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Ashok Leyland Ltd
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Good morning, ladies and gentlemen. I'm Ashad, your moderator for this session. Thank you for standing by, and welcome to Ashok Leyland Post Results Conference Call. [Operator Instructions] I would like to now hand over the conference to Mr. Kapil Singh. Thank you, and over to you, sir.
Hello, everyone. Good morning. Thanks for joining the call. Today, from Ashok Leyland management, we have Mr. Vinod Dasari, CEO and MD; and Mr. Gopal Mahadevan, President, Finance and CFO. I'll hand over the call to Mr. Dasari for the opening presentation, which will be followed by Q&A. Sir, over to you.
Thank you very much. First of all, I would like to thank all who have joined us today for the interest shown in Ashok Leyland. So welcome to the Investor Call. I'm happy to share that we had another stellar quarter. Continued our double-digit operating margin run for now, I think, about 14 quarters in a row, or -- and is something that we intend to continue to make. The industry also turned around very good. We had about 12% growth in overall volumes for the last full year. And although the initial quarters were smaller because of the BS IV change in Q1 and Q2, it recovered very strongly. And even for us, where we were making 53,000 in the first -- the TIV was 53,000 for us, and then it went up all the way to 125,000. So we maintained our market share. I think the demand will continue to grow. Our industry runs on 3 primary things; one is the GDP, second is -- which is being driven very well with these GST reforms and all that. Second is the growth in infrastructure. I think being a pre-election year, the continued investment in infrastructure will happen. And third is mining, and that is largely related to the infrastructure also. Plus there has been a good shift for us, particularly, because of the 2 things happening in the country. One is, more and more hub and spoke is happening because of -- mainly because of the GST phenomenon and that is resulting in the size of trucks becoming larger. So even if our number of trucks doesn't go up, the size of trucks goes up, so our revenue goes up. So just -- if I look at last quarter, our volume went up 15% for trucks and buses, but our revenue went up by 32%. So it's an indication that the size of the trucks have become larger. The year itself was quite satisfying. We were the only company in the world which launched the iEGR-based BS IV, because we believed it was a simpler thing to do for Indian markets and it is something where we continue to believe that you keep things simple and easy in India and that will help the reliability. IEGR, people thought would not work, but we sold more than 100,000 trucks with that and it has proven to be a very good technology developed in India. And we continue to be very positive about the benefits of it. We produced a record number of vehicles. And if I look at the equivalent chassis, actually we're producing them much higher than that. Revenues and profits were at record levels. Some of the satisfying things last year is we became -- we achieved a second Deming award for our Hosur II plant. I believe we are now the only commercial retail company in the world with 2 Deming awards, which is like a pinnacle of quality. We had fantastic performance from our LCV business. We have been trying over the last 3, 4 years that we've been talking to you that we are trying to develop other businesses so that we are not just depending on the truck business. And I'm happy that our LCV business has grown by about 35%. Our defense business has grown very well. Now we are the second largest defense producer, a private player to the Government of India. We have started to get into exports of defense also. We won about 12 tenders in the last year and another 13 tenders the year before. Our aftermarket is doing exceptionally well. We've grown at a CAGR of 30% per year for the last 2 or 3 years. Our power solutions business is also doing well. We've grown by about 25% with positive margins, very positive margins. And we've started to now export for the first time engines made in India directly to United States. That gives you confidence that we have capability of making engines for BS VI. So we will be ready. So like that, all the nontruck businesses grew exceptionally well. Our international operations grew by about 38% largely due to the very strong demand in many of our markets. We've continued to maintain our position in the top 40 brands in India. For the first time in 20 years, our rating got upgraded to AA+. We had a fantastic turnaround of the LCV joint ventures and as well as the foundry joint venture, which was for ages, not making money and now is quite profitable for us. Compared to where we were some 5, 7 years ago, or 5, 6 years ago was about $7,000 -- INR 7,000 crores of debt, I'm happy that we have a record cash of about INR 3,000 crores in the bank now. We were rated by ET, I think, as one of the best places to work. And what gives me personally a lot of satisfaction is the CSR work that we are doing with lots of villages and schools, there are about 150 of them in Tamil Nadu alone, has been rated as one of the best CSR activities in Asia. So as I look forward, I think, last year was one very pleasing in all round, not just in financial performance, but market performance and various other aspects of it also, whether it was quality awards or how we are judged as a company, as an employee-employer relationship and so on. If I look forward, I think, I'm quite bullish that the infrastructure-led demand will continue. The GDP will continue to grow on the back of GST, the hub and spoke model will continue to play to our favor, and I think the international markets will also continue to do well. Now we are, at the same time, looking at nontruck business also that I talked to you about. The aftermarket business for us is doing exceptionally well. We also launched digital platforms last year. For example, the ServiceMandi platform where we said it was a on-demand availability of mechanic anywhere on the highway. We had launched it only on 3 highways across the country and we launched it last August, and people thought that it would not work. By March, we had crossed 50,000 transactions, and I'm happy to report that in April alone, we did 25,000 transactions, and with a [ GTV ] in -- on ServiceMandi just for - in the month of April of INR 12 crores. This is just one of the examples of the various initiatives that we are doing. In aftermarket, we also have a parts platform called Leykart, a telematic solution. So we're growing our business a lot into services and solutions also. We launched a new business called Customer Solutions Business. All in, our domestic truck industry is continuing to do well, we are continuing to do well. But equally, we are looking at all these other aspects, whether it's LCV, defense, aftermarket, customer solutions, international areas to grow them at a faster pace than the truck business so that we can make our company less prone to cyclicality that the truck industry is known for. Two things that I wanted to address that I know have been a concern for some of you or has been mentioned in the media. One was the high fuel prices that you -- yes, that is a cause of concern, but we are hoping that it will not have an adverse impact on the MHCV industry. These things go up or down. Usually it is adjusted in most of the contracts and it's not like if a price goes up, the trucker doesn't get compensated. The very few fixed contracts, which are not negotiable, so I think that should have very little impact. But specifically, I wanted to mention about the impact of the overloading concern that some of you had and some of the media people also mentioned. Actually, this is happening only in a couple of pockets. In most states across the country, it is not happening. It's happening in a couple of pockets, especially in UP in Rajasthan. Those are not markets where we are the dominant player. But even if I look within that, it is happening in segments which has -- which are not the biggest for us. So even if overloading happens, we did an internal calculation based on the total volume that we have. Even with overloading, at best it can have maybe a 1% or 2% impact. That comes to about 1,000 to 2,000 vehicles max, which we'll easily make up. So I'm not so worried about the overloading concern. Some of you are also concerned on the commodity prices, and I had mentioned that we will continue to increase prices, but that is just a strategy. It is not written down rule that we will increase prices. We will increase, if necessary. Like I said, our goal is to affect our margins. We will not give away our margins for the sake of market share or for the sake of commodity increases. We continue to maintain our margins in double digit and we continue to keep our margins going forward. Last year, we were able to raise prices almost every quarter. In fact, in Q4, we raised prices twice. And yet, we maintain market share throughout the year. So that goes to show that we are the price leader. So we will probably raise prices on some of the innovative products that we have. And it will allow us to get the premium pricing that we deserve and -- otherwise, we wouldn't be able to keep the market share. We are launching 2 very good products platforms this year that I'm very excited about. There's a whole range of them. I think some of you had come and seen it at our Global Dealer Conference, or Investor Conference too. The 2 that are the biggest is, one is a high horsepower range of vehicles which is for tippers and tractors, and second is the world's first 41-ton vehicle with a 5 axle with twin-tire lift. And that's about all that I wanted to say that our dealers are also doing very well, almost all of them. We measure them on profitability. We take responsibility for their profitability. They are also doing really well. So they are excited and enthused. I am quite bullish about not just this coming year, but the year after because of the pre-Euro 6. And then after that, there will be slight dip, but that would be made up by the scrappage scheme that is supposed to be coming in 2020. So those are all the comments that I have, I'm open to questions now.
[Operator Instructions] The first question comes in from Sahil [ from ] Kedia.
This is Sahil from Bank of America. Sir, can you tell us in terms of A, what is the kind of cost increases that you are likely to see on the BS VI changeover? There seems to be numbers ranging from 6% to 10% in the various discussions that are happening? Number one. Number two, in your media interaction yesterday you said that there is likely to be a pretty strong prebuy that you are expecting. Can you give us some sense of what that -- what could be the impact on prebuy that the industry could get?
So the impact of Euro 6 on a vehicle depends a lot on the type of the vehicle. So I can't give you an exact number for the entire range of products that we make from 2.5 ton to 49 ton. But roughly -- and these are rough numbers. Roughly, let's say, a vehicle sells for INR 20 lakhs, an engine would cost about INR 2 lakhs, okay, just in - at BS IV level. If you add some peripheries and all of the peripheral equipment including, take systems and exhausts, or the cooling system, it might cost a little bit more. But roughly let's say, about 10%. That INR 2 lakhs is likely to go up to about INR 3 lakhs to INR 3.3 lakhs. So all in all, maybe, INR 1 lakh to INR 1.5 lakh cost increase per vehicle.
And plus there would be OBD, et cetera which will be added on? Or is that included in the cost increase that you have just said?
No, OBD is already there for BS IV. We'll just have to upgrade that. So that I don't think there is -- that's a more of a software change, not too much of an increase in that. We also own a company that makes SCR system, so we are fairly confident of managing the cost as well as the quality of it. As far as the other part of the question, you asked about the prebuy. Because there is a cost increase from April 2020, now if the cost increases INR 1 lakh to INR 1.5 lakh, the price increase will be INR 2 lakh to INR 2.5 lakhs, right? So it could be anywhere from 8% increase in overall pricing, 6% to 8%, depending on the model, of course. Since there is a cost increase, most customers like to prebuy, and this has happened in other parts of the world and I think it has happened in India also, and I think it will also happen next year.
Okay. One follow-up question, sir. At the Auto Expo, you have shown the swappable battery technology -- buses. How is that progressing? And can you give us some sense on how fast do you expect that to actually commercialize and start to sell?
Yes. So for our electric technology, as I had said, we are working on 3 different strategies; one was the fast charge, one was a swap, and another new technology that we are coming up, which is called flash. The swap is ready. We showcased it. And we had targeted amongst this Smart City Campaign, rather than go berserk about -- at every city, we said we will take one city and do it well. So we took the Ahmedabad contract. It is on a cost per kilometer basis and it allows us to try different types of technologies. So the 40, 50 vehicles, I think, in Ahmedabad we will have to start delivering in the next 4, 5 months. We are ready to go and we can deliver that. So to answer your question, when do we commercialize it? I think in the next 4 to 5 months. A majority of that we will try with swap. We will also other technologies in Ahmedabad.
And next we take the question from Sonal Gupta from UBS.
Sir, just wanted to understand, in terms of, like you said, GST is clearly driving hub and spoke model increase. And we have seen even in, I mean, like overall industry numbers, the share of above 25-tonners in terms of the SIAM data has really gone up a lot. So I mean, over the medium term, over the next like -- next 2, 3 years, how do you think this -- I mean, what do you think should be the longer-term picture on this ratio or proportion in terms of medium duty versus the heavy duty and the LCVs. So if you could give some light on that?
If you look at all the developed countries, the MHCV to LCV ratio is something between 70% to 80% LCV and balance MHCV. In ASEAN countries, it is closer to 80% LCV. And in some of the larger countries, it is closer to 70% LCV. So we are somewhere following the same range of about 70% to 80% LCV. And -- yes?
Sorry. My question is more within the medium and heavy, how do you see the sort of split in terms of say 9-tonners or the lower-end medium duty ICVs versus heavy...
Roughly, the ICV is about 25% of the total MHCV TIV. I think that will continue to grow. Some of the, what we call the 16-ton segment will shift out but there has actually been a degrowth, if you noticed in that. And that degrowth in -- has shifted to either to 25-ton or higher or to the less than 16-ton. So long run, I would believe that if you look at it in number of vehicles alone, this might be about 60% to 70% large vehicles and 30% to 40% smaller vehicles. But we are a unique country in that sense because it's difficult to measure just number of units. I remember when I joined Ashok Leyland, we used to make 4 x 2 vehicles and it was counted as one vehicle. Now we make a 10 x 2 vehicle, it still counts as one vehicle, although we sell it for almost 2.5x the price. So that, I think, if you look at it in tonnage-carried perspective, I would say that in MHCV, 80% will be on the larger side, 80% to 90% on ton KMs will be on the larger side and maybe about 10% to 20% on ton kilometers will be on the smaller side.
Okay. That's great. And on the financial side, could I get the breakups in this quarter in terms of revenues as a percentage from the domestic trucks and other businesses that you give sometime?
Yes, I'll just give you a broad -- this is Gopal here. I'll just give you a broad [indiscernible] of the revenue share. For Q4 FY '18, domestic truck business accounted for about 72% and buses accounted roughly for about 7%. And exports for the quarter was at about 5.5%, but for the full year, it was at about 8.6%.
Right. And sir, could you just tell us how much is aftermarket for the full year? Aftermarket and defense?
Yes. I'll give you a rough share, because we don't give the detailed breakdowns, aftermarket revenues was about 5% roughly.
Next in line we have Pramod from Goldman Sachs. We will take the next question, which is coming from Amyn, Deutsche Bank.
Sir, my question is on the fact that you are guiding for robust growth this year and probably even higher growth next year. I just want to see, in terms of capacity, what kind of a growth are you geared for in the next 2 years, because obviously, you've not made any new greenfield expansions. So there is something that you are doing in existing facilities. So what kind of a capacity growth are you geared for in the next 2 years?
I think first of all, in MHCV business, the capacity for us is largely defined by capacity constraints in the supply chain. Yes, there are some internal bottlenecks. So let me break it down. As far as chassis assembly is concerned, there is very little concern for us. We can always go to the third shift in assemble mode. There were bottlenecks that we had in making, for example, a 9-speed gearbox, which we invested in last year, which cleared that capacity. We had capacity constraint in making cabins, especially in the paint shop. We did the investment and implemented the solution in May this year or first half of this month. So that has resolved. There were some constraints on high-horsepower engines on NEPTUNE and others, where we have done some debottlenecking and corrected those. So we are looking at constraints aggregate by aggregate by aggregate, and wherever there is a capacity constrained, we are releasing that. We do not see a requirement for a new plant to make chassis assembly. We do have some shortage in capacity in bus body that we projected if the bus body [ board ] comes, and hence we are building a plant in Vijayawada then. But those are very small investment plants, which we have done in many parts of the world also. So those bus body building plants, we will do -- continue to do in other parts of the world, but large truck plants, we don't need to do. We will continue to invest in engines, gearbox, cab, frame, et cetera, to release the bottlenecks.
Okay, that's helpful. And then secondly, in terms of market share, in the last few years, when the industry was being a bit volatile, your market share has consistently been increasing. But in the last 2 to 3 quarters, when the industry growth has really picked up, your market share has been a bit volatile, because I guess, other players are also trying to get aggressive, trying to gain more market share in this growth. So how would it play out for market share and margins over the next 2 years, wherein industry growth could be strong, but a lot of players who have lost in the last 3, 4 years may try to get more and more aggressive?
Yes. So it's a broader answer that I'd like to give. We stick to our brand name, which is Aapki Jeet, Hamari Jeet. Our business is very simple. I must make my customers' profitability go up. In the end, the EMI of my customer is less than 10% of his operating cost. So even if I sell a vehicle at a discount, the real impact that I make to his operating cost is negligible. I should focus on making the vehicles, which are best-in-class in operating cost, and hence, we do not like to go and try to buy market share. We will continue to focus on making sure that my customer is profitable and, thereby, protect my margins at all times. I have said it repeatedly that we will not buy market share at the cost of margins, we will protect our margins. So our focus then [ becomes ] have the right kind of product that will deliver to the customer the results, and then have a network that backs it up across the country. Now last year, the volatility in the market came because the North region grew by 20%, 25%, which is where we are generally a much lower market share, and my competitors have a big market share and that was mostly because of the rated load regime in UP. So the market just took off in UP and some other places and that moved the entire north zone to 20%. Our South zone did not grow at the same pace. It only grew at about 6% or 7%. Nevertheless, we maintained market share in -- or grew in all regions. So it will take a different effort, but I think, so long as we are focused on 3 things: focus on the customer by providing him the right product; focus on the customer by making sure that, that product is continuing to run no matter where it is; and third, do not chase market share, protect your margins. These are the things that we drive ourselves on.
Next in line, we have Mr. Binay from Morgan Stanley.
Could you share some outlook on the bus segment. How do you see that going into a FY '19? And secondly, similarly on the LCV side, we've seen very strong growth. You're talking about 10%, 12% growth in trucks, but how about the LCV growth, and what will that have an impact on the overall margin for the company?
So first of all, the bus segment actually de-grew last year substantially, and it de-grew in all segments. In -- we look at 3 segments. One is the ICV segment which is the school bus and staff segment, that is about half the business. And about 30% of the business is intercity buses, which are large buses who are intercity, and then, about 20% of the bus TIV is state transport. We purposefully slowly exited from many state transport businesses because they're difficult to do business with and we continue to gain market share in all of them, except the STU where we purposefully wanted to back out. But I expect the bus business to continue to come back. We are the fourth largest bus manufacturer worldwide. We are the largest heavy bus manufacturer in India and we are very proud of that position and we will continue to maintain that. Regarding LCV, there is a growth of 26% in TIV, largely driven by the hub and spoke thing that I talked about. We launched the Dost+ last year. I'm told it is the only commercial vehicle sold in the country with 0 discount. That has helped us substantially enhance our margins. Are we allowed to say the LCV margins? Gopal is saying I cannot say the LCV margins specifically, but I can say that they're very good margins and I'm very pleased by the turnaround that the LCV team has done. We have gained market share by 1%. We are now looking to -- the board has approved an investment of around INR 400 crores for the LCV business over the next 3 years, which as the BS VI platform comes, the entire range of LCV will be extended. Today, if you notice, we only have a 2-ton vehicle, 2.5-ton vehicle and a 7-ton with partner. So we have large gaps, plus those cannot be made into LHD, so we are only exporting the partner. So we are now in the -- completely changing the platform. We will have a full range from 2-ton to 7.5-ton at multiple nodes and they will also be left-hand drive, so capable, and all will be at BS VI level-capable. So we are very excited about the investments that we are doing and we wanted to wait to see, can the LCV business earn a return, which is substantially higher than their cost to capital, which they are able to do so, so hence we go -- went ahead with this investment, okay?
Right. That's very helpful, sir. And what will be the LCV contribution in FY '17 in terms of revenues and FY '18?
LCV revenues overall contributed in FY '18 roughly about 6.5%, 7%, it got up close to 7%. And in FY '17 was about 6.25% -- 6.3%.
Great. Thanks for that. I just have one additional question on the competitive side. We've seen Ashok Leyland taking prices up, but has the competition followed up on the same?
I think there is a lag they all follow-up. Sooner or later they'll follow-up. Everybody's net sales realization last year went up slowly but surely. Like I was saying, we are the price leader, and while somebody else had earlier asked a question that there are others who are trying to do whatever at whatever cost trying to buy -- get market share back. So they might not increase the price, but sooner or later, they won't have a choice because the commodity costs have gone up. We increase prices every quarter. I think 4 or 5 times last year and we still maintain the market share. So we will have to balance this between market share and margins. But if I have to, I will protect my margin first.
But equally I won't want to give up my market share, so it's a nice balance.
By the way, just to add to that, saying from the Managing Director all the way to the lowest level executive, everybody has 3 metrics in this company and the variable pay of everybody is connected. It's market share, it's profitability, it's working capital. So it's the balancing act of market share and margins and working capital that we have to do throughout the year, across the country, all the time. 100% of the variable pay is depending on -- only on these 3 metrics for every single executive. So it is the balancing act that we have to keep on doing. While I will never say that one is more important than the other given that there are others who are trying to only buy market share, I'm not going to go do that. It just means that I have to do more value selling. I have to go to the customer more, build a stronger relationship, explain my differentiation, enhance my network, those kind of things, rather than just give it away on price.
Next in line we have Mr. Pulkit from Motilal Oswal.
Sir, congrats on a good set of numbers. Just quickly, if I missed out on your guidance for the industry growth for FY '19, if you can please repeat for MHCV?
I think it should be the same as last year, is what I said, it's about 10% to 12% growth.
All right. And do you expect the prebuy to impact FY '19 or only come in FY '20?
FY '20, latter part of FY '20.
Okay. And in terms of 4Q numbers, some of us had probably wrongly assumed that margins will be a lot higher, given that there was 23% growth quarter-on-quarter in terms of revenues. And since there are a lot of fixed cost in the business, we expected the operating leverage to be much higher than you've shown. So 11% has gone to 11.8% and other expenditure has gone up by 20% Q-on-Q. So can you help us understand what really has happened this quarter? And why hasn't operating leverage come in as much as you would have expected?
I think the operating leverage was pretty satisfactory. If you look at it, there has been a 0.8% increase that has happened, point number one. The second one is, you must understand that there is also a mix factor in the entire thing here. The mix, when you have -- you see Vinod mentioned that the entire LCV business is profitable, what it actually means is that when you look at the 3 companies, which are the subsidiaries and the LCV business together, which by the way, we have announced that the board has approved the merger with the main company, those consolidated operations are very profitable. But the LCV business part of it, which is tucked inside Ashok Leyland is at the moment possibly lower margin, but once you get the merger out you will see the benefit of the multiplier effect. But having said that, so when you have higher ICVs from the trucks and then when you have STU billing happening in buses as well as when you have the LCV business growing also, you would actually see a little bit of the gross margin coming [ off ] which is not anything to be worried about, it's purely a mix. The other reason also has been that, while there has been a certain amount of discounting that came off in January and February, in March, actually, we have seen the industry exerting a downward pressure on prices and raw material price has also increased. So you have a confluence of factors, which actually increases the pressure on the EBITDA margin. Having said that, when you look at the results as a whole and when you look at the larger expenditure growth, but that actually does not reflect whether we are efficient or inefficient in controlling our overheads because that -- our other expenditure is a big mix of both variable and fixed expenses. If you look at individually sales, admin and manufacturing overhead, let me tell you that we are almost at the same level, if not a tad lower in terms of percentage of revenue in the previous year.
Sir, just to help me understand, so the mix and pricing, et cetera, I thought would understand raw material costs, and which it clearly reflects. But when it comes to other expenditure, if there is a 20% growth in volumes, what would -- this expenditure line to grow lesser because the variable cost will probably grow in line with volumes, but fixed costs may not. So is there an impact of mix, even in other expenditure? Or what is it that impacts?
It does not have -- there are expenditures which are incurred directly, for example, even for export, there are higher costs to be incurred on exports. Now that will get factored into it. But, for example, the expenditure that you already incur from freight to insurance because these are long-haul revenue, so there is additional cost that comes in. Similarly, what happens is, when you look at some of the expenditures which have -- a lot of production overheads are actually tucked in another expenditure because the lines you have in material cost, manpower, after that, you've got other expenditure interest and depreciation, right? So a whole bunch of expenditure actually sits in other expenditure. The other thing that happens is, you have certain -- some of the expenditures, incentives, et cetera, which actually get reentered at the end of the year. Even though you try and accrue pro-rata basis, what happens is, some of the incentive payout that happens, start sitting in the fourth quarter. So one can't -- one of the things that we should remember, when we are doing this, is we really can't say that my revenue has now grown by say 20% and then my percentage over raw material cost is say 25%. So I just multiply that and that will take us straight to the bottom line, it doesn't happen that way. What we see internally, at [indiscernible], we look at it as to how much of the operating leverage has kicked in and more importantly, when we look at these 3, 4 larger buckets, which unfortunately is not how the format is for disclosure, if you look at the manufacturing overhead, selling overhead, administrative overhead, and then manpower, we look at it as a percentage of revenue as how much is it getting better and we have our own internal targets for that. So that is the reason why possibly when you look at it, you see this slightly lumpy growth in other expenditure.
Sure, sir. Lastly, EBITDA margins have been in double-digit I think for last 13 quarters now, except for maybe one quarter.
Yeah, you're right. 2017, we...
For 1Q FY '18. So that seems to be almost like a given and well-achieved kind of target. Now given from hereon, given your expectations of industry growth and kind of market share increase, et cetera, from hereon, do you -- are you in the mindset of increasing margins? Or are you -- or is it more of protecting margins that you are currently looking at?
Well, actually to be on a lighter vein, everybody likes to make money. So we would certainly like to enhance margins. But like Vinod mentioned, we have to have a very intelligent trade-off between volumes, market share and margins. So we have to ensure that we optimize this whole thing so that we continue to enhance our presence in the country and the network and the dealers get rewarded by their presence, we have to look at that also. And at the same time, we have to ensure that we don't discount a way into buying market share and reducing margins. So I think, we would certainly like to enhance margins. And let me tell you, this is not a forward-looking statement, but I think, what the internal team is driving at, it is how do I get -- how do we get this operating leverage to work better, right? But we have to do this without ensuring that we don't cut costs which will enhance our capability and capacity. So there are investments that we have to make in people, in our training, there is a lot of -- in our marketing network, et cetera, which we will not pull back on, even if it's a bad quarter. What we have to look at is the capability building because a lot of what we are doing today, has all the seeds of which have been sown about 3 to 4 years ago. So that will continue on the journey. So there are investments -- there are costs to be incurred, but is that going to depress our margin? The answer is, no. The team is looking at how do we get an optimal mix and how do we get a mix between the main -- the domestic truck business, the bus and then more importantly, the aftermarket LCV, defense and international. How do we keep continuously moving the mix better and better to achieve a better gross margin, which would also start trickling down, even as we continue to focus on operational efficiency.
Just quickly a data point. FY '18 domestic trucks and domestic buses, what will be the contribution? And defense, I don't think you mentioned about this, what the contribution is, FY '18 full year?
FY '18, overall, the domestic truck business was 66% and the domestic bus business was 7.3% of the revenues. And defense revenues were accounted for nearly about 2.9% -- about 3%.
[Operator Instructions] We take the next question, which is from Mr. Ashish Nigam from Axis Capital.
So on defense and export, can you highlight the growth we saw in FY '18 and the outlook for FY '19?
Exports, we saw roughly 38% growth, and defense, I think was 35%?
Yes, about 35% growth.
35% growth.
Okay. We know the longer-term outlook, but what can we expect in FY '19 and '20 in both defense and exports?
In defense, it's a long-gestation business and we won, I think, 15 out of 20 -- sorry, 23 out of 27 tenders that we competed in and they will start to show up this year and beyond in defense and that's a long-gestation business. So I think, these alone will contribute substantially to our revenue and there are more that we are working on. So over the next 5 years, I think, defense will be more. These tenders that we have won alone could be about INR 5,000 crores in the next 5 years. I can't specifically tell you how much will be in defense next year per se.
It depends on the ordering of the government also.
It's defense budget, how much they order, and so on. But the good part about defense is, once you get it -- it takes a long time to get it, once you get it, it stays for a long period of time, some 15, 20 years. And so we are very bullish about it because we used to only sell logistics vehicle. Now we are selling bullet-proof vehicles and some of those we are selling to police also, like J&K Police. Punjab Police has been our good customers on bullet-proof buses and we also have mine-protected vehicles. We are exporting quite a few of these. So our defense business will continue to grow at this pace is what I expect.
Okay. That's helpful. Also on the cash flow clunkers, what is the latest status? Is it mandatory for 20 years from FY '20?
Yes, I think so. The BMO has also cleared it. I have been working on this for at least 7 years now with various governments. There was always this problem of the guy who is actually scrapping is not the same guy who is buying. So we had suggested that we create a tradable certificate like there used to be for the GEPP for exports. And we even said that we will help contribute to some of that through an MRP discount if necessary to help incentivize the government people to do that. It will happen from April 2020 and I don't see any reason for it to happen anytime soon or anywhere -- everybody's -- the demand is very good right now, and I think it's ideal that it comes in April 2020. First, I think, it will come for 20 years, but I actually believe that it will come for more than -- vehicles above 15 years. So the number of vehicles that will be scrapped at '20 versus '15, it starts to go up at a logarithmic scale. So I think if you take the number of vehicles at 20 years, if my number is correct, it's somewhere around 200,000 to 250,000 vehicles which will be scrapped, but if you go to 15 years, it is like 600,000, or 700,000 or something like that.
This is the vehicle population or the vehicles you expect to be scrapped?
Vehicles I expect to be scrapped. So just 20 years alone is equal to almost 1 full year of TSAB demand or at least 70% of it. One year of TIV is -- total industry volume is 350,000. So if 220,000 to 250,000 vehicles are scrapped or replaced, that is a huge demand. I don't think it will all come in one year, but I also think the government will -- by the way, will push for 15 years, not 20 years.
And the incentive shared between you and the government, which...
Very little from us. We give an MRP discount that we talked about.
Sure. Okay. Just last housekeeping question, Gopal, if you can just give us the gross and the net debt number as on FY'18?
Mr. Ashish, may I request you to please join in the queue, because the rest of the participants are waiting to ask questions.
Net debt is INR 2,900 crores, INR 2,993 crores. But that is the cash positive, let me clarify that guys. We held our cash [ into broad ] cash.
We have next Mr. Jinesh from Motilal Oswal Securities.
My question pertains to the LCV business. So you have indicated you will be expanding your range from 2 tons to 7 tons. Any time line by when we expect this product portfolio expansion to happen?
From April 2020, predominantly. We are not wanting to launch a new product and then upgrade it to BS VI, but we will do some of it, upgrade the work right now and then we will launch the full range from 2020. But meanwhile, the existing product range will keep on getting upgraded.
Okay. So until 2020 -- April 2020, we will have 2-tonner range and then we will expand the BS VI?
Yes. So let me clarify again, so the entire range of vehicles that we had today are under license from our joint venture partner, right? So we are developing our own range, which will take us from between 2.5 ton to about 5.5 ton and then beyond also. This will all come with BS VI.
Right. And the LCV business subsidiaries which we are merging, what kind of debt it will add? And what's the accumulative loss, which will be eligible for -- [ take-split ] us?
Well, the overall LCV debt is quite insignificant at the moment. I think it's about INR 120 crores. I'll just confirm that number. But as far as the accumulated losses are concerned, they are close to like, I mean, the accumulated depreciation and losses to the extent of nearly about INR 800 crores to INR 900 crores. Yes, so those are the numbers.
We'll take the next question which is from [ Ramesh Jain ] from IIFL Wealth.
Just on the LCV part again, so the profitability of the segment would be higher than or will we be at par to the overall margins?
Yes.
And do we expect that to improve with the kind of growth that we're seeing?
Well, that we are targeted to continue to improve margins. So I think, look at it this way, last year, their margins substantially improved and they had Dost+ only for half of the year. Now they will have Dost+ for the full year, and they will be able to compete much better. They actually gained market share. Despite having only one platform, the Dost platform, we have now created Dost+ as well as the Dost Light. We created a Dost Express and Dost CNG. So we have multiple varieties of Dost and that has helped the margins.
And even for that market, the exports and the spare parts, our replacement market business would be materially higher margins as compared to the core business, right?
Yes.
And that kind of a growth that we're seeing in the segments, the overall margin should be -- would you be using them -- using the better margin from the segment to protect -- now what would be the strategy in order to conserve the margin at current levels or to gain [ 4% to 6% ] discounting on the truck side and retaining market share. So how would be the strategy?
I think you figured out my strategy. I can't say that on a public conference call as to what is my strategy to compete. But as you know, the margins on vehicles will always be tight. We will continue to sell value, which is how good is our vehicle in terms of performance, and how good is our service network to be focused on the customer profitability and not just the price competitiveness at the OE level. Remember, I said, for my customers, less than 10% of the operating cost of the vehicle is EMI. So you just by giving him another INR 20,000 discount, doesn't get him to make a significant dent. It might cater to his ego, but it won't significantly enhance his operating profit. But if I can give him 0.1 kmpl better, he will recover that in 1 month, that is what we focus on. But at the same time, if you look at the percentage of AMC penetration that Ashok Leyland has, it is probably more than twice the rest of the competition combined. If you look at the percentage penetration that we have in spare parts, it is probably twice what some of our nearest competitors have. And so we use the AMCs to help the profitability of our dealers, we help use our spare parts and other sales to help the profitability of Ashok Leyland, we enhance with things like ServiceMandi to capture the postsales revenue of our customers, also created a new business [ called the ] Customer Solutions Business. I said all of this. So you can see the strategy. I don't want to be articulating exactly what I will do with profits and how I will compete, but that's broadly the game.
We take the next question, which is from Mr. Chirag Shah from Edelweiss.
Sir, one question on 4183 or 41-tonner, when can we expect the launch, and how are you looking at in terms of ramping it up?
4183 no, 4123.
Sorry, 4123, yeah, sorry.
We don't make any internal [indiscernible].
Sorry. My, my -- sorry.
So it is under trials right now. I hope to launch it in the second half -- the second quarter.
So significant volumes from that would be in FY '20?
No. It will be very good volumes, second quarter, not second half.
Okay, second quarter. And just a follow-up on electric buses. So what kind of -- next 1 or 2 years, what kind of volumes one can expect from industry perspective to happen from electric buses?
Good question, Chirag. I think we talked a lot about electric vehicles, but percentage of buses that will be electric in the next 1 or 2 years will still be insignificant. So it will take a while -- Sorry?
Can we expect a run rate of like 50 to 100 buses from industry perspective a month, kind of order of flow coming in? And what -- which will be driven by government entities only for next 2 years, that's the right way of looking at it? Or private participation?
Yes, both those assumptions are correct, Chirag.
Great. And last question if I can squeeze in just a housekeeping. On the discounting front, has the discount gone down in Q4 on average basis?
Yes, I think so.
And is it possible to quantify how much, ballpark estimate INR 40,000, INR 50,000 could be a number?
Sorry?
Will the [ overall ] discount sequentially be down by INR 30,000, INR 40,000 or how -- because we are getting mixed reviews that suddenly discounts have again inched up in the system?
No, I would say the discounts have sequentially come down.
Sequentially come down, yes.
It's not very much. If I look at the margins, including April, our margins are better.
We take the follow-up question from Mr. Pramod from Goldman Sachs. Ladies and gentlemen, we take a follow-up question, which is again coming up from Mr. Chirag Shah, Edelweiss.
Just a follow up on raw materials. So can we assume a large part of the pressure is there for us in the quarter? Or how to look at the RM basket?
Well, it is largely driven by steel and it is somehow protected by the government because of these MIP that they have, minimum imported price. In the end, steel truck which is, let's say, about 8 tons of weight, steel is only about 1 ton. So that is going up. We will recover that much from the pricing. We have some cost reduction ideas as well. So historically, I think -- last year also, there was commodity price increase, right, roughly -- and we were able to recover all of that either through price increase or through cost reduction. So I'm fairly confident that we will do that again this year.
Ladies and gentlemen, due to the paucity of time, we will take the last question, which is coming up from Kapil.
Sir, I had a couple of questions. So firstly, I wanted to check on the performance of foundry business, how it has improved performance over last year?
So it has -- historically, as you know, was making loss. It was negative EBITDA. The full year, we finished with a positive EBITDA, I think, about 5% or so. Full year cash breakeven also. So last several months, we have had positive EBITDA and we continue to. So now it's turned around.
So are you expecting this to improve further?
Yes, I think so. The foundries are one of those bad boys who are increasing prices.
Okay. Second, on the cash flow generation, Gopal, we had pretty strong cash flow generation in FY '18. So can you just run us through how we were able to achieve that? And what are you looking at for next year?
Well, we'll -- I'll not be able to share a prediction for next year, because we don't give a guidance on either the profitability or the other key financial matrices. But one of the key reasons has been that -- two, one is I mean, the level of profits have actually trickled down into cash, very quickly. Our overall EBITDA has been pretty consistent. So we've had now nearly about 3 years of very good profitability. So we've been so far 10% in EBITDA. So that has actually come in, and we have also been steadily improving our working capital. So that is the other key reason. And our CapEx, over the last few years, has been very negligible. So all of this has resulted in cash generation. But what I would also want to say is that as on 31st of March, we had actually -- because of the pretty heavy demand, our levels of inventory had come down and we had quite a bit of significant customer advances. So the net cash, I mean, the favorable cash that we had was about INR 2,992 crores, after a debt of roughly about INR 900 crores being - INR 900 crores to INR 950 crores being set off, but one can't expect that all of that will continue to sit through the whole year. But all I can tell you folks is that the current financial position of the company is very, very strong. We have sufficient levers to fund our CapEx over the next few quarters. And yes, there are no major losses in subsidiaries so we have provided for it. So the balance sheet is very strong at the moment.
And sir, what has been the pricing action that you have taken in the last few months after March?
We have taken -- last few months, we have taken a 2% increase in April. And we did one in [ early August, remember that. ]
So this 2% would largely cover the material cost increase?
Yes, it would, it would. But the material cost increase is something that we are closely watching. Let us see what happens. Hopefully, at some point in time, we will see some respite.
At this time, we would like to hand over the floor back to our speakers for final remarks.
Okay. Go ahead. Kapil, go ahead.
Thanks everyone for joining the call. And I would also thank the Ashok Leyland management for taking out time for this one. You may all disconnect now. Thanks.
Thank you very much speakers. Thank you very much participants. Thank you for joining the call with us. Now you may discount your lines. Have a great day ahead. Thank you.