs to undergo a fitness test, but further details are awaited from the government on incentives because she used the word, voluntary scrapping policy, but we are in touch with the government to understand the details. The government is also planning to increase, as was announced, the share of bus-based public transport in urban areas and is going to launch a scheme of INR 180 billion to support the augmentation of public bus transport services. This will enable the private sector, especially Ashok Leyland, which is strong, to work and find ways of operating the 20,000 buses we've envisaged under this scheme. So this augurs well for the CV industry. I must flag 2 points. The global auto industry has been affected by the constraint in the supply of electronic control units, ECUs, as we call them, owing to a global shortage of semiconductors. The Indian automotive industry has been no exception. We are closely monitoring the situation with our suppliers, as this can have an impact on production if the constraints do not ease. Regarding the commodity price increases, particularly for steel, we're trying to partially negate the impact through price increases taken in quarter 3 as well as quarter 4. Revenue for third quarter has grown by 70% sequentially to INR 4,813 crores, which is 20% higher than Q3 last year, which was INR 4,017 crores. EBITDA has improved to INR 254 crores, 5.3% in quarter 3, up from INR 80 crores, 2.8% in quarter 2. The Q3 EBITDA is about 13% higher than Q3 last year, which was INR 225 crores. Ashok Leyland has reported a PAT loss of INR 19 crores for quarter 3 as against a PAT loss of INR 147 crores in Q2. This includes a onetime VRS charge of INR 85 crores. We manufactured 17,911 MHCVs in quarter 3, which is compared to 8,431 MHCVs during Q2 and have ended the quarter with MHCV inventory of 3,171 against 1,853 in Q2. The Q3 closing operating working capital was negative at INR 525 crores approximately, which is sequentially at the same levels of Q2. CapEx till December '20 was approximately INR 450 crores versus INR 869 crores in the same period last year. CapEx incurrence is towards the modular business program, the Phoenix variant, which came -- out of which came the Bada Dost; electric vehicles at CEV4, et cetera. Investments were at INR 260 crores, INR 90 crores in HLFL in April '20; INR 150 crores in Optare in Q3 as against INR 58 crores during the same period last year. The second quarter witnessed INR 1,200 crores of net cash generation. In continuation, Q3 is also cash positive with approximately INR 160 crores of cash generated from operations. This was done through working capital reduction, which was used to repay short-term loans. Debt as on December 31, '20, was at INR 2,880 crores, gearing at 0.43x, lower from INR 3,076 crores as on September 30, which at that time was gearing at 0.45x. Finally, I'd like to thank you very much again for the interest shown in Ashok Leyland. With this brief overview of our Q3 performance, I'd ask my colleague, Gopal, if he'd like to add a few points, and then we could get into the Q&A. Thank you very much, again. Gopal?

[Gopal Mahadevan, CFO & Whole Time Director]

Thank you. Thank you, Vipin, and good morning to all of you. Thank you again for the interest in Ashok Leyland. I'll keep it very short. I know there are 2, 3 points that all of you are looking forward to. So I thought I'll just share them with you straight away in terms of explaining the performance. One is material cost. I think material cost increases. You can see that between Q3 -- Q2 and Q3, the material cost percentage seemed to have been higher at 74.4% as opposed to 71.2%. I'll explain that. But if you were to look at it in the same period last year, 74.4% versus 73.5%, it's marginally higher. The reason for that is twofold. One is you have -- one has seen raw material price increases happen. All of you know about the pricing pressure that's happening in steel, that continues, and this was especially present in Q3, and we were making price adjustments. In fact, I would like all of you to know that in the fourth quarter again, Ashok Leyland has taken a price increase of nearly 1.5% to partially offset this material cost increase. This is one of the main reasons why you've not seen steel price increases happening at this stage ever over the last few years. The quantum of increase and the percentage of increase has been very severe, and the speed of increase has also been high. This is one part. The second part of it is, of course, the mix itself. So if you look at it, month-on-month, the mix has been improving, and I would say deliberately the word improving towards more and more MHCV being sold. Because in Q1 and Q2, the share of non-MHCV business was higher. And as you all know, the non-MHCV businesses like aftermarket, defense, LCV, power solutions, are all having higher gross margins than the MHCV business. But MHCV business is the main business of the company. We have seen a sequential improvement. I think what one will have to see is the performance holistically. So if you look at it sequentially, our market share has improved significantly from Q2 of the current year to Q3 of current year.Our revenues have increased over Q3 of last year. Our EBITDA margins are predominantly at the same level despite a transition from BS III to -- BS IV to BS VI, and so we are actually seeing better price recovery. The products are performing exceedingly well. The fluid efficiency that customers are looking for is, by far, the best in the industry in most of the SKUs that we are operating. So I wouldn't get too -- this is a quarterly event that can happen. But I wouldn't say that -- we'll have to wait and watch how we are neutralizing it. We have done it in the past. We have taken price increases successfully and, at the same time, being able to make inroads into the market very efficiently. The second part of it, I think, a couple of good friendly investors have called last evening to me, some of them to Balaji, we are getting worried about the manpower cost increase. The manpower cost increase is approximately, I'm just giving a broad number, is approximately about INR 400 crores per annum -- per quarter, okay? It said about INR 400 crores, INR 450 crores. When you compare it with the same quarter last year, it appears that there is a huge jump. But my dear friends, I would request you to just kind of go back into the same quarter last year, when we had mentioned that we had reversed some of the provisions that we had taken for the for FY '19/'20, and we thought that judiciously we'll reverse it because we found that the volume trends were coming down. We were expecting '19/'20 to be a growth year. If you remember in Q1 of FY '20, all of us were expecting that FY '20 will be a good growth year for commercial vehicle, owing to the BS IV to BS VI transition. But what we saw was after Q1, the volumes and the industry volumes itself started to move southwards. When we did that, we said that some of the expected bonuses and performance pace, et cetera, would need to be reversed, which is what we did in Q3 of last year. That is why when you look at it sequentially in Q4 of last year itself, you will see the manpower cost again, we said [indiscernible]. So this is not to be compared actually in absolute terms. We'll have to look at it -- if you look at the sequential manpower cost over the last 6 to 7 quarters, you would see that it is almost at a very stable level. Having said that, we have taken an exceptional charge of INR 85 crores, around INR 85 crores for VRS, which we have done this quarter, and the benefits of which -- the financial benefits of which will inure to us over the next few quarters. So you would also see some improvement in the manpower cost as a ratio this year. With these comments, I'll now hand it over back to Chirag. Hello? Chirag?

[Chirag Shah, Research Analyst]

Yes. Thank you, Gopal. We can now start with Q&A session.

[Operator]

[Operator Instructions] The first question is from the line of Nishit Jalan from Axis Capital.

[Nishit Jalan, Executive Director of Auto]

Sir, my question is on a price increase and RM cost. Can you quantify what kind of commodity hit we saw in 3Q? And what kind of incremental pressure can come in 4Q? Just wanted to understand how this could impact margins going ahead.

[Gopal Mahadevan, CFO & Whole Time Director]

You see, I'll quickly give a heads-up and then hand it over to MD. I think, see, very difficult to kind of quantify commodity increase because this has been a month-on-month-on-month increase that has been happening. And we do discuss with our suppliers to see how we can efficiently manage this because this is -- this has to be done in conjunction with our suppliers. Q4 appears to be that steel prices are going to be even harder. All of you know this, right? So we are trying to kind of manage the margins. But I think what we have to look at in this business is, I just wanted to set a context. This is not a normal year. We have actually had a situation where there was virtually no volume in Q1, then the volume started to kind of warm up in Q2. In Q3, we are actually just starting to grow. And in Q4, we are expecting that the volumes will be growing further, subject to the ECU challenges that the entire world industry is facing. It's not just commercial vehicle, the entire automotive industry is facing. So there are a number of moving parts that we have to figure out. As far as the NIMs are concerned, the net margin over the material cost increase are concerned, actually, what we have been able to do is predominantly manage it, but as we are moving -- as the shares of the domestic truck and bus industry are going up, you would actually see that there is a realignment of the overall material cost as a percentage to sale. So one, if you were to compare Q2 with Q3, you would actually see that the share of the domestic MHCV business has actually grown. And this is also one of the reasons why you're seeing this happening. But we will have to wait and watch as we move forward as to what Q3 and Q4 is going to offer. We are still in discussions with vendors, but there appears that there could be a price increase. But at the moment, I'm not able to confirm anything, and now I'm going to hand it to Vipin.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Gopal, I think you've said it very well. The only thing that we will be doing is that all times ensuring that there are cost focuses inside to make sure that we are working on all aspects of cost and value engineering as well. So it's going to be a mix, but I think we'll have to wait and watch. We are in constant contact. But is there going to be a price increase from a steel price increase? Yes, the steel companies are discussing with us, and we are working it through with them.

[Nishit Jalan, Executive Director of Auto]

So sir, if I understand correctly, we have not given any increase so far in 3Q, and bulk of the impact will probably come in 4Q. Is that the right assessment?

[Gopal Mahadevan, CFO & Whole Time Director]

No, I don't believe so. We are giving price increases in Q3. Let me be very clear. There are price increases that have been given in Q3, and there could be price increases that will be given in Q4. That is why the material cost as a percentage to sale has actually gone up.

[Nishit Jalan, Executive Director of Auto]

Okay. Sir, my second question is on your scrappage policy that we keep hearing about. Just -- obviously, it's very difficult to say what government is thinking. But on the scrapyard side, do you think that we do have now or we will have enough capacity to kind of at least manage the scrappage that will be required if policy comes in the right direction? And is Ashok Leyland also looking to set up a scrapyard?

[Gopal Mahadevan, CFO & Whole Time Director]

Okay. Again, very quickly, I think the scrappage policy, we will wait and watch what the announcements are. But whatever announcement that has been made till date is definitely favorable to the industry. There is nothing that has been unfavorable to the industry. There is an incentivization to scrap. Now whether that will result in a mandatory scrapping, which we thought may happen -- may not happen. But at the end of it, I keep telling this in each of the conference calls over the past so many years, what will happen is that the technology is evolving. There's a lot of -- first of all, the emissions have completely changed. We are in BS VI. The second one is there's a lot of electronics today in the vehicles to make the vehicle operations more efficient, right? So it's becoming very connected. Now with this kind of a scenario, one can naturally expect that there will be a natural scrappage, which the larger and the medium fleet operators would want to do and maybe take advantage of whatever benefits the government is offering. As far as the scrappage -- scrapyard is concerned, I don't think we are going to -- at the moment, there is no large investment being planned, but we will certainly have very efficient tie-ups. MD, for your words?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Scrappage centers will come up. It's an opportunity for employment, it's an opportunity for a circular economy, et cetera. So it's very positive for the environment. We will probably have tie-ups as Gopal says. The important thing is to see what the government finally comes out as a notification. And as an industry body, we are seeking an incentive-based scrappage policy, but we still need to understand what the word voluntary means.

[Nishit Jalan, Executive Director of Auto]

Lastly, if you can just share some details on CapEx and investment plans. We have seen about INR 150 crores investment in Optare. So just wanted to understand, are there more investments, which will be required in any of the subsidiaries or in Optare going ahead? How should we look at it?

[Gopal Mahadevan, CFO & Whole Time Director]

Well, we have -- I think I'll allow our MD to talk about the larger strategy that we have with Optare, which is now being renamed as Switch. You must have all seen the press release that we had released, I think, in December -- we have issued in December. And we have some plans in place for that. As far as investments are concerned, we may require some very marginal investment maybe in Optare, not at the moment, certainly not maybe in Q4. It doesn't look like there will be anything required. And we may require to make some investment maybe in Q4 or Q1 in HLFL, if that is required. But in HLFL, you must understand that if we are to make it, that is for growth of the business, and the company has been doing exceedingly well even under the current circumstances. So these are the 2 large, I would -- even that would not be very significant. We aren't too concerned about the quantum of investments, but MD, over to you.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

So just to respond, and Gopal knows Switch as well as anybody else in terms of how he's -- how hard he's worked on it. Switch will be the global arm of Ashok Leyland for electric vehicles. And the idea is really to focus all our resources, which we had in the U.K., as you know, in Optare and in India, where we already have buses plying on the road in 2 cities, to ensure that all of it comes together to create a truly global electric vehicle facility. So that is what Switch is all about. India, of course, will play a massive role because of simply the way the government policy is moving ahead, and we are absolutely alive to that. And this will be our global arm with a huge interest in India for the electric vehicles going forward.

[Operator]

The next question is from the line of Sonal Gupta from UBS.

[Sonal Gupta, Director and Research Analyst]

Gopal, could you please indicate what is the proportion of revenues, which has come from the medium and heavy commercial vehicles for this quarter? I mean could you share that?

[Gopal Mahadevan, CFO & Whole Time Director]

Sure. We have -- see, the total MHCV that has come for the current quarter, which is domestic, is roughly about 56%. It was 45% in the same period -- in Q2 of the current year itself.

[Sonal Gupta, Director and Research Analyst]

And exports would be how much?

[Gopal Mahadevan, CFO & Whole Time Director]

Exports have not been very significant. Markets are falling. But I think the overall exports for the current quarter has been at about -- it's been about 7.5% to 7.6%.

[Sonal Gupta, Director and Research Analyst]

Okay. And my other thing...

[Gopal Mahadevan, CFO & Whole Time Director]

The other thing -- I just wanted to add one more thing. Because you, of course, and I wouldn't -- you see everything in terms of predominantly as ratios and stuff, which is very, very important, but we also see it in terms of trends. So for example, one of the most important things, which -- our MD mentioned in the opening statement has been that the bus -- domestic bus volumes have not yet really kicked on. So there has been a steep reduction in domestic bus volumes. Now I see that as an opportunity, because as the COVID regulations kind of are opened up and we are opening up pretty fast and, touchwood, nothing will happen here. You're seeing cinemas being opened up, you're seeing stores being opened up slowly, restaurants are being opened up. So public transportation, people will start getting the confidence to use public transport, and public transport is here to stay and grow. So when that happens, Ashok Leyland, as India's premier bus manufacturer and bus brand and maybe global top 4, is going to benefit from that growth. We have -- our performance still does not factor in that. And that is an opportunity that is waiting to happen there. MD, would you want to add something more, please?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes. I think in addition to that, schools opening up, schools for all practical purposes have been shut right through the year. Staff transport buses. So all in all, I think the bus segment is going to be an opportunity, which we have enormous strength as Gopal has stated.

[Sonal Gupta, Director and Research Analyst]

Sure, sir. And my second question was on basically trying to understand like you took price -- I think roughly a 2% price increase in October as well. So what has been the retail trend like, right, in terms of discounts, et cetera? So have you been able to sort of -- have net realizations also improved to the extent of the price increase? Or are we seeing some increase in discounting as well? And also, if you could talk about which segment within the medium and heavy commercial vehicles space are you seeing good growth? And what's the situation -- what are the retail trends like on the MHCV side?

[Gopal Mahadevan, CFO & Whole Time Director]

I'll just touch upon the discounting and then hand it over. In absolute terms, actually, the discounts have been growing because unfortunately, the industry seems to look at discounting as a way to reach the customer. So what we are doing as a strategy, which we have done, and you must remember my dear friends, on 1st of April 2017, when we moved from BS III to BS IV, we were the only manufacturer who have taken a very large price increase and successfully gained market share as well. So for us, it is not an either/or. For us, it is going to be the strategy will continue to be profitable growth, better penetration, better offering to customers through technology and service and reach and which is what is happening as we speak. So to your question, I said discounts gone up, it has. But what we are doing is we're raising the prices. With that, we're able to neutralize part of the discount increase and absorb part of the material cost increase. MD, would you want to add something?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes. I just wanted to add. Thank you, Gopal. I think the AVTR platform, which is really a state-of-the-art modular vehicle platform, it will take some time for customers to feel it, experience it. And as you know, this year started late by almost 4 months in that sense. And this is really an application-based platform. The customer can actually optimize his or her application by using modularity. Now that has a benefit not only to the customer but all along the value chain in terms of efficiencies of parts, efficiencies of the way our dealers as well as our suppliers deal with it. We are getting very encouraging performance from a fluid efficiency standpoint. And fluid efficiency is a combination of diesel and the AdBlue that's put it vis-à-vis competition. So I think we will be able to further, as the customer gains experience of usage of the AVTR platform, gain a lot of experience and therefore, the benefits of the AVTR platform will start playing in, which then gives us the opportunity to also value sell more and more. So the focus is, as Gopal said, it's not either/or, it will be value selling and also focusing on market share. And buses coming back, that will further have a positive interplay in our entire performance.

[Operator]

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

[Jinesh K. Gandhi, Senior Vice President of Equity Research]

Gopal, my question pertains to some data points. So one is with respect to staff cost, you indicated INR 85 crores was one-off, but that is not accounted in staff costs. So is there any staff -- one-off in staff cost of that INR 50-odd crore number?

[Gopal Mahadevan, CFO & Whole Time Director]

Yes, you see that -- this is an exceptional. INR 85 crore -- actually, let's me clarify, INR 85 crores is the VRS impact. We have also had a onetime favorable impact of around INR 40 crores, INR 41 crores in terms of EPCG benefit, and that is how it has been netted off and shown in the results. This is one part, okay? Now the second part, which I just wanted to -- since that is a question on staff costs. If you had to roll back the staff cost reversal that happened last year, then you would see that the EBITDA margins are significantly lower in Q3 of last year versus Q4 -- Q3 of the current year. As far as the staff cost increase is concerned itself, there has been one-off, which is about maybe about INR 25 crores, INR 30 crores or so, which is on account of an outcome, one, of the VRS because there is leave encashment, et cetera, which need to be charged off. And also we have -- because of COVID, have also given people the flexibility too, and this is done because, I think, that's the right thing to do because in COVID situation, people are not able to avail leaves. So we have actually allowed them the benefit of deferring the leaves instead of canceling it off. And that has also been taken as a charge. But this is, again, again, onetime events. So that is about INR 30 crores, INR 35 crore. Balaji, can you give you that total aggregate number, is it about INR 35 crore?

[K. M. Balaji, Vice President of Finance]

Yes. Yes, it is INR 35 crores.

[Gopal Mahadevan, CFO & Whole Time Director]

Yes. So that is what -- that is also added to the pressure. That is included in staff cost.

[Jinesh K. Gandhi, Senior Vice President of Equity Research]

Okay. Okay. And the second question pertains...

[Gopal Mahadevan, CFO & Whole Time Director]

Let me assure you -- let me assure you one thing. So that the concern on staff cost is gone. In the sense, at least, it is -- we have not done any major increases in staff payouts or staff cost, which has resulted in the staff cost going up. So whatever -- what you see vis-à-vis Q3 of last year is not exactly comparable. So I would ask you to look at it in terms of the sequential flow to see how the staff cost is moving. Certainly, thank you for asking this, Jinesh. We have added about INR 30 crore, INR 35 crore as an exceptional event. We have also done a VRS, which will be beneficial to the company. So you will see in the going months that there will be a benefit that is coming into the staff cost. So overall, I would only say that this point that all of you are seeking clarification on staff cost, there is nothing unusual that has happened as a staff cost increase in the current quarter. Get back to you.

[Jinesh K. Gandhi, Senior Vice President of Equity Research]

Sure. And second question pertains to other expenses. So in this quarter, other expenses seem to be very low. Is this the sustainable run rate? Or is there any element of costs, which are yet to come back?

[Gopal Mahadevan, CFO & Whole Time Director]

No. Actually, what has happened is, we have been discussing this. And I think we mentioned about the Reset program that we have, which we have across the company. We called it as like -- we have another name internally for it. So that has actually benefited us. We have -- this is not just about the cost reduction, this is about bottom line enhancement. So this is a program that is run with nearly 37 satellite war rooms. We have 250 people dedicated for this from various departments from sales to marketing to product development to manufacturing to HR and, of course, finance. The -- and one of the significant benefits that we're seeing is the steel production and administrative overheads, typically -- and this doesn't come in our schedule this way, it is because we -- our internal management information systems are slightly different. But if you look at it about 2, 3 years back, our administrative overheads were in the range of something like about INR 800 crores. Today, when I'm talking to you, it may end up with something like INR 400 crores. Even between last year and this year, I think the savings could be something like nearly 1/3. So there has been a huge amount of effort. Now you may ask, is it because that traveling, et cetera, as traveling has come off, yes, it has come off. But we have also now adopted to a new work style, where possibly some of the costs that we have been able to save will not catch up as growth happens. So we will be -- we are looking at operating leverage. We would want to see that for every dollar or every rupee that is added on the top, how much is coming to the bottom line. And we are trying to resize our P&L accordingly. So the focus is not just on EBITDA margin, the focus is not just on profitability, the focus is also on seeing how do we drive operating leverage in a methodical manner in the company. MD, would you want to add something?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

No, I think you've said it all. I think what really -- and Gopal is rightly saying is this is a holistic approach, and we are involving thousands of colleagues in every element of adding to either revenue or reducing cost or eliminating wastage, so that everybody is involved with a cost consciousness that we must spend wisely, and we must spend prudently.

[Operator]

The next question is from the line of Mihir Jhaveri from Avendus Capital.

[Mihir Jhaveri]

I just wanted to ask a question on how is the demand situation, Gopal? You said that there is some supply disruption. That's okay. But how do you see the demand situation panning out in Q4? And what's the current trend looking like? That's the question I want to know. And if you can just -- I just missed out, sorry, if you can just highlight what is the inventory situation as well?

[Gopal Mahadevan, CFO & Whole Time Director]

Okay. I think, as MD had mentioned, the inventory was at about 3,000 numbers. Demand is certainly, quarter-on-quarter, we're seeing the volumes going up. And as our MD has mentioned, and with the opening up of the economy and especially the initiatives that are being announced by the government, very clear agenda of investment-led growth. That's what I would say is coming out of the budget. If these were to happen, we will actually see the demand for trucks going up. And when the economy and the COVID -- opening up happens, we'll see buses also, the demand going up. Over to you, MD.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes. I think the demand go up, I think what's important is for the supply chain to go in tandem. And I think the big thing is this global semiconductor shortage, which is affecting commodities all around the world -- affecting, let's say, autos all around the world. But we've got to see how to manage that, and we are working very, very closely with the supply base.

[Mihir Jhaveri]

And sir, just to repeat -- just to clarify, INR 30 crores, INR 35 crores, which Balaji mentioned was one-off in the staff cost this quarter. Is it correct really?

[Gopal Mahadevan, CFO & Whole Time Director]

That's right. Balaji, would that be the right number, yes?

[K. M. Balaji, Vice President of Finance]

Yes, yes.

[Gopal Mahadevan, CFO & Whole Time Director]

Okay. You can tell the exact number, if you want, so that it's on the record. What is the exact number?

[K. M. Balaji, Vice President of Finance]

INR 11 crores has been the VRS-related leave encashment adjustment and...

[Gopal Mahadevan, CFO & Whole Time Director]

and then another INR 21 crores.

[K. M. Balaji, Vice President of Finance]

Yes. The rest is on the regular leave encashment due to the postponement of the leave from FY...

[Gopal Mahadevan, CFO & Whole Time Director]

Which is another INR 21 crores. So about INR 30 crores or INR 31 crores or something like that?

[K. M. Balaji, Vice President of Finance]

Yes.

[Operator]

The next question is from the line of Raghunandhan from Emkay Global.

[Raghunandhan N. L., Senior Research Analyst]

My first question was again on the demand outlook part. Cargo MHCVs in the recent months have been doing very well, especially tippers and ICVs. Can you comment a little bit on the trends in MAVs, tractor trailers and directional prospects ahead? Also, are you seeing the replacement demand coming back gradually?

[Gopal Mahadevan, CFO & Whole Time Director]

Well, I think we just discussed this. You are asking for a segment-wise thing. So all I would add is that with the infrastructure spend coming in, I think we're going to see a demand for tippers and multi-axle vehicles. So -- and this is where we see immediate thing. ICVs has been doing very well in the current scenario, and we have seen a high growth in intermediate commercial vehicles. We also see the tractor trailer business -- demand going up because, see, all of these cater to different parts of transportation, right? So it's not like in the different parts of transportation and different segments of the economy. So tipper is in one way or the other directly connected with mining and road building. Tractor trailers are required for transportation of extremely heavy cargo, including steel rolls and other equipment like that. So we believe that we would see the growth happening in each of these segments, but possibly led by tippers. MD, would you want to add something?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes. Basically, it's quite interesting that each subsegment, as you've asked, has its own trajectory. And there is a certain part of the economy, which drives that trajectory. So Gopal has stated it all, and we are seeing now demand coming back in multi-axle vehicles where we are strong. The green shoots of that have started. And I'm sure the fleet owners will soon start looking at replacing their stock. Ultimately, when an economy moves, trucks move, it's very, very clear and vice versa. So we see that going forward to be going into a positive demand cycle.

[Raghunandhan N. L., Senior Research Analyst]

Exports have also come back to positive territory in Q3. Would it be recovery in underlying markets? Or would it be the new products, which have been launched in various markets? What is driving this recovery? And what would be the prospects ahead?

[Gopal Mahadevan, CFO & Whole Time Director]

I think if I were to put a 2x2 metric, you would see new products and opening up of markets as a reason. So we -- definitely, as we have been sharing with you, and we did that in November last year, when all of you were there, many of you were there in our engineering center. We said that if you were to look at Ashok Leyland today as compared to what it was 4 years ago, we have a larger number of vehicles, including -- we have just launched Dost+, and we have launched quite a bit of variants even in the MHCV segment. And more importantly, we also have both LHT and RHT. So we are kind of more ready to meet the requirements of the global market. And we are also seeing -- as you rightly mentioned, we're also seeing the country is opening up after the COVID crisis that has happened. And this is one of the reasons why we're seeing -- so we're positive about the growth in exports. Vipin, over to you.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes, we continue -- actually, it's a wider array of products, Gopal said and packaged with RHT, LHT. So we have the focus. We recently launched the Gazl and the Falcon in the Kingdom of Saudi Arabia. One of the things that we are doing is kind of market expansion through a revamping of our existing network of the retail footprint in Africa. So we are working and appointing, as we speak, important distributors in certain clusters in Africa, which should then further enhance our position in markets, which we are naturally inclined. India, not we, as Ashok Leyland, but India is naturally inclined to us. So our thrust continues.

[Operator]

The next question is from the line of Kapil Singh from Nomura Securities.

[Kapil R. Singh]

Sir, I'll go back to the question on material costs, and I'll explain in the context. Basically, what I'm trying to -- the material cost is hitting the companies with a little bit of that. So if you could quantify how much of the increase you have already seen in Q3? And I know you can't forecast, but till Jan, how much of the increase is there over and above that? And what is the net increase in pricing in Q3? That would be really helpful.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Hello, Gopal?

[Gopal Mahadevan, CFO & Whole Time Director]

I'm sorry, I'm on mute. I didn't realize it. Sorry, I was on mute. Sorry, Kapil. I said that's a very difficult question to answer because the quantification is something that we are not able to do it on a month-on-month basis. And I'll tell you why. These negotiations with, especially on steel, don't happen on a month-on-month basis. They happen sometimes on a quarterly, sometimes on an half yearly basis. What we see happening is that there is a price increase that is happening in the market. And different customers of the steel mills have different kind of pricing cycle. So what we do typically is when we are engaging with the steel manufacturers, we are actually saying, can we now close this at particular price for the current quarter? They come back maybe with a lag. So when there is a lag, we have to take some intelligent estimates of what we should be reporting as the price increase. So based on that, we factor in some of the cost increases and then finally settle the price increases with the steel mills. It may be marginally way off. But one thing that appears to be there in the fourth quarter, and I'm not too concerned about it because you see -- this is -- that's why that this company or this industry cannot be measured purely on a quarter-on-quarter performance. But if you look at it, we believe that in the fourth quarter, there is a further price increase that may happen on steel. And I cannot share that information not because I don't have the information. This is too much of the strategic information that -- of what will be the price increase that we will get on steel. It is not uniformly distributed, right? So it depends on the demand, the offtake that you have with a particular steel producer as opposed to another steel producer. So if there are larger relationships, which have been happening over the years, obviously, there will be a favorable consideration. If it is not, then you may have to end up paying a little more. Sometimes, what we are doing is we are also buying steel from outside India in slightly larger lump, so that we can actually take a -- we are able to utilize some of the price increase that is estimated in the near future. It's a very complex activity. But having said that, directionally, what we are trying to do, and it is that we're trying to see how much of the price increase that we estimated in the fourth quarter will get neutralized by a price increase in the selling price. And within that, we are also trying to change the mix. Please understand what's happening here in the fourth quarter. MD had mentioned about the semiconductor challenge, then we have the steel price, right? But we also are -- with all of this, our teams are looking at how do we improve the mix, so that we are able to deliver a better gross margin on the entire mix that we have. At the same time, there's a set of people who are working with the steel vendors to see how much we can neutralize on the price increases by maybe having a little more extended contract, giving them offtake assurances. So it's a very complex thing, which I can't really put a number. Vipin, would you want to add something here?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

No, no. I think you've said it very well, Gopal. It's absolutely well stated.

[Kapil R. Singh]

Okay. Secondly, could you talk about the financing situation in the market and also performance of Hinduja Leyland Finance?

[Gopal Mahadevan, CFO & Whole Time Director]

Yes. So I will give the performance of Hinduja Leyland Finance, and company is doing well. As I had mentioned last time, the collection efficiency is more than 90%. We are not -- and so all the morat accounts, not all, I mean -- I'm on the call, so I had to be very careful. I would say that almost all the morat accounts are doing -- performing well. They're going back into payment mode. That's why you're seeing the collection efficiency being there. The gross NPA is 4.3%. The net NPA is 2.3%. That book is INR 26,600 crores. So that capital adequacy is about 16.6%. I think they are doing very well. They have sufficient funding lines tied up. There are no issues on liquidity at all. And I must compliment the management team, the Vice Chairman, the Managing Director, the Chairman of the Board, I think it's being pretty well run.

[Operator]

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

[Shyam Sundar Sriram, Research Analyst]

This is Shyam Sundar Sriram. My first question is you did talk about the production shortages. So just a couple of points on that, if you can please clarify them. So if you top off the, say, X volumes of production in Q4 FY '20 -- FY '21 and Q1, where would that X be as we stand today, given your understanding of the -- if you -- and the semiconductor shortages, if you can give some perspective on that? In relation to that, sir, given the production shortages and the demand improving, underlying retail demand being strong, shouldn't the discounts and therefore, the market operating price improve substantially on a quarter-on-quarter basis if the demand is high and the supply side is facing constraints per se? On these 2 points, if you can please share your thoughts?

[Gopal Mahadevan, CFO & Whole Time Director]

Yes. The only point is I didn't understand Shyam -- I don't know what you've -- the content was. I didn't understand your relation for Q4 and Q1. You said about the trend. So I wasn't very clear what you meant by that.

[Shyam Sundar Sriram, Research Analyst]

Until June -- I was referring to until June, sir. I mean, generally, what is being talked about...

[Gopal Mahadevan, CFO & Whole Time Director]

Until June? Until June? See, I'm just going to have kind of very quickly -- see, at the moment, the challenge that we have, there is a further announcement, I think, that has been made by one of the suppliers, stating that they are not able to estimate what will be the India supplies. I think that has come yesterday or today. And so we are -- see, we are also in -- we -- ultimately, the shortage is not from our side or it's not a unique situation, right? It's a global phenomenon. It's an India phenomena. It's for automotives itself. So we are not able to kind of state what the production shortage will be. What we know is that the shortage is not insignificant. But the relevant companies are trying to see how to -- and it is not just them, it is their own suppliers. It's a kind of a 3-stage, 4-stage process, which is actually resulting in the shortage. So the second part of it is with respect to your question, that given that there may be a shortage -- I mean there could be a shortfall in terms of satisfying demand, will the pricing improve? We'll have to wait and watch. Logic tells me, it should provided the buyers say no, let us wait for another quarter and buy. But otherwise, if they have a here and now demand for, say, for example, some of them have to quote for tenders, right? And if they have to quote for tenders, they prefer to have new vehicles. So which is why, I say, in the medium term, if we are actually forecasting that the GDP is going to be one of the highest growth rates in the world, okay, then this will augur well for the commercial vehicle industry because, again, I keep saying trucks do nothing but transport GDP. So if that is the situation, we are going to see the demand actually coming back. And hopefully, by that time, I'm not able -- this is not a forward-looking statement. Hopefully, by that time, a lot of things would have resolved because we are seeing steps being taken to address the steel price increase. We are -- hopefully, the semiconductor shortage should also stabilize. And things can get back to normal, by which time the demand would have also started to grow. This is my overall view that I can give from sitting where we are, but I'll now hand it to Vipin as well.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Just to add, I think we're coming out of the pandemic, but we must realize that there is still volatility around in the world, shortages coming in here, demand patterns growing there. And we will continue to navigate through all of this. And we've got a great team to navigate. We've got very good products. The semiconductor issue is of global supply chain, and it's something that they are not able to pin down absolutely as to how it's going to work. We have mitigating plans. We are working through everything. So it's a matter of navigating through this period, which is still a relatively volatile period. And I'm sure we are strong to come out of it.

[Shyam Sundar Sriram, Research Analyst]

Understood, sir. On the LCV business, we have been -- we have launched models even during the pandemic period. So if you can give some perspective on the LCV pipeline, addressing the right spaces going forward and on the network expansion as well? How do you see the business going into the next 2 to 3 years? If you can provide some perspective on that, that would be helpful.

[Gopal Mahadevan, CFO & Whole Time Director]

Yes. I think the LCV business has been doing very well. Let's compliment the -- both the manufacturing and the LCV business teams for achieving what they are doing. Essentially, what is happening is the market share is actually growing very efficiently. We have actually seen that the Bada Dost has been received very well. On LCV terms between Q3 of current year and Q3 of last year, we have actually seen the addressable market actually changing from -- going from 18.3% to 20.3%. And we have seen that while the TIV of the addressable market has increased by 17%, the volume that has increased in Dost and Bada Dost is nearly 30% in these 2 vehicles. The other 2 vehicles, Partner and MiTR are not very significant numbers. We are still to grow. These are very fine vehicles, and we have -- we are positive towards them. But on -- purely on Dost and Bada Dost, these are the numbers that we have. MD, would want to add something?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes. We are very positive about our LCV business. And now with Bada Dost, we are addressing, as Gopal said, a very large proportion of the LCV market. The question is what is driving LCVs, e-commerce. We are sitting at home and ordering stuff. Agri is driving, Swachh Bharat is driving. So we're very positive about this business, and we will continue to move forward investing in this as well. Right now, we are growing month-on-month, quarter-on-quarter and, as Gopal said, gaining share as well.

[Gopal Mahadevan, CFO & Whole Time Director]

Yes. I would possibly also add one more thing, Vipin, is that for us to be a global top 10 in commercial vehicles, the growth in LCV is going to be very crucial and is very important. And similarly, in our group, in international, LCV range is going to play a very important role as well. Back to you.

[Operator]

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

[Amyn Pirani, Research Analyst]

My question is actually on the debt reduction and free cash flow generation in this quarter. We would have expected that maybe free cash flow generation could have been higher, but I think MD mentioned in the beginning that working capital was flattish on a quarter-on-quarter basis. But given that volumes recovered so strongly, shouldn't working capital would have improved much more? Is there anything that you can help us understand there?

[Gopal Mahadevan, CFO & Whole Time Director]

Well, see, the working capital would have improved, but you must also remember that our level of inventory between Q3 and -- Q2 and Q3 has also increased. So if you ask me, I have got 3,000 units of vehicle there. So both inventory, not only finished goods, raw material, et cetera. So what we are also doing is we are astutely managing our working capital in the sense that we don't want to have over creditors. See, most of our business also is -- it's almost that is very negligible credit. But when you start improving the level of -- and I'm using the word improving the level of inventory, both in raw material, you would actually see that the working capital has improved. But the overall cash flows, while the cash from operations has improved, but we have also -- we did it to manage our cash flows as astutely as possible. So we can't actually, primarily increase the cash flows at the same level as the level of revenues going up.

[Amyn Pirani, Research Analyst]

Okay. So the INR 3,000 crore inventory is actually at your end? It is not selling inventory that you have?

[Gopal Mahadevan, CFO & Whole Time Director]

No, no, no. We don't post [indiscernible]. You must remember, we also had -- I wanted to tell you that we infused about INR 150 crore in the quarter for Switch. We invested INR 150 crore in Switch Limited, which was part of the plan. And so that also kind of -- otherwise, suppose if INR 150 crore was not there, our overall cash flows would have been INR 300 crores plus.

[Amyn Pirani, Research Analyst]

Understood. I just wanted to go back to the gross margin theme. And we appreciate the fact that, obviously, 2Q was not a normalized revenue -- a breakup quarter, and Q3 is a more normalized one because truck is your main business and truck share increased. But then going forward, historically, you were able to achieve a double-digit kind of a margin, 40,000, 41,000 kind of vehicles. This quarter, you did 33,000, margins are still at a lower level. So going forward, is that still a good range to work with? Or do you think that given BS VI, given the volatility, you may need to achieve a higher amount of volumes to achieve double-digit margin? Directionally speaking, I don't want exact number.

[Gopal Mahadevan, CFO & Whole Time Director]

When you say -- when you look at 33,000, you are telling both MHCV and LCV put together?

[Amyn Pirani, Research Analyst]

Yes, yes, and on the total company vehicles.

[Gopal Mahadevan, CFO & Whole Time Director]

Yes, yes. See, what happens is we must understand that there are 2 parts to this. In the past, when you calculated 33,000, the ratio of MHCV would have been significantly higher than the ratio of LCV, okay? So what happens is the overall revenue that you have in the top line for a 33,000 volume will be much higher than the revenue that you have today for 33,000 vehicles because LCV is playing a higher -- as I said, the share of MHCV is catching up and hopefully, will keep increasing as we move forward because that is still our main business. Not that LCV is not important. So just to kind of clarify, in this call, sometimes one tends to speak, all the businesses that we have are important to us. Each one is looked at as seriously as anything else. But when we talk to the outside world, we have to talk in terms of ratios. So when you look at that, the heft is by the domestic MHCV. So the absolute multiplier of saying that 33,000 will give me -- give Ashok Leyland double-digit EBITDA is not absolutely right because when the revenues in absolute terms are higher for the earlier mix of 33,000, then the absolute contribution that you have and the absolute EBITDA that you have would be a bit more than the current mix of 33,000, which has got LCVs. For example, an LCV may cost INR 5 lakhs, INR 6 lakhs, INR 7 lakhs, okay? An MHCV will cost INR 25 lakhs, INR 30 lakhs. So it is -- while the numbers are correct, we can't multiply that and say that the revenues are different. So I wanted to actually correct your perception that at 33,000, double-digit EBITDA will come in. I don't think -- it will come in at a mix level. What is important is, we have said 33,000 or 40,000, I don't know the basis of your calculation. But assuming it is right, what will happen is it will come in, but at a particular mix level. Otherwise, it can't. But all I can assure you is that all of us in the team are working towards reducing the breakeven point and improving the EBITDA margin. So hopefully, as we move forward into the further years, you are going to see the operating leverage also kicking in.

[Operator]

Ladies and gentlemen, due to time constraints, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

[Gopal Mahadevan, CFO & Whole Time Director]

Hello?

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Gopal, you're going first? Yes. Go ahead.

[Gopal Mahadevan, CFO & Whole Time Director]

No, I thought Chirag is going through the closing comments. Chirag? Okay. We are not able to hear Chirag. So thank you very much. I'm going to hand it over to MD very short -- to our MD very shortly. Thank you very much. All we can tell you is that we are placing the right efforts in the company; one, for revenue enhancement; second one is the product launches that we've done in the current year have been very well received, and we will continue to pursue launches at a steady pace to fill in the slots to address the market better. LCV is a very important initiative. We believe that exports should start to open up as COVID does. Our focus on middle line management continues, all of you know about this. And we'll have to wait through the uncertainty, of course, of the semiconductor. We'll have to, of course, face the challenges of steel price increases. But I'm sure that we will continue to do that as we have successfully done in the past. Vipin, over to you.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Yes. I want to thank all of you for your sustained interest in Ashok Leyland. This should continue. We are very focused on the bottom line as well as enhancing the top line growth, both in the domestic market as well as internationally and some of our other allied businesses. What is extremely important is that the entire company is contributing towards making sure the P&L is rightsized, as Gopal says, to ensure that we take operating leverage. We will continue to launch new products and, the AVTR platform without doubt, as it stabilizes, as the customer experiences it, will be a significant, let's say, game-changer in the way this is positioned. So we will always be technologically nudging our customer and nudging the industry to move forward. One last thing, the huge impetus on the digital play. Digital is extremely important to us. That will further drive not only efficiencies but it's focused on the customer, what is it that we can make it easy for the customer to do business and easy for him to use all our products, both in aftermarket as well as in the sales. So digital is a big play with us. But with that, thank you very much for your interest in Ashok Leyland.

[Gopal Mahadevan, CFO & Whole Time Director]

Thank you.

[Chirag Shah, Research Analyst]

Thank you, everyone, and thank you, Mr. Sondhi and Gopal, for giving us the opportunity and giving some time out for the call. Have a great day, everyone.

[Gopal Mahadevan, CFO & Whole Time Director]

And Balaji, of course. Thank you.

[Vipin Sondhi, CEO, MD & Non Independent Executive Director]

Thank you, Balaji.

[Operator]

Thank you. On behalf of Edelweiss Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.