Ashok Leyland Ltd

NSE:ASHOKLEY

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Ashok Leyland 4Q FY '22 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jinesh Gandhi from Motilal Oswal Financial Services. Thank you, and over to you, sir.

[Jinesh Gandhi, analyst]

Thank you, Aman. Good morning, everyone. On behalf of Motilal Oswal Financial Services, I would like to welcome you all to fourth quarter FY '22 post results conference Call of Ashok Leyland. Ashok Leyland is represented by Mr. Dheeraj G. Hinduja, Executive Chairman; Mr. Gopal Mahadevan, Whole-time Director and CFO; Mr. K.M. Balaji, Deputy CFO.

We'd like to thank the management for taking time out for the call. I will now hand over the call to Mr. Hinduja for his opening remarks, post which we'll start the Q&A. Over to you, Mr. Hinduja.

[Dheeraj Hinduja, executive]

Thank you. Good morning, ladies and gentlemen. It gives me immense pleasure to be in touch with you, and I thank you very much for the interest shown in Ashok Leyland. I will quickly run you through the Q4 and full year performance as well as on latest basis development.

I'm extremely happy to share that FY '22 has been a year of turnaround for AL, aided by a strong performance in Q4. We have been able to post marked performance on most of the areas. Q4 was more a consolidation quarter, if I may call, post the trend reversal in Q3.

I'm happy to share that after 10 quarters, our MHCV domestic truck market share has crossed 30%. In Q4, MHCV truck volumes have grown at almost 50% higher than the industry growth, resulting in our market share growing to 30.6% as compared to 28.9% in Q4 last year.

Sequentially, also in Q4, our MHCV truck volume has grown 78% as against an industry growth of 47%. Our market share has grown to 30.6% in Q4 from 25.3% in Q3. Our April '22 market share was at around 30% as against 29% and same month last year.

I'm happy to state that our Q4 absolute EBITDA has gone up sequentially by 2.5x. In percentage terms also, EBITDA has more than doubled to 8.9% from 4% in Q3 despite taking into account the full impact of raw material price increases.

Last year, Q4 EBITDA was at 7.6%. LCV, which was on a growth phase, has been impacted by semiconductor shortages, but on a full year, our volumes are still higher than last year.

International operations sales have registered a 31% year-on-year growth in Q4, 4,173 numbers compared to INR 3,164 in Q4 of last year.

International operations sales for full year has been at 11,014 number, a 38% growth over last year. Domestic aftermarket sales grew at 14% in Q4 over last year. On a full year basis, aftermarket sales were up at 31% over last year.

Despite challenging circumstances, our operating profit grew by 91% year-on-year in Q4 and for full year. Operating profit has turned positive at INR 17 crores from a INR 400 crore loss last year.

We continued to generate cash and further reduce our net debt by INR 1,977 crores this quarter.

Debt equity is at a comfortable 0.1x.

Cash generation for full year was at INR 1,900 crores.

During the quarter, we have launched 2 more models in CNG covering 14 tonnes and 16 tonnes, respectively, which should help in growing our market share further. In parallel, exciting launches happened in tippers, 4825 and 2825 and multi-axle segments, expanding our range. I'm extremely confident that with these launches and the continued expansion of network, we will sustain the market share gains achieved in the last 2 quarters.

The domestic and MHCV truck segment posted an improvement in sales volume in Q4, both on a year-on-year as well as sequential basis with low basis in previous corresponding quarters. The uptick in the economic environment post pandemic and the resultant improvement in freight availability supported these improvements.

MHCV TIV has been growing since Q4 of last year and this augurs well for the industry. There is still a lot of headroom for growth given that the fleets are aging with average age between 9.9 years after April and the announcement of the scrappage policy is a step in the right direction. Macroeconomic indicators put India as a high-growth economy and an attractive market.

With further demand growth, we are expecting pricing to be more rational. Increase in steel prices, which have resulted in significant cost push in the industry, continued unabated in Q4. And if this trend continues, we should see margin depletion for all the industry players. The situation on the semiconductors is also being monitored closely.

For FY '21/'22, fleet utilization levels were on the rise as freight volumes picked up, thereby easing cash flow pressure for the operators. Russia-Ukraine conflict has driven the diesel prices up, leaving the spotlight on the fleet operator's ability to protect their margins through freight rate hikes. Trade movement indicators covering ports, rail freight, FASTag and e-way bill volumes have all improved as economic activity picked up.

Ashok Leyland, even while growing market share sequentially, has been raising prices owing to a higher input cost. What is good to see is that the retention of such increases is getting better. I must complement our MHCV team, who have taken up a rationalization of our network appointing new distributors where there are gaps to be filled and are also working to further improve dealer profitability, which is crucial. A special team is working on expanding relationships with financiers.

AVTR modular vehicles are doing extremely well and have raised the bar on industry performance. As volumes grow, I'm confident that we will see the benefits of modularity.

On the LCV front, both Dost and BADA DOST are exceptional vehicles and have been growing stronger by the day, and volumes are limited by the availability of semiconductors. Both these products hold immense potential for exports and are a perfect fit in our addressable market.

Going forward, the growth drivers for the bus segment remain largely favorable with increasing vaccinated applications, opening up of offices and additional institutions. This will add to our volumes and market share as a showcase and as a leader in buses historically.

Aftermarket and international businesses continued to perform exceptionally well. And power solutions business, which again has grown significantly in FY '21, is constrained by availability of ECUs.

We are also putting effort in reducing costs, both product costs as well as overhead. You can see the effect of this in the improved margin.

Switch is an important initiative, and I'm extremely happy with the progress that has been made. Switch India is operational with its own dedicated team. We have received statutory approvals for transferring eMaas business to Ohm Global Mobility India. We are in discussion with investors to raise capital, both at Switch Mobility U.K. as well as on Ohm Global Mobility India for the e-mobility as a service space. We will let you know on the outcomes of these very soon.

Finally, before we address questions, let me ask Gopal to share the financials in brief.

[Gopal Mahadevan, executive]

Thank you, Chairman. I think it's a very comprehensive introduction. I'll just run through the financials very quickly. Our revenues were at INR 8,744 crores, which is a significant jump over Q4 of last year by almost 25%. You can see the benefit of the operating leverage coming in. Sequentially, also when you look at the revenue, the Q4 jump in revenues has resulted in better operating margins.

There has been a lot of middle line management, material cost management, which has actually helped the negotiations in the fourth quarter of last year and the current -- in '21, '22, which also saw some volume and accounts coming in. We were also able to kind of reverse some of the provisions that we didn't require at the beginning of the year because we were looking at incentives and stuff like that. All said and done, it has been a great quarter in terms of margins.

In terms of the cash situation, we -- as we mentioned earlier, during the year, as the working capital was getting a little tight during the middle of last year, you would have heard us mention 2 things. One is that we would see the working capital situation easing off. And the second one is also that we would be kind of increasing market share from the 18.5% that we were at last year, last year in August to September.

So we finished the year on the MHCV side itself, the total market share itself was more than 30%. The exit market rate was kind of, given the team's extreme confidence that we are on the right path, the products are being well accepted and our cash, the net debt at the end of the year was just about 0.1x equity. Our overall debt was only about INR 700 crores.

So with this introduction now, I'll hand it back to Chairman if he has -- to say anything, then we can hand it back over to the floor for questions.

[Dheeraj Hinduja, executive]

Yes, I think we're ready for questions.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Kapil Singh from Nomura.

[Kapil Singh, analyst]

Congratulations to the entire team for a great performance. Firstly, I wanted to ask you about market share. It's seen a substantial improvement in fourth quarter. You have touched upon it, but if you could give us some more details on what are the actions you have taken that has helped this thing improve so much?

And also the CNG salience, how much is it for us right now? And how many more models are required to be launched going ahead in both LCV and ILCV or MHCV space, whichever way you look at it?

So for the industry, what is the CNG mix? And where are we right now and some color on that.

[Dheeraj Hinduja, executive]

So regarding the market share, I think if you look back the last 4, 5 years, we have been at the 30%-plus level. The last 2 years have seen a reduction. And I think 30%-plus is the norm where we should be.

What has helped us gain back our market share is definitely the addition of the CNG product. As you're fully aware, ICV segment has become the largest segment in the industry, and within that, CNG is 40% of the market. So our product was slightly delayed, but market response has been very good.

During COVID, in Phase I, our network in North and East, unfortunately, some of dealers have shut down. And it took a little time to get the revival done. This has also come up very well now and that has helped us to revive some of our market share in both of those markets. The MAV front is also seeing a revival, which is doing well as well as the tipper.

But I would say above all, the products are performing very well, which is appreciated by the customer and we've been able to push through the reliability and the quality standards of our product to the customers even more. So I would say those are really the aspects which have allowed us to improve our market share.

Gopal, would you like to add on the CNG side?

[Gopal Mahadevan, executive]

Yes. I think -- thanks, Chairman. As mentioned by the Chairman, I think there are 3, 4 things that helped to improve the market share, especially in the fourth quarter. There was a lot of focus that started to happen on the network that you mentioned about. There was a complete refresh, realignment, bringing in new dealerships as well.

The second one is AVTR is proving to be a product, which is [ report stated ] by a lot of customers to it because they find that both in terms of build quality, total cost of ownership, fuel efficiency, especially in tippers, AVTR is actually kind of raising the bar.

The third one is, as we had mentioned, the CNG product launch, which happened in the early part of this quarter, has been received very, very well. We have 4 more launches to happen in CNG. We would also be launching an AMT tipper, another variant of non-AMT tipper because tipper demand is also kind of expected to grow.

See, strategically, what we do and I'm going to finish with this for the next question is, as Chairman has mentioned, we will continue to keep launching products and filling in the slots, which is what we are doing in MHCV, which is what we are doing in LCV, which is what we are also doing in exports. So we will keep on kind of introducing products, which will help us to have a larger kind of share of the customer's pipe.

Very clearly, our goal is to continue to build our domestic business, grow the share, grow it profitably, grow the LCV business, which is very, very crucial for our vision of being a global top 10 commercial vehicle manufacturer and ensure that we also grow our international business. Aftermarket and other businesses have also been doing extremely well, but we'll look at that later. Back to you, sir.

[Dheeraj Hinduja, executive]

I think, more specifically, with regard to the launch of the CNG products, we have the 14- and 16-tonnes that are in the market at the moment. And during the course of this financial year, we will have the full range of products available in CNG.

[Kapil Singh, analyst]

The second question is on profitability. This quarter, Gopal, we've seen a great performance, particularly on other expenses. We've kept them very tight. Is there anything one-off here to call out?

And as you look through going ahead, we've taken, I believe, a 2%-odd price increase. Does that cover for the cost increase that you are seeing in 1Q?

[Gopal Mahadevan, executive]

See, as far as the expenditure is concerned, I think there's been -- the whole team has rallied together to ensure that we are keeping our overheads light, to be candid with you folks. Administrative overheads have been at the level of 2014/'15 not factoring in inflation. It means in absolute terms, we have kind of handed -- you must understand that you are trying to post this kind of a growth and you're trying to, as you know, also kind of work on the distribution and new products, costs typically get -- tend to go up. But we have said that we'll limit it and use it for the right appropriate purposes. And hopefully, we'll continue this trend as we move forward.

As far as the pricing is concerned, yes, we have been raising prices. We raised it in November. We raised it in January. I think we raised it in March as well. And we have done a price increase even in April. The retentions have been getting better and better. And so we actually see a traction not only in the market share going up, but you're also seeing the traction in retention going up. Hopefully, with the softening in the steel prices we would see benefits from one operating leverage as well as better margins in the coming quarters, but we'll have to wait on this.

[Operator]

The next question is from the line of Mukesh Saraf from Spark Capital.

[Mukesh Saraf, analyst]

Firstly is previous quarter you had mentioned that the replacement cycle will start very soon. And so just wanted to get your sense on where we are now in the cycle. Have you started seeing fleet operators replacing these old trucks? And how do you see this going forward?

[Dheeraj Hinduja, executive]

We're definitely seeing that people are -- look, as we mentioned that the average age of the truck is really at an all-time high of 9.9 years. And so we are definitely seeing people coming back into the market, especially the fleet operators. And this is a lot to do with the government initiatives on infrastructure, road building. So yes, we are -- the replacement cycle has definitely begun.

[Mukesh Saraf, analyst]

Okay. Any guidance or any sense you want to give us on, say, FY '23, how the growth for the industry will be and really how the mix will move for the industry in terms of tippers. Any kind of guidance you can give us?

[Dheeraj Hinduja, executive]

I think it's a little too -- it has become very difficult in estimating how the markets are going to go. If we go by published data, then ICRA has estimated anywhere in MHCV growth of 15% to 20% and LCV growth of around 10%.

But like I said, the important thing for us has been that how can we make sure between these troughs and peaks, how we are able to sustain ourselves. And we've done a lot of [ structuring ] during this downturn, which I believe irrespective of how the market reacts, we should be able to hold our own and continue the market share growth.

[Gopal Mahadevan, executive]

And if I may add, Chairman, I think with the product launches that we had, expanding portfolio, especially in CNG, I think we would actually have slightly better growth. That is our aspiration. Because as we know, ICV is now today about 1/3, in fact, 35% of the overall TIV. Within ICV, we find that CNG is about again, 1/3, right, about 35%. So you have anywhere between 10% to 12% or 13% of the TIV being factored by CNG.

Our CNG play has only started. So we still need to launch 3 or 4 vehicles, as mentioned by Chairman. So once we do that, we possibly will see a lot more traction on our ICV side itself. And with the tipper launches, which is happening, there is a lot of infrastructure play that is happening in the country today aided by the government initiatives, the more tippers that we have in the market, the better it is for us to kind of get a larger share. Let us see and the play out on -- in the semiconductor industry, if the semiconductor supplies get better, as Chairman had mentioned, we actually would see a greater play in the LCV part also, but let's see. I hope things pan out as the forecasts tell us.

[Mukesh Saraf, analyst]

Right. And just secondly, could you give you a sense of the revenue mix that you saw in this quarter between, say, [ muscles ], MHCV, exports, LCVs?

[Dheeraj Hinduja, executive]

Gopal, you raised your hand.

[Gopal Mahadevan, executive]

Yes. Thanks. So you see, basically, if you were to look at our revenues, right, I mean, while we can give a broad breakdown for the quarter, we have had domestic truck, our volumes have been 28,733 -- I'm sorry, 27,082. Domestic buses were at about 1,270 crores. See, one thing we have...

[Mukesh Saraf, analyst]

Yes. I was asking about the revenue mix that you provided in the previous quarter.

[Gopal Mahadevan, executive]

You wanted the revenue? Okay, not the volume. Okay. Our revenue, trucks were accounted for nearly about 57%. Bus was about 2.3%. Light commercial vehicle at about 977 crores out of 874 crores, was 11.2%. So if you were to kind of add that up, about 81% of the total revenues were between trucks, buses and light commercial vehicles. The rest was the other businesses.

[Mukesh Saraf, analyst]

Exports and aftermarket, basically. And even the power and defense business [ seem to growing more ].

[Gopal Mahadevan, executive]

Yes. Right.

[Operator]

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

[Raghunandhan N. L., analyst]

Congratulations, sir, for stellar numbers. Two questions. Firstly, can you talk about demand trends in export markets? How is the demand conditions in key regions and company's initiatives?

[Dheeraj Hinduja, executive]

Yes. We have -- I mean look, firstly, on the global trend, there are a lot of uncertainties, inflationary pressures. But for specifically the markets that we are operating in, where we are likely to see a lot more growth is in the African market because over the course of the last 12 to 18 months, what used to be predominantly project sales for us, we have established many new distributors who are very strong and have a large presence in these countries. So -- and with the added product range that's available, they should be able to start growing the volumes for us in these areas.

So Middle East, Africa, we feel we'll continue to see good growth. And the SAARC countries, Bangladesh, is still looking to be better than the other. I think Sri Lanka, unfortunately, you know what the situation is like. But the growth in our product range and the larger network should allow us to see a much healthier international operation sales.

[Raghunandhan N. L., analyst]

My second question is on CapEx and investments. Can you indicate how do you see the CapEx plan for FY '23? FY '22 CapEx seems to be lower than planned. .

And on noncurrent investments, there is an increase in FY '22 versus '21? Is it mainly due to reversal of impairment? Or is there any other investments?

Related to that, for Switch Mobility, what are the investments so far and any progress in the fund infusion.

[Dheeraj Hinduja, executive]

Gopal, why don't you go ahead with this.

[Gopal Mahadevan, executive]

Yes. I'll do that and on the absolute balance sheet, wait, I'll maybe ask Balaji to answer the noncurrent investment.

See, as far as CapEx is concerned, as we have mentioned, we have been able to hand in the CapEx to about INR 400-odd crores. So as we move into the new year, and I would actually kind of share it and then Chairman can add, we are looking at rebalancing or steady-state CapEx to be in there between INR 500 crores to INR 600 crores. Typically, that's what we see happening over the last few years. We don't see a significant change on that.

In fact, there's a larger theme that is being driven in terms of the overall manufacturing strategy to see how much more efficiency can you build into the system. RPD rates actually have been -- the manufacturing teams have done a wonderful job in driving the RPD rates and the productivity has been common.

To answer your question, we see about INR 500 crores, INR 600 crores of CapEx in the current year.

The second one is if we decide to expand the LCV portfolio, we'll have -- we are in discussions with that. I think that would be a separate CapEx, but then that would also bring in a [ few ] separate capability as well.

As far as investments into Switch and other subsidiaries are concerned, let us wait at watch if HLFL requires some kind of capital infusion. We are very happy to support it because for every rupee that we invested to HLFL, HLFL bridged the book 7 to 8x on it. So it is something that we will be happy to support. So this is more for growth capital in HLFL than anything else. Maybe about INR 100 crores, INR 200 crores, I'd bet. Not very significant at all. HLFL has been able to manage it through very well till now.

As far as Switch is concerned, I think as Chairman had mentioned, we are kind of actually pursuing discussions with the investors. We would want to ensure that we have the right set of investors in the company because this is very -- this is a medium-term and long-term business and we need to ensure that the investors that we have are aligned with our kind of thought process also because, ultimately, we are here to build a very good business just like we have built Ashok Leyland.

If there is any funding support that may be required for Switch, for instance, from the Ashok Leyland side, we will have to provide it and we'll be ready to provide it. But I think at the moment, there is nothing that we can kind of share with you.

As the debt equity of the balance sheet is just 0.1, we are very comfortably placed as well. So certainly, we would continue to invest in growth, but we will do it the way we have been doing it in the past, very, very prudently. Balaji, can you answer on noncurrent, yes?

[K. Balaji, executive]

Noncurrent as well as the noncurrent investments, it is primarily because of the reversal of the impairment provision, which refers to the Optare. That is why we are seeing the investment value going up from INR 3,068 crores to INR 3,500-odd cores.

[Operator]

The next question is from the line of Abhinav Ganeshan from SBI Pension Fund.

[Abhinav Ganeshan, analyst]

Congrats on a great set of numbers. I just had a couple of broad questions for you. Also that when do you say and we've seen -- I believe that the CV cycle is turning. So when do you think...

[Operator]

Mr. Ganeshan, sorry to interrupt you. You're not...

[Abhinav Ganeshan, analyst]

Am I audible? Yes. So the -- I have a couple of broad questions. First is when do you think the current CV cycle will be peaking, another cycle has turned.

And second, I just wanted to understand on the financing piece of our MHCV part. How much of the total percentage of the vehicles is financed and how much is done in-house? And how much other partners do it? If you could give some color.

[Dheeraj Hinduja, executive]

On the CV cycle, I mean, as you've seen, there is an element of cyclicality in this business. Typically, 3 to 4 years are seen as the boom and then we do sometimes experience anywhere between 6 to 18 months. This time, it has been a little longer as well.

It would be very difficult to guess when we would see the peak of this cycle. With the growth commitment that the government has given, it is very favorable for the industry at this point of time. And considering that we have just come out of the recessionary trends in this segment, the next few years should continue to be quite positive. Gopal?

[Gopal Mahadevan, executive]

Yes. I would agree, Chairman. I think the CV cycle, there are certain -- if you look at the large megatrends that have happened over the last 3, 4 years, there has been a kind of a reduction in the TIV itself, right?

Of course, one part of it was COVID. The second part of it has been that the impact of the axle load norm seems to have waned. So it looks like there is fresh buying that is going to happen now because the actual load norms have been used up. The third thing that is happening is with the push for green energy and so many things happening. Very clearly, the larger corporate chemical companies, oil companies, pharma companies, e-commerce companies, all of them want to ensure that their supply chain partners, which is the transporters, are using the latest generation vehicle and not a BS II or a BS III vehicle.

So what is going to happen is at the larger scheme of things, the government has announced the scrappage policy, but this is more I think -- it's more I think that there is more to come. And we would actually see a lot of vehicles going off the road of the older generations and there will be a replacement demand also coming in.

Because of the trifurcation into long-haul, intercity as well as LCV, what transporters are also doing is we are doing extremely sharp buying. The earlier trend was to buy a vehicle of 25-tonner or 30-tonner and then start using it for multiple purposes. So -- but today, it isn't any more like that.

People are becoming specialist transporters. We will see a consolidation in the industry, which is good for us. And we would actually see that each of these segments can be growing independently.

ICV is driven by e-commerce. LCV, of course, because of the last mile, that is kind of the huge amount of potential that is being held because of warehousing businesses and last-mile delivery companies coming in. And of course, the long haul coming in because of the larger growth that we are expecting in the economy.

So core segments -- core sectors are expected to grow. There is going to be infrastructure investments, road building is actually -- has become even more ambitious with the government setting targets much, much higher than the 25 kilometers per day that we were looking at. So all of this seems to be auguring well for the industry.

And of course, lastly, we have not talked about one important thing, which Ashok Leyland is exceedingly good at, which is the bus segment. We are -- we were the largest bus manufacturer in the country and we hopefully will soon get it back. But we must remember that the bus industry, the total TIV was just a 1/4 of the total potential. In a good year, typically, it's about 40,000, 45,000 units. We were hardly about 11,000, 12,000 units, if my memory serves me right, because everything was shut.

But now with offices opening up, schools opening up, colleges opening up, intercity travel would start to go because people will need to get back to their work city and want to go back home. And once that happens, when the buses start to come back on the roads, again, I think that would also add to industry growth.

[Abhinav Ganeshan, analyst]

That was really useful. And if you could just answer the fee -- or the financing part, broad color if you could give.

[Gopal Mahadevan, executive]

You see the financing continues. I think there is a little bit of -- on the NBFC side, what is happening is there is a greater amount of strictures coming in, which is -- well, which is good from a governance perspective, but I'm not too sure how this will pan out in terms of operational things.

But as far as the financing is concerned, HLFL is a very important strategic finance company for us because they fund Ashok Leyland customers, both in MHCV and LCV. But our financing is actually pretty well spread out.

So aside of HLFL, we have deep relationships with other financing companies as well. But -- and we are also -- HLFL is actually a full suite finance company. It is not like the finance companies that either companies have or some of our competitors have. They don't end up financing only for trucks or buses.

So if you -- I don't remember the exact number, but approximately about 35% of the portfolio of HLFL would be commercial vehicle. But other than that, it is actually pretty well spread out in terms of 2-wheeler, 3-wheeler, off-road applications, loan against property and you have [ buy-in/trade-down ]of various kind of debt instruments.

So while we will -- so the aspiration of HLFL management is to be a best-in-class finance company providing latest solutions for customers. For Ashok Leyland, of course, we are a very important subsidiary and a strategic partner for financing extremely strategic relationships. While doing that, we also ensure that we are building great relationships with other financials.

As far as loan to value is concerned, well, I'm not able to say that there is any significant changes. But actually, the industry is moving to be a little less aggressive, which is good. Why is it good? Because then what happens, the truckers can [indiscernible].

But no major shifts have been seen in terms of financing, I think the collection rates have improved significantly. People are comfortable now because this is a reasonably small ticket portfolio, but with a very large portfolio, which banks and NBFCs are looking at. So I believe that truck financing is actually slowly gaining ground.

[Operator]

The next question is from the line of Gunjan Prithyani from Bank of America.

[Gunjan Prithyani, analyst]

Two questions. Firstly, on the electric bus, now we're clearly seeing a lot of noise in the industry, a lot of STU orders, which are coming through. And we have seen some of the aggression from both the incumbents as relative new startup companies.

Now just wondering what is our thought process there? How are we thinking about it? Where are we on the bids with the STU? Just some color on the strategy around this electric bus because we do have a dominant share on the ICE business here. So how are we thinking on this?

[Dheeraj Hinduja, executive]

I mean Ashok Leyland has been -- that we've now been operating the electric buses for close to 3 years, 2.5 years. And so between Ahmedabad, Patna, we are also in Chandigarh and now coming into Bangalore and Mumbai.

Over these years, with the experience that we have gained, we understand what the operational cost can be and what could be the right pricing model that we can get into these GCC contracts.

And since they're long-term agreement 8, 10 years, we want to make sure that they will be positive and adding margins for us. And some of -- as we rightly say, some of these tenders are going on a very aggressive basis. We are not going to be participating in, let's say, a price war. We believe Ashok Leyland and now Switch has a good reputation and standing with the FTUs. So we will bid, but we will make sure that we will be in areas where we believe that it will be with a positive contribution margin.

The other area that we are seeing is increasingly the private sector for passenger for the South transportation is now also moving into this segment as well. And there, we believe we could see more positive and a healthier contribution.

So a lot of aggression in this market for gaining market share. But I think this would be very short term because in the long run, I do not think people will be able to take on too many contracts in -- with very low contribution and running for 8, 10 years.

[Gunjan Prithyani, analyst]

Got it. Do you have any expectations how we are looking at the penetration playing out any broader industry numbers? What penetration can we see in next couple of years?

[Dheeraj Hinduja, executive]

Well, in terms of market indications, we are -- we will be launching next month our European bus, and we are already in the U.K. And we're seeing very good traction in the European markets as well. We are participating in many tenders over there.

In the domestic market in India, I think you've seen that not only the central government but the state government, they're all pushing towards greener cities.

To give an exact volume in terms of what is the TIV expect, I think it's a little early. If there are many tenders coming, [indiscernible] had a tender for 5,000. I understand that there's likely to be a new tender coming up once again in excess of 5,000 vehicles.

But all of them have a long lead time as well. So the delivery time frame is not always within 6 months. They do reach out to 12 months as well. A little difficult to give you an exact answer on the expectations.

[Gunjan Prithyani, analyst]

Sure. And the second and last question from my side is on this Nxtdigital transaction that we did. Any -- one, I mean, if you could share thought process around doing it. I mean it would make sense from the terms of keeping it out.

But does it also mean that it becomes independent as far as the capital commitments in future go? Is that the way to think about it, this carving out of Leyland Finance and merging it with Nxt? And any time lines as to when do we see this concluding?

[Dheeraj Hinduja, executive]

Gopal, please?

[Gopal Mahadevan, executive]

Sure. See, we have not completed the transaction what we had actually announced to the exchange. It was more of good governance than anything else. Was that the -- both the companies are appointing investment bankers to study the transaction. So we'll come up with the details as we progress on the deal.

See, the basic idea is that we are the management of HLFL, we are discussions with investors. And some of them had mentioned that they would be keen to look at an investment into HLFL for its future capital growth, provided they are also looking at a defined exit.

So what we decided to do was the Nxtdigital is now a company without -- it may -- if things go well, both the Boards approved, these are all subject to statutory clearances. So it is at a very early stage. But it is also kind of a company, which is -- could be an ideal fit because at the moment, they are just sitting on some amount of cash and a very small amount of real estate, which can be possibly liquidated. We'll have to study that. But other than that, there are no operating businesses, which have to be merged. There are no post-merger integrations to be done, right?

So if you are able to do this, it's a win-win for everyone, I mean, Nxtdigital, Hinduja Leyland Finance as well as potential investors who will come into the company. That is how we are looking at these 3-way match.

[Operator]

Our next question is from the line of Hitesh Goel from CLSA.

[Hitesh Goel, analyst]

So I was just looking at April numbers for the industry, right, for MHCV. If we just annualize that, right, and April being not a very strong month seasonally, we should easily be surpassing 30%, 35% growth for the MHCV industry. So I was quite surprised with the [ crowd ] estimate and you also guiding to only 15% to 20% growth. Are we starting to see a slowdown after the price increase that we have seen in April or fuel price increase which will happen? Can you shed some light on this?

[Dheeraj Hinduja, executive]

I think I did not personally want to give you any forward trends, but I was quoting what the [ crowd ] has given. April has been stronger months coming back from March. And hopefully, the strength continues. But there are so many uncertainties that are currently in the global economic scene, so it's difficult to estimate.

But from all indications, as I mentioned, and with the high expenditure that the government is committing on infrastructure, the year is looking very good and there -- sorry. I was saying with the strong growth that the government has committed towards infrastructure, we feel that the year is going to be very strong especially in the MHCV segment.

[Hitesh Goel, analyst]

Great. My second question is to Gopal. Gopal, if you can shed some light on the -- see, when we look at the steel cost average in fourth quarter, it's close to INR 70 to INR 72 per kg where we are right now on a spot basis.

So the price increase that you've taken in April covers for that? And if there is any subsequent reduction in steel price will add to the margins. Am I right on understanding this?

[Gopal Mahadevan, executive]

Your question is spot on. The price increase that we're taking is about 2%, 2.5% will not be sufficient for steel price increases. See, let us understand where we see the potential in this business. There has been a price increase that has happened from BS IV to BS VI. So all of you guys know that. You're all experts.

The second one is there has also been an increase in steel prices, which is if you look at it from December 2020 to December 2021 or even now has been quite a significant jump, right? And in between, what has happened is please understand there has been this COVID, right, where the demand has -- there has been a demand.

So the ability to realize the raised prices has not been significantly there because there was no significant volume in the industry. So unless you actually start picking up volume, pricing becomes -- has to be done in a kind of stepped up way.

Our price increases, we believe, to the best of our knowledge, that our price increases have been higher than what we -- the competition has been doing. And fortunately for us, with the excellent efforts of our team, we have also been able to [ grade ] our market share. This is exactly what we did in 2017 when we launched [indiscernible].

To answer your question specifically, has the 2% been enough to kind of neutralize the price increase of steel prices? No. But what are we planning to do? I think the first thing we are planning to do is to continue to pursue market share. That is for sure.

The next thing that we are planning to do is, of course, to raise prices to ensure that the MHCV portfolio starts to become better in terms of contribution.

The third thing we are hoping for is that steel prices will soften and there will be a price retention in the industry, which will then kind of improve the margins of the business even further.

Fourth one is operating leverage. Try to get a larger amount of share through product introductions, network, et cetera, which will also help us incrementally to have a better margin in -- by having a larger share of the market.

[Hitesh Goel, analyst]

just a clarification, Gopal. My question was more saying that if I look at the gross margin, basically, net sales minus raw material costs by net sales, that is 22% today in fourth quarter. You have taken a 2% increase in the first quarter. So that would offset the price increase, which has happened in third quarter to fourth quarter when it comes to the lag. So this 22%, if the steel price don't go up from here, barring neutral mix, would be sustainable, right? Or there is some other steel cost, which is...

[Gopal Mahadevan, executive]

It is sustainable. We are -- to answer your question, we are looking at the contribution over material cost to get better unless there is a further increase in steel prices, which will not happen.

The other thing that we're doing is also doing an acute management of the mix between businesses and within trucks also to -- within the product itself, which will help us to hopefully gain better margins as we move forward.

[Operator]

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

[Amyn Pirani, analyst]

Most of the questions have been answered. I just wanted to get some clarification on the exceptional items on the consolidated side because on the stand-alone, you have a gain. On the consol, you have a loss. So can you just help us understand what specifically you have done in this quarter?

[Gopal Mahadevan, executive]

Balaji, do you want to answer it or do you want me to take it?

[K. Balaji, executive]

The exceptional items are within the group companies. That is why you are seeing the effect of that is shown in the one of the group company, essentially Ashok Leyland. And when you look at the consol level, the impact of that you will not see in the consolidation stage.

[Gopal Mahadevan, executive]

See, I mean, just to Add what is happening here is you've written back the investment of the impairment of Optare, right? And then we have also prudently taken off some reversing impacts in other investments. So that we kind of -- it also helps to rationalize the balance sheet. This is on a stand-alone basis because this is the investment that we have in the subsidiaries, which has been either added back kind of impact. So that is a net benefit of around, I don't know the exact number because I kept these papers in office, but around INR 400 crores or so.

Now as far as the consolidated numbers are concerned, this is nothing but the performances of all the subsidiaries and Ashok Leyland. So we are having certain losses because there are subsidiaries like Optare, et cetera, which we know that is how it is. But as we move forward, we are expecting that these numbers will start to reduce, yes.

[Amyn Pirani, analyst]

And I think you've taken some impairment on Albonair. So any update on what is happening there? And what's the way forward for that entity?

[Gopal Mahadevan, executive]

Actually, Albonair has been doing -- in real terms, they have actually turned a little profitable. But we want to also be a little conservative. We -- I mean, we've known each other for so long. Over the past few years, if you notice, wherever you find that there is a necessity to take an impairment [indiscernible] kind of more prudent to do that, which is why we have taken the impairment on Albonair. We had already provided 50% of it.

But we thought that given what is happening in the world, the European market and stuff like that, we said why don't we actually take this window? And we studied the cash flows. We looked at the future potential of BS VI in Europe, et cetera. So then we decided that it may be prudent after valuation exercise to take the impairment in -- the balance impairment of Albonair itself.

But having said that, let me also share with you, and the Chairman may also want to add, the investment in Albonair has actually paid off quite a bit. The entire BS VI, the exhaust system, the novel is actually the dose is actually using Albonair doser.

So -- and that has actually proved to be cost after treatment system, which is there in our vehicles, which has got the -- after the engine manifest, you have the DOC, DPF. And then after that, you've got a few other kind of parts in the system. There is a significant -- there is one piece, which is doser. That doser design is actually from Albonair. So we are using that and that will continue. But we said that if proven measure, let us take an impairment at Albonair.

[Operator]

The next question is from the line of Joseph George from IIFL.

[Joseph George, analyst]

I had 2 questions. First is in relation to the NPAs in the system. So if you recall, if you go back in 2020 and maybe even parts of 2021, there was fear that because of NPAs, a lot of trucks are getting repossessed and they will come back into the system, et cetera. Could you give us an update on where this particular issue stands? Is the excess inventory in terms of repossessed where it is completely flushed out? And as a result, replacement demand, et cetera, should pick up strongly. If you can give some update on that.

[Gopal Mahadevan, executive]

So I think you see this is a very good question because in addition to the pressure that the axle load norms we're creating because suddenly overnight, you had 20% of the truck capacity being available, we also saw that the vehicles had got repossessed and they were getting back into the market.

Fortunately, we believe what has happened from our own experience of the NBFCs, is that the repossessed vehicle, most of these NBFCs are also kind of notably taken a prudent hit, they also kind of disposed of the vehicles as quickly as possible because they also wanted to rightsize their balance sheet. So we believe that the significant impact on repossessed vehicles coming back into the market and actually creating a competition for primary demand is possibly over.

I would still see this will continue as a cycle as long as vehicles are financed 95% or 90% from NBFCs, repossession would happen. But one thing is I think we -- the level of repossession, which was there in the past, which was COVID and used is no longer there. Wheels are turning. There is a demand that's happened. What we're seeing happening in the industry is the deals, which are happening more are of these larger fleet operators more than the first-time buyers/first-time users. That is because some of the first-time buyers/first-time users is a guy who are most prone to defaulting. Not the larger guys because they have their credit quality also to be maintained.

Now as the market moves to a larger share of possibly -- not larger share, more demand coming from first-time buyers and first-time users, you will see a little bit of the repo cycle happening. But that is anyway happening in the traditional NBFC business.

I believe that the assumption at the moment, going by what is happening in the market, is that the repossessed vehicle sale is predominantly over.

[Joseph George, analyst]

Understood, Gopal. The second question that I had was in relation to margins. So when I look at Ashok Leyland's history with respect to EBITDA margins, you have hit 11%, 12% EBITDA margins in the previous peaks as far as the CV cycle go. And I just wanted to understand how you all think about potential peak margins in this up cycle, given that the prices of vehicles have gone up by about 20%, 25% in the last 1.5 years following BS VI. Do you think the percentage margin of 11%, 12% is still achievable? Or do you all think of margins as EBITDA per vehicle? I just wanted to understand the internal thought process there.

[Dheeraj Hinduja, executive]

Well, I would say that -- okay, go ahead, Gopal.

[Gopal Mahadevan, executive]

Chairman, please go ahead. That was I was just listing...

[Dheeraj Hinduja, executive]

Had it not been for the commodity price increases, we would have definitely seen coming back to the types of previous margins that we had. And as Gopal mentioned a little earlier, we do feel that steel prices will begin to soften soon.

And once that happens, there shouldn't be any reason why we should not be able to keep a double-digit EBITDA on a more regular basis. There are many -- irrespective of the external factors, we are increasing prices. We are at the same time doing many cost reduction exercises internally, both on the product front and in our overheads as well. So the aspiration is definitely to ensure that we're able to maintain that double-digit EBITDA.

[Operator]

The next question is from the line of Ronak Sarda from Systematix.

[Ronak Sarda, analyst]

First question is on how's the inventory in the system. [indiscernible] suggests the inventory is pretty low, around 10, 15 days. And given a really robust demand recovery, I mean, do we see discounts or the net pricing improvement more than offsetting the entire gross margin pressure given discounts at peak have been nearly 15% of sales. So how do you see the entire net pricing movement over the next few quarters?

[Dheeraj Hinduja, executive]

Gopal, you want to start?

[Gopal Mahadevan, executive]

Sure. So see, as far as the inventory, the system is concerned, I don't think there is any back pressure at all. This back pressure was there last year, where we had shared with investors quite kind of candidly that we would actually be going a little slow on wholesale last year because there is so much of inventory in the system because unfortunately there was a COVID and the system just shut down, right? And the dealers were left saddled with a lot of inventory. And we don't push wholesale beyond a point. We keep watching retail, wholesale, retail, dealer-wise, geography-wise, so that, that's the best and the more credible way of growing share of business.

Now sitting as we are here, I don't think there is any major inventory issue that dealers are facing. In fact, there is demand that sometimes we are not able to cater.

[Ronak Sarda, analyst]

No, no. I'm saying inventory is very low in the system, I'd just point out -- so yes.

[Gopal Mahadevan, executive]

So the other thing is as far as pricing is concerned, yes, the discount levels have slightly elevated levels even now. But with the price increasing that has happened, the retention of the price increases, at least at Leyland, let me tell you, has been very good.

So typically, we have raised prices, say by -- this is an approximate number. But say, if we raised prices by about, say, 2%, we are able to retain, say, about 1.6% to 1.7% net. Similarly, we think about 2.5%, we are able to do about 2%, 2.1%, which is very, very good. You can never retain the entire 100% pricing even in good markets. This is one part.

As we move forward, I think we may need to raise prices. But as Chairman had mentioned, as I had mentioned, we also want to ensure that we are growing our market share methodically and steadily. So this is going to be a good balance between what our closing team is able to do with vendors, what our product design team is able to do on the product cost, what our front-end marketing team is able to do both on market share and pricing. And hopefully, the synchronicity of all of this will result in better margins as we move forward here.

[Dheeraj Hinduja, executive]

I think just to add on what Gopal has said, production from our internal perspective is not really much of it, and we would be able to ramp up with terms of the market is on.

The only constraint seems to be on the semiconductor chip. And as we understand, in the next few months this should also start easing. And it will -- we will always take a very measured balance between these commodity price increases and the availability of the chips as well. But specifically, as you said, inventory might be on the lower side, but we don't see an issue in terms of ramping up.

[Ronak Sarda, analyst]

Got it. Got it. And a question on the electric vehicle business. So how do we see -- I mean you mentioned the experience on the India side. But if you can share some experience on clearing the global markets for buses, for light vehicles, SCVs and CV. If you can share some experience on the global markets as well.

[Dheeraj Hinduja, executive]

Yes. I mean, generally, I think as you've seen, the government overall are looking to substantial growth everywhere and making sure that they agree to the COP26 commitments that they've made. But if you look at the electric bus business, specifically, leaving aside China, the current sales volume is around 1.4 billion based on the studies we've done with McKinsey and other consultants and this is expected to grow to about 16 billion. And when you look at electric light vehicles currently, they are at around 4 billion and this is likely to grow by 14x to 55 billion.

So the growth rate and the potential in these segments are very strong. And this is equally distributed at China specifically because the Chinese market has been ahead of the curve in electric for many years. But all the other markets from the U.S., Europe and also in many of the Middle Eastern markets, we are seeing that they are now wanting to move into electric buses as well. So all in all, I would say a quite robust scenario going forward for electric vehicles.

[Operator]

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

[Dheeraj Hinduja, executive]

Thank you very much for your questions. And I hope we've been able to provide more clarity for you. I would just close by saying that we have shown in Q4 a strong turnaround and year ahead. It looks to continue in this similar manner.

And we, as Ashok Leyland, will continue this growth as we've experienced in Q4, but in a very profitable manner. We will not be buying market share. We want to continue this market share growth and continue to grow our margins as well. So thank you once again.

[Operator]

Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines. Thank you.