Ashok Leyland Limited (ASHOKLEY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ashok Leyland Conference Call. [Operator Instructions] I now hand the conference over to Mr. Pramod Amthe. Thank you, and over to you, sir.

Yes. Thank you. Good evening, everyone. On behalf of Incred Capital, I would like to welcome you to the management conference of Ashok Leyland Limited today. We have with us the management team represented by Mr. Shenu Agarwal, Managing Director and CEO; along with him, Mr. K.M. Balaji, Chief Financial Officer; and also the Investor Relations department. I will now hand over the call to management for opening remarks, post which we will open the floor for Q&A. A request to all the participants, please restrict your questions to the topic of today's briefing only so that we can have a brief call. Over to you, sir.

Yes. Thank you very much, Pramod, and good afternoon, ladies and gentlemen. Thank you for joining in. We really appreciate your continued trust in Ashok Leyland. Our step-down subsidiary, Switch Mobility Limited or Switch U.K., has today commenced a consultation process with its employees, which could potentially lead to cessation of its manufacturing and assembly activities at its Sherburn facility. This reflects the continuing general economic uncertainty within the overall bus manufacturing sector in the U.K. and consequent inability to derive benefits of scale. While Ashok Leyland has remained committed to the U.K. market over the last 15 years, due to market variations and varied product challenges, Switch U.K. was not able to achieve volumes and cost economics in electric vehicles. Lower volumes with uncompetitive cost structure has made the operations unviable. On the other hand, the EV bus market in India is doing exceptionally well and is poised to grow multifold in the next few years. We are happy to share that Switch India operations is expected to achieve an EBITDA breakeven in FY '25. This is on back of doubling the e-bus volume, crossing 1,000 units of eLCV volumes within the first year of launch and more than doubling the top line in FY '25. FY '26 looks even more promising for Switch India with a clear path to achieving PAT breakeven. In e-buses, we are hoping to triple our volumes in FY '26, and that is on back of 1,300-plus orders in hand. In eLCVs, within the 2 to 3.5 tonne segment we are present, we have already achieved a market share of 80% plus, with clear prospects of 50% to 80% volume growth in FY '26. In this backdrop and after thorough evaluation of all the available scenarios, the Board of Switch U.K. has given their approval to commence a consultation process with its employees, which could potentially lead to cessation of manufacturing and assembly facilities in the Sherburn U.K. facility. We believe this is the right time for Switch to reevaluate the business model and place the focus on the high-growth India market. A few other highlights of the Switch Board decision are as follows: Number one, given superior city bus designs and a reliable product lineup, Switch Mobility is not planning to exit the U.K. market, but are only reevaluating the current business model. Number two, Switch U.K. will execute and complete all the orders on hand and will continue to provide aftermarket support for the existing vehicle park. Number three, at the right time, Switch will cater to the U.K. market from Ashok Leyland's alternate manufacturing sites. In this context, it's also important to note the following: A large part of the value of Switch U.K. is contributed by Switch India operations. On an overall basis, the value accretion from Switch EV business is expected to be much more than the investments made in these entities. We are not anticipating any further and immediate equity infusion in Switch U.K. The equity infusion that was approved by the Ashok Leyland Board in February 2025 would be sufficient to take care of current cash flow needs of Switch U.K. Notably, there is also a net debt of approximately GBP 80 million in the books of Switch U.K. However, as per the contract with the lender, this needs to be repaid only by year 2029. Today's decision on potential seizing of Switch U.K. manufacturing operations is not likely to have a bearing on the repayment terms agreed with the lender. Switch India is already EBITDA positive. And for the next couple of years, we intend to run Indian operations with tighter cost controls and enhanced synergies with Ashok Leyland so as to bring Switch India to PAT breakeven now within the next 4 to 6 quarters. Switch India cash flows, therefore, are likely to be robust, not warranting any major equity requirement for India operations. With this, we leave the floor open for any questions or clarifications. Over to you, moderator. Thank you very much.

[Operator Instructions] Our first question comes from the line of Kapil Singh from Nomura.

So I just wanted to understand the numbers, sir. if you could just tell us that the GBP 80 million debt that we have on Switch U.K.'s books, is it after the debt repayment because we said that we will be keeping the debt of INR 500 crores or thereabout once we infuse capital. So if you could just tell us that. And as per the annual report, the Optare U.K. has about INR 2,100 crores of net investments on book. So will this need to be written off? And will there be any further costs that can come in future for cessation of operations?

Okay. So Kapil, thank you for the question. Just to clarify, that GBP 80 million GBP debt is as of now. So some amount of the equity infusion that was approved in February by the Ashok Leyland Board will go towards clearing of the debt. A part of it will also go towards closure costs. But immediately, we don't see any need of any further equity infusion into Optare or Switch U.K., as I explained. So that should be sufficient. And like I said, this GBP 80 million debt has to be repaid only by year 2029. So we have sufficient time to repay that. So we don't see any immediate need of any further cash infusion. As far as Optare, Optare investments are concerned, like I said, right now, the value -- most of the value of Optare or Switch U.K. is coming from Switch India operations, which is doing extremely well. As I said, Switch India is already -- or I say, likely to be EBITDA positive in FY '25, and we are gunning for it to become PAT breakeven in the next 4 to 5 quarters as well. So the requirement of any cash, even at the Switch India level, should not be there in the immediate future. And like I explained, the value of Optare is much more than the value of the investments we have made so far. And therefore, we don't see any -- likelihood of any impairments in the AL balance sheet.

Okay. Okay. Great. And just also wanted to understand the volume numbers that you have for Switch India. I think you mentioned more than 1,000. So if you could just give the numbers, actually, how many eLCVs and how many MSCVs are you expecting for FY '25 and also the revenue numbers?

These are all very rough numbers, Kapil. Balaji here. These are all very rough numbers. As far as the buses volume is concerned, it could be around 450 -- 450 numbers. And as far as the eLCVs, it could be about 1,000 -- to be about 1,000. And revenue could be close to -- it will be between INR 900 crores and INR 1,000 crores.

Okay. Okay. And if I got it right, the investment value that is shown in Optare U.K. So the investment is flowing from Optare U.K. to Switch India? Is that how it's working, and that's why there will be no write-offs?

No, actually, the value of one has come down, and the value of the another, especially the India business has gone up, thereby, it is almost -- I would say that the value is very much well protected. There is no need for any impairment.

So what is the -- the INR 2,000 crores investment book value that we have, if you could just help us understand the breakdown of that? That will be the last question from my side. How much is it...

I mean all the investments that AL has made has gone through Optare only, right? And therefore, when we have to do a check on the impairment possibility, we just look at the whole value of Optare, which includes the value of Switch U.K. and Switch India. So that is how you should look at it, right?

Sure sir. But what is the breakdown of your investment of this INR 2,000 crores between India and U.K.?

That we'll get back to you, Kapil. We don't have the numbers right away, but we'll get back to you very soon.

Your next question comes from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.

I just want to understand what could be the Switch U.K. losses for this year, sir?

For this year, it could be around -- as of now, it could be around GBP 20 million, GBP 21 million.

Yes. See, I mean the losses are varying between GBP 2 million to GBP 3 million depending on the order and the workload in the whole pipeline per month, that is a per month number. So this year, we are at, roughly like Balaji said, about GBP 20 million to GBP 21 million.

Right. And sir, I just want to understand, how much time this excess would take? And would it be fair to assume by, say, a year or 2, these losses would go away, sir?

See, I mean, we are going through a consultative process, right? So whatever we are saying today to you is subject to that consultation, which would happen, which would start happening later today in the U.K. with the union and rest of the employees, right? So right now, we estimate that the time that consultation would take would be 45 to 90 days, but it is hard to give you a very accurate number. But that is the estimate we have right now.

Got it. So basically, this unit losses at least would go away next year?

That is right to assume that if consultation leads to a cessation of the manufacturing and assembly activities in U.K., then these losses should go away very, very soon.

Your next question comes from the line of Pramod Kumar from UBS.

Most of the questions have been answered, but I just want to understand the technology transfer and other bids on the IP side as to where are those housed? And what does this entire procedure means for that? Will there be any tax implication around that? If you can just help us understand. And also if you can quantify what will be the cost of restructuring, what do you expect? Because you said that you already provided for it. But if you can just help us understand what will be the one-off cost attached to the restructuring what you're planning to do here?

Yes. So Pramod, thank you. This is a very good question. So there is a lot of strength in U.K. while we are taking -- we are following a process that might lead to the cessation of the manufacturing. But in terms of product and technology, we would like that to be protected. And therefore, we are contemplating as of now as to how we can still cater to the U.K. and European market. Like I said in my opening statement, our idea is not to exit the market, but basically to reduce or scale down so that we can cut down on the losses. Now we are evaluating as to where we can produce those products that are available for the U.K. and the European markets. We had earlier talked to you about this latest even bus that we had been able to develop for Europe specifically, but it has potential in Middle Eastern markets as well and some of the other markets. So we are contemplating on those issues that how we can use our alternative manufacturing facilities to produce these products. IP, of course, is fully protected and is in our control. As far as the closure costs are concerned, again, it will -- more clarity will come as we go through the consultation process. But right now, a rough estimate would be between GBP 5 million to GBP 10 million.

GBP 5 million to GBP 10 million. Okay. And sir, while we have you here, can I ask you a general question which has been in the minds of the investors regarding the entire -- what do you say, the series of events which happened IndusInd bank and their stock also took a knock around that. So if you -- any thoughts on that, whether -- is there a chance of the promoter pledge going higher from where it is today? Or any plans of Ashok Leyland kind of being asked to kind of participate in the fund infusion into the industry? And anything which you can just clarify that will help a lot.

Yes. Pramod, I mean, of course, we are -- we can't speak on IndusInd, and there is enough news available for you to gather from, but as far as the pledge of the promoters is concerned, I mean, we would just like to state that promoters, the family has -- is a large conglomerate, and they have many businesses even outside Ashok Leyland and some of these businesses are doing well and are on a growth path. However, we are not privy of this particular matter of pledge as to the usage of funds from the pledging of the AL shares. But as we get to know more, we'll be happy to keep you posted if that is of interest. And I would say that -- I mean, I would like to reassure you on one thing, that promoters are fully committed to Ashok Leyland, and they are very, very keen for Ashok Leyland to realize its vision of being among the top 10 global CV players.

Your next question comes from Raghunandhan N.L. from Nuvama Research.

A couple of questions. Firstly, can you indicate how big would be the order book for the U.K. market? And would this be catered from India, Spain? And second question, more on Switch India. Congrats on the EBITDA breakeven. Considering that more sales on electric bus will be on gross contract basis, what would be the approximate IRR on these sales? Also, given that you have payment security mechanism now, are receivables and payments happening on time?

Yes. So Raghu, thank you for the questions. Firstly, on the U.K. side, our order book is very slim. We have a few orders on hand that we expect to complete within the next few weeks, right? And since we have decided to follow this consultation process, as of now, we have not been fetching more orders, but let this consultation process be over, I think more clarity will come in, like I said, in the next 45 to 90 days. On the Switch India side, yes, it is very likely that Switch India would achieve EBITDA breakeven during FY '25. As far as the ratio of the business between outright sale and GCC is concerned, you know that we have been supplying many buses on the outright sales basis also. So there is increasing interest actually in the EV segment, not just from the government or the STU banks, but also from the private side. Even some of the STUs we are seeing now are very keen to look at different models, where we could be, where we would be able to sell buses on the outright basis. However, on the GCC side, where I mean, Switch is not now going to enter into any GCC contracts by itself, right? So as far as Switch India is concerned, it will be -- everything would be outright sales for Switch India. Of course, some obligations or some contracts that we had already entered in the past, that would still continue to be on the books of Switch India. But any new business that we fetch will be not of the GCC kind of nature, right? So it will be a very clean operations where we design, we produce and we sell the buses on an outright basis. That is on the bus side. On LCV side, of course, everything so far has been completely on an outright sale basis.

So is it right to understand -- just a clarification, is it right to understand that GCC is happening through OHM Mobility? And there, if you can indicate how could be the approximate IRR?

That is right. So all the GCC contracts would be through OHM Mobility, although it will not be constrained to OHM only, right? We are looking at various options. But yes, OHM is a special company, specialized company, which is looking at operating the buses as well and keeping the buses on their balance sheet and operating them. The IRR, it varies according to the type of the bus and the state, et cetera. But I can give you, let's say, a range of 12% to 15%, that is kind of a threshold for us. And this is project IRR. Of course, equity IRR is much better than this.

The next question comes from Gunjan Prithyani from Bank of America.

Most of my questions have been answered. I just needed a clarification on some of the numbers. The investment in Optare INR 2,100 crores? If I factor in what you have announced, this INR 500 crores incremental inclusion, it's fair to say the book value that is -- there is about roughly INR 2,600 crores, INR 2,700N crores?

Yes, you can assume that, Gunjan.

Okay. And then on the losses, when I look back, usually, the Optare has had losses of about INR 500 crores, INR 600 crores. Last year was, I think, INR 460 crores or so. So -- and then if you're mentioning that with this exercise consultation process, the losses of GBP 20 million, GBP 21 million will go away, India is going to turn PAT breakeven. Is it fair to say that Optare by itself this losses drag that we've had will no longer exist in fiscal '26 or maybe second -- from second half onwards? Any thoughts around how should I think about the drag of Optare that's been there for last few years?

Yes. I mean you're right, Gunjan. There will not be any drag on the overall profits of the Switch as a whole because this Switch U.K. losses will be minimized once we are able to get through this process.

Just to clarify further, Gunjan, Optare is purely a holding company. And now with this decision, if this -- through the consultation process, we arrive at some conclusion, then Switch U.K. would also be more or less a holding company other than the aftermarket business, which in any case, is normally profitable, right? So the only -- a large chunk of the business in this whole chain would be Switch India, which we have already spoken about.

Okay. Got it. And then just OHM, we've infused once, about, I think, INR 300 crores in that business. But now that if you are going to do more and more of e-buses, how should we think about the funding requirement for that business, that can be quite sizable, right, as we scale up the electric bus operations?

Yes, Gunjan, you're right. So there would be funding requirements in OHM, and we are evaluating various options at this time. We can't say more because we are still in the evaluation process. But yes, we had inducted INR 300 crores, I think, last year, and that is sufficient, at least for next few quarters for OHM to operate successfully.

And OHM business is profitable when you look at fiscal '25 because '24 was quite, quite thin operations, right? So fiscal '25, how does OHM stack up in terms of profitability?

Gunjan, we have just started the business, Gunjan. It will take time for us to move to the profitable zone. We have just started this, and numbers will have to come, volume will have to come and we'll have to inject capital. All this should happen. And then only you can see the profits.

The next question comes from Ashish Jain from Macquarie.

So my first question is on the U.K operations. Can you give a sense of the employee strength and all in the U.K. operations, which we may have to restructure because you gave a number of GBP 5 million to GBP 10 million as a onetime cost. So just to get a sense of that number?

Actually, if you look at the overall investments, which Gunjan has been talking about, plus the additional investments which we are going to give, which we are going to do now. All this put together -- you also add the value of both the Indian operation as well as the U.K. operation, the value accretion will be much, much better than the investments which we have made so far. So this will not necessitate any impairment in the stand-alone books of Ashok Leyland.

And Ashish, specifically to your question on the number of employees, I think roughly, we have about 240 people in the entire Switch U.K. as a company. And as I said, as I explained that we will continue with the aftermarket operations because we have a significantly high vehicle part in the country. So we want to just continue to service them as long as we need to. And therefore, certain percentage of employees should stay back. However, all this will be clarified during the consultation process with employees.

Right. So sir, just to kind of dwell on this a bit more, like out of the INR 500 crore investment we spoke about, is it fair to think that U.K. requirement is not more than like INR 150 crores, INR 200 crores based upon the GBP 10 million number that you spoke about?

Ashish, let this consultation process complete. But yes, I mean, it will -- the closure costs would not be significant. However, whatever is the rest of the money, will go towards bearing of the debt.

Ashish, just to tell you and to everybody who are there present in the call, I would tell you that -- I want to emphasize that this measure will be much beneficial in the longer run. It will create more value. The cash burn will stop, and Switch India will continue to grow profitably. This is what we wanted to convey in this call.

Your next question comes from Chandramouli Muthiah from Goldman Sachs.

My first question is just related to, I think for the past couple of years, we have been looking for equity infusion for our broader electric bus business, Switch/OHM/Optare. So does this change that in any way? Are we looking to get external funds into this longer-term investment that you are making in within the electric bus space? And sort of the related other question I had just around strategic events is I think the Leyland finance IPO is something that we have been planning for the past couple of years. So I just wanted to understand if the time lines on that change in any post this...

Yes, Chandramouli, thank you for the questions. I'll take the first one and then maybe Balaji can respond on the HLF IPO. As far as -- sorry, can you repeat the first question?

Sure, sir. It's just about external equity infusion into our electric bus investment to come.

Yes, yes, yes. So I think, Chandramouli, we have made it amply clear in the past -- in the recent past that we are not averse to raising equity. However, there are 2 considerations we should keep in mind. Number one, there is no urgency, right, especially with this current decision on Switch U.K. You -- and the situation where Switch India is right now in terms of profitability and cash. There is no urgency, and this is what we have been kind of conveying to all of you in the recent past. Now the timing of the raise of equity, external equity or external funds, is extremely important for us, right, since there is no urgency. So you know that worldwide the valuations of the EV businesses is not very good in the recent past. And therefore, we should wait for the right time. And we have 2 different paths also available. One is to raise external funds through private placement or public placement or otherwise to go for a listing. So both of these options would be available. I think with the current decision, the confidence in the whole Switch entity would be much higher as a whole to be more profitable and value accretive. So at the right time, we will decide which way to go. But this is not the right time, and we are neither in a hurry.

Regarding your second question, Chandramouli, on the individual Leyland finance. The final no objection certificate from RBI is expected shortly and Hinduja Leyland Finance is in the process of responding to the last set of queries. Post the receipt of this no objection certificate, evaluation of both the companies will have to be initiated and swap ratio will have to be decided. And then the Boards will have to approve the swap ratio. And then we'll go ahead with the regulatory approvals from stock exchange, CCI, SEBI and finally, the scheme document will have to be filed with NCLT for final approval. So I'm not able to attach any time line for it, though we are progressing at a very good pace.

Thank you. Ladies and gentlemen, we will take that as a last question for today. I now hand the conference over to Mr. Pramod Amthe for closing remarks.

Management, any last comments you want to do, closing comments or...

Not really. I think we have had a good call. But I would say if you have any remaining questions, we are always available to respond to those. Thank you for joining in again.

Thank you all for active participation, and have a good evening. Thanks.

Thank you.

Bye-bye. Bye.

Thank you. On behalf of Ashok Leyland, that concludes this conference. Thank you for joining us. You may now disconnect your lines.