Ashok Leyland Limited

NSE:ASHOKLEY
Q1 FY2025 2024-07-26
TOTAL COMMERCIAL VEHICLE
Total commercial vehicle volumes: 43,893 units, up 6% YoY
REVENUE: RS. 911
Revenue: Rs. 911 crores, up 5% YoY
EBITDA: RS. 911
EBITDA: Rs. 911 crores, up 11% YoY
PAT: RS. 526
PAT: Rs. 526 crores, highest ever for Q1
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KA
Kapil Singh
Analyst at Nomura
3 questions
VI
Vinay Singh
3 questions
MU
Mumuksh Mandlesha
Anand Rathi Institutional Equities
3 questions
GU
Gunjan Prithyani
3 questions

We see a very high headroom for growth in the LCV business, currently covering only 50% of the market. This year, we have lined up six launches in the LCV segment, with a couple already launched in Q1. We will launch four more LCV products in the next few quarters. The sub-2-ton segment is a medium-term project and will not be launched this year, but we are finalizing our approach for it. Additionally, we will launch new products in the bus segment to increase our market share, especially in the ICV bus side where we are currently under 20%.

Shenu Agarwal • Management

The aging of the fleet is at its peak, with the average age close to 10 to 11 years, compared to the historical average of seven to eight years. This indicates a huge potential for replacement demand, which we expect to unlock in the next two to three years. We are positive about industry growth not just for this year but also for FY26 and FY27.

Shenu Agarwal • Management

Before the year started, forecasts were grim for the CV industry, with predictions of a 10% to 15% de-growth. However, Q1 saw a 10% growth in MHCV, which has changed the narrative positively. We are optimistic about growth for the year, expecting at worst a flat performance but potentially some growth overall. Regarding pricing, we will not discount our products to gain market share; our strategy is to rely on the strength of our products and customer experience.

Shenu Agarwal • Management

The IeV4 LCV launched three months ago is seeing sales primarily on a B2B basis, especially from e-commerce and logistics companies committed to Net Zero. The numbers are small, but we expect growth as more products are introduced. We are part of the PLI scheme and meeting all requirements for PLI and FAME-III approvals. We hope to get certification for PLI incentives this year, while we are ready for FAME-III as soon as it is announced.

Shenu Agarwal • Management

We are seeing an increase in orders for electric buses, with a significant order book for various states. The speed of adoption seems to be faster than originally planned, indicating a positive trend towards electric buses.

Dheeraj G. Hinduja • Management

The one-time expenses are related to advanced engineering and setting up a Center of Excellence for battery packs, electric drive units, and software-defined vehicles. These are revenue nature expenses and are included in the standalone financials. We are focusing on integrating products and building capabilities in-house for electric vehicles.

K M Balaji • Management

Defense revenues have been strong in Q1, with sales of over 1,000 vehicles compared to 250 last year, leading to a revenue increase of almost three times. We expect to continue this growth trajectory, aiming to double our defense business again in the next 2 to 2.5 years.

Shenu Agarwal • Management

Investments, in the past quarter we have not done any major investments. On the CAPEX side, I would say that we have retained our earlier estimates as Shenu had indicated earlier. It could be around 750 crores. On the investment side, in case there is anything, we will let you know. As of now, there does not seem to be any major investment. Maybe for the full year, it might happen, but we do not know the quantum now. It could be around another 500 to 750 crores of the investments in the associate companies, primarily, Switch and OHM. But we will let you know in case if that happens.

K M Balaji •

On the medium and heavy commercial vehicle side, while the overall industry has grown by 10%, the contribution of buses has been the maximum, with buses growing by 50%. The truck growth has been a little bit muted in quarter one, witnessing only 2% or 3% growth in the overall truck segment. This muted growth was mainly due to a downfall in the Tipper segment, affected by elections and stalled infrastructure projects. However, from July or August onwards, we expect the tipper segment to start improving. There is a positive pulse on the ground from larger operators in the construction and mining segments, indicating that the cargo segment should start growing from August onwards. Tractor and ICV have been growing well, with tractor demand significantly increasing. The only segment that could show some de-growth will be multi-axle products, as demand is shifting to tractor-trailer.

Shenu Agarwal •

Margins are impacted by provisions on commodity costs based on market trends. We settle this after a lag of a quarter, and provisions are made for certain quantum as recommended by our sourcing head. This is offset by savings from internal initiatives covering value engineering, resourcing, turnover discounts, and commercial negotiations. We factor in various commodities including steel, aluminum, and rubber. This is an ongoing process that occurs every quarter.

K M Balaji •

The warranty expense has increased due to an extension of the warranty period from two plus two years to three plus three years. As some vehicles are now entering the third-year category, this has led to an increase in warranty expenses. However, the extra cost of warranty is being offset through various price increases.

Shenu Agarwal •

The expenditures relating to R&D are included in other expenses, and they are meaningful. This has been stated by our Chairman in his opening remarks.

K M Balaji •

The main factor holding fleet owners back is the significant price increase of commercial vehicles over the last three to four years, particularly the transition from BS4 to BS6. Although retail demand for commercial vehicles is positive, fleet operators are hesitant to replace their aged fleets due to the price differences between older and newer models. However, as the economy grows, the replacement demand will eventually have to happen.

Shenu Agarwal •

The restructuring is going through all necessary approvals and is expected to conclude before the end of March, which is the end of this financial year.

Dheeraj G. Hinduja •

Ashok Leyland vehicles now account for less than 25% of the business, which has become fairly diversified across all vehicle categories, including used vehicles.

Dheeraj G. Hinduja •

We have never revealed that number of defense, but we can assure you that we could double our top line on defense last year in FY '24, actually more than double. Based on a strong pipeline of orders, we hope to double that number again in the next two years.

Shenu Agarwal •

We have the technology and capability to produce engines beyond 250 horsepower. There are programs running to extend the higher horsepower range in our products through our own engine. We can go easily up to 350 and even beyond when the market requires. The next requirement in the tractor-trailer segment would be around 280 or 300 horsepower, and we are ready for it.

Shenu Agarwal •

Our increments and promotions are effective 1st of July, so you will see an increase happening in the coming quarter. We haven’t assumed any of those increases in this 1st Quarter and provisioned accordingly.

K M Balaji •

This depends on a case-to-case basis for each commodity. As of now, it appears that we may not go for any provision in the next quarter.

K M Balaji •

We have not taken any price increase in the 1st Quarter or in July so far.

K M Balaji •

In the worst case, we might see a flattish year. However, considering Q1 is normally the slowest quarter, we feel that the growth momentum should continue this year.

Dheeraj G. Hinduja •

We are clear that we are not going to cut prices to win market share. Short-term measures don’t last much and don’t give a permanent impact. We are focused on building strength in our product portfolio and expanding our reach.

Shenu Agarwal •

The cost increase for mandatory air-conditioning will not be very high. About 20% of trucks sold already have AC. The cost impact for the remaining trucks will not be significant. Profitability of fleet operators is rising, which helps pricing discipline and should not adversely affect volumes.

Shenu Agarwal •