Ashok Leyland Limited (ASHOKLEY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ashok Leyland Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Joseph George from IIFL Capital. Thank you, and over to you.

Thank you. Thank you, Ananya. Good evening, everyone. On behalf of IIFL Capital, I welcome you all to the 1Q FY '27 Results Conference Call of Ashok Leyland. I also welcome the senior management of Ashok Leyland; Mr. Shenu Agarwal, Managing Director and CEO; Mr. K. M. Balaji, Whole-Time Director and CFO; and the Investor Relations team. Now I hand over the call to Mr. Shenu Agarwal. Over to you, sir.

Good evening, everyone, and thank you for your trust in Ashok Leyland, as always. As we all have witnessed, Q1 this year was marked by various geopolitical uncertainties, translating into widespread challenges for the Indian automotive industry. The sequence of events that unfolded had put on test industry's execution capabilities and supply chain resilience and also raised questions on the impact on customer sentiment and market demand. Ashok Leyland has been able to weather these volatilities well, and I'm happy to report yet another quarter of strong financial performance for the company. For Q1 FY '27, we achieved all-time high CV volume, revenue, profit and cash surplus. Continuing from FY '26 historic records, we delivered broad-based growth across all our core businesses, demonstrating the resilience of our operations and the trust our supply chain partners and customers place in us. Q1 started with moderate CV industry volume growth due to fuel supply and pricing issues. However, it bounced back strongly in June once the situation stabilized. Overall, in Q1, the domestic MHCV industry volume grew by 13% on Y-o-Y basis, while the domestic LCV VAHAN industry grew by 17%. This is indeed a strong performance, especially given the headwinds faced during the period. This robust momentum demonstrates strong industry fundamentals and sustained growth potential of the Indian CV industry. Ashok Leyland domestic MHCV truck volume for the quarter was at 22,998 units, higher 15% Y-o-Y basis. Our bus volume declined in the same period, mainly in the STU segment as the company decided not to take some unprofitable orders. In the medium-sized bus segment, which is about 2/3 of the total bus industry and is one of the company's focus areas for growth, we did better than the industry and increased our share. Overall, Ashok Leyland domestic MHCV market share stood at 29% for the period. Ashok Leyland domestic LCV offtake volume for quarter 1 was 18,874 units, higher 21% Y-o-Y. This is the highest ever Q1 volume recorded in LCV business. LCV VAHAN market share for Q1 was 13.2% with a gain of 30 basis points Y-o-Y. Our exports volume for the quarter was 2,461, lower 18% Y-o-Y. The war situation posed major logistical challenges in our RAK-based plant in UAE, impacting our GCC volumes. SAARC and Africa volumes, however, grew substantially, negating the impact to some extent. With improving situation, we are confident of reviving the GCC volumes and make up for the losses in the remaining year. Our foray into ASEAN in establishing it as our fourth home market outside India is progressing quite well. Our overall CV volumes at 48,673 units, the new peak for quarter 1. This includes defense vehicles. Our non-CV businesses maintained their growth streak and remained untouched by the recent global headwinds. Domestic aftermarket revenue for the quarter [Technical Difficulty].

Ladies and gentlemen, the line for management has dropped. Please wait while we reconnect. Ladies and gentlemen, we have reconnected with management's line. Please continue.

Yes. Thank you. So I'll start from where I left. Overall CV volumes at 48,673 units is a new peak for quarter 1. This includes defense vehicles. Our non-CV businesses maintained their growth streak, remained untouched by the recent global headwinds. Domestic aftermarket revenue for the quarter was up 12.7% Y-o-Y. Revenue from Power Solutions business was higher by 51% Y-o-Y. Revenue from defense business was higher 64% Y-o-Y. Defense order book and tender win pipeline remains ever strong. Coming to financial performance, Ashok Leyland achieved a record quarter 1 revenue at INR 9,634 crores, higher by 10% Y-o-Y. Despite record revenues, the EBITDA was flat at INR 970 crores as compared to same quarter last year. EBITDA margin was 10.1%, 100 basis points lower on Y-o-Y basis. We witnessed rising trends in the material costs owing to supply chain disruptions and commodity pressures. The company took several initiatives to address the situation, including better price realization, rigorous cost-saving efforts, product and business mix improvement and opportunity based inventory buildup. These initiatives helped us in mitigating any significant gross margin contraction. As a percentage of revenue, the material cost stood at 71.5% for the quarter, higher by 90 basis points Y-o-Y, but in line with Q4. PBT for the quarter was at INR 830 crores, higher 4% Y-o-Y. Profit after tax was at INR 609 crores, higher 3% Y-o-Y. CapEx for the quarter was at INR 153 crores. New products, including future technology development, alternate powertrain technologies and EVs remain the focus areas for the new CapEx. Investments in subsidiaries in Q1 was at INR 10 crores. Our cash position, net of debt, has got stronger on Y-o-Y basis. We had net cash of INR 2,252 crores at the end of the year, an increase -- at end of the end of the quarter, an increase of more than INR 1,431 crores on a Y-o-Y basis. While in the short run, we are taking aggressive measures to mitigate the impact of rising material costs, our long-term focus remains intact. We are resolutely pursuing the path of premiumization, working diligently on delighting our customers with superior products and services and maintaining operational discipline. In terms of new products, the highlight of the quarter was introduction of new air suspension technology in multi-axle trucks, which is an industry first and provides our customers industry best payload and TCO. This adds to our long list of innovations, which have always defined Ashok Leyland brand and its DNA for the last 78 years. We are also seeing very strong customer reception of our other recently launched range of trucks, the HIPPO tractors and the TAURUS tippers with industry best power and torque. Our new product pipeline remains strong with many more launches slated for the rest of the year. Creating a new industry benchmark in service delivery remains our key focus. Our flagship program, Throw, is continuing to make progress with all our service processes now becoming automated and intelligent with deployment of AI and other digital tools. We continue to add more touch points. During the quarter, we added 33 touch points in our MHCV and LCV businesses. The focus of new additions continues in North and East region, where we have a higher headroom. At the end of the quarter, Ashok Leyland network has a total of 2,137 touch points, 1,177 for MHCV and 960 for LCV. Our EV subsidiary, Switch Mobility India, recently bagged an order of 650 electric buses. With this, Switch Mobility has a healthy order book of 2,100 e-buses. During the quarter, Switch Mobility delivered 225 electric buses and close to 300 electric light commercial vehicles. OHM Mobility, our E-MaaS subsidiary, improved operational fleet to over 1,900 e-buses with over 500 units added during the quarter. OHM is progressing well towards its PAT breakeven target, which we hope to achieve in the near future. Hinduja Leyland Finance, our vehicle financing subsidiary, delivered robust growth in the quarter with its AUM expanding by 20% year-on-year to INR 60,310 crores. Pre-provisioning operating profit increased by 56% to INR 587 crores from INR 376 crores in June '25, while PAT grew by 37% to INR 123 crores from INR 89 crores last year. Hinduja Housing Finance similarly saw its AUM grew by 13% Y-o-Y to INR 16,157 crores. Total gross income of INR 470 crores, pre-provisioning operating profit of INR 136 crores and a PAT of INR 69 crores. PAT was at the same level as last year. Both HLF and HHF maintained healthy asset quality with consolidated net NPAs at 2.1% on book basis. Delivering solid profitability alongside prudent risk management augurs well for future growth of both the financial companies. Reverse merger of HLF with NDL Ventures is progressing as per plan. NDL Ventures Limited and Hinduja Leyland Finance Limited have received the requisite approvals from their equity shareholders and unsecured creditors. The entities will now approach the NCLT for the requisite approvals and, upon receipt, will proceed with the merger and the listing processes. ESG commitments remain close to our heart. Our Road to School and Road to Livelihood programs continue to grow, extending their reach to about 6.4 lakh students now. In our commitment towards RE100, we achieved 77% RE status with Tamil Nadu plants now at 91%. In summary, Q1 performance corroborates to our commitment to sustainable and profitable growth. Our business and financial results clearly demonstrate that our processes and management systems are robust and resilient enough to absorb any external shocks, enabling us to maintain focus on future value creation. In the recently concluded Monetary Policy Committee meeting, RBI, while maintaining a neutral stance and retaining key interest rates, has revised GDP growth outlook for the year to 6.7%. This indicates that macros are getting favorable. Looking forward, we believe that the overall demand drivers for commercial vehicles remain positive. We remain mindful of the key risks, particularly the elevated commodity prices, but shall continue to put all efforts to achieve better price realization and mix, higher cost savings and enhanced operational discipline. Our foundations remain strong. We will keep innovating attuned to our customers' needs while maintaining focus on prudent fiscal management. We will navigate the road ahead with even more rigor and heightened focus on creating long-term value for our stakeholders. Thank you once again for your continued trust in Ashok Leyland. Can I now hand it over to the moderator?

[Operator Instructions] The first question is from the line of Gunjan Prithyani from Bank of America.

My first question is just to get a little bit better color on the margin delivery for this quarter. I mean, it's a commendable gross margin delivery. Just trying to get some more information on what was the sort of gross RM headwind that we saw in this quarter? How are we able to offset this through price hikes? Some color on price hikes taken. And maybe also some sense on how do we think about the next quarter. Like you pointed out, there are more elevated cost headwinds, right? So what is the sort of pending RM impact yet to reflect in quarter 2?

Yes. Thank you. Thanks for your question, Gunjan. Actually, there was increase -- we faced increase in the commodity prices in this quarter. The increase was there. But what -- one good thing that has happened in this quarter is that we could consume most of the item from our opening inventory. We had maintained considerable inventory, both in terms of production inventory as well as in terms of the finished inventory, so we could use about 1/5 to 1/4 of the total requirements in this quarter from the opening thing. What that has done, that has prevented us from charging the commodity cost increases that has happened during the quarter. So only the 4/5 of the total costs that have been incurred during the quarter has got into the P&L in the sense that the value of these increases have got added to the stock. When these vehicles get sold subsequently from the opening inventory, we'll get the benefit. And the charge will also flow as and when the production from the current year gets sold more and more, when it gets sold in the subsequent quarters. So this has really helped us in reducing the cost. The benefit of that is also -- is what you are seeing by way of better gross margin and the lower material cost. This also -- when adding to this material cost increases, the overheads also will have to be added for the stock -- for the vehicles which are in stock. For us, we carried about 6,000 vehicles at the opening level. And again, this 6,000 level of stock at the opening level, it got increased to 8,000 level as at the quarter end. So this also helped us because many of the overheads that have been incurred during the quarter have also been added to the increased inventory. So we got a good benefit from the inventorization, which has got added to the cost of stock and not to the P&L. And these costs will get -- will find its way to the P&L as and when the vehicles gets sold in the coming months.

Gunjan, just to add to that. So that was one. And the other was also we accelerated some of the cost savings. We have started a project -- we had started a project a couple of quarters back, which we internally call Achieve 2K. And that project is now delivering some benefits, but it will deliver many more significant benefits in the upcoming quarters. Then also the focus was on improving the mix from the product side, also from the business side. We also took some pricing actions. So as a result of that, we could negate, I would say, most of the impact coming from the commodity side.

And in addition to that, Gunjan, we also took a price increase. Price increase during the quarter was about 1.2%, 1.25%. That also helped us in negating the commodity cost increases. In a way, I can say that the commodity cost increase got negated 50% by way of the price increases and another 50% by way of the benefit from the cost savings as well as the inventorization impact.

And how do we think about next quarter then? Does it mean that we have -- because we were able to have inventory, which was at the lower cost, does it mean that Q2, we see a sharper hit? Like if -- this is a very useful color, but just trying to think how does Q2 look in context of incremental cost yet to hit the P&L and pricing action, cost reduction. Should we be able to neutralize the impact heading into quarter 2?

Ladies and gentlemen, the line for the management has been disconnected. Please wait while we reconnect. Ladies and gentlemen, we have the management line back with us. Please continue with your question.

Yes. Actually, I was answering Gunjan's question. Gunjan was asking whether the impact of that will be felt in the subsequent quarters. The impact will be there in the subsequent quarters, but will not be felt in a big way. It depends on the quantum of the vehicles which are getting sold, and it will not be very significant.

Yes. But just to add on that. So I mean, the challenges we see continuing on the commodity price side. So the respite from that we think will come in Q3 and Q4 only. So it will be a challenging quarter, but then we are accelerating a few things internally, looking again at those levers that I just described, product mix and business mix. Pricing, we have again taken some price increase from July. We are considering some more before the quarter is over. Also, we are looking at accelerating some cost savings.

Got it. And my second question is on the investments bit. I mean, the switch bit is clear that there is a debt repayment -- the Optare bit, sorry. And what is the -- this Housing Finance is a bit which was -- which I -- it will be good to hear your rationale because I thought we are demerging the entity, the finance entity, and they were to be on their own in terms of funding the growth. So this incremental investment in the Housing Finance, if you can give some sense how to think about it?

Yes. I would like to clarify to everybody who are present in this call. On Optare, as you rightly said, we -- actually, I have been indicating this literally in every call. In FY '25 -- Q4 FY '25 call, I indicated and in Q4 FY '26 call also, I indicated. We had debt of about GBP 80 million. We paid about GBP 30 million last year. And now we have about GBP 50 million debt, which is there, and we don't want to incur interest cost necessarily. So we -- now we are trying to pay another GBP 25 million by this year, and we will pay another GBP 25 million by next year. So that is the plan. I think I would -- I mean, I want everybody to have clarity on this. This is not something new. I have spoken about this in the last 2 years and have been progressively repaying this loan. This is nothing new. This is not a surprise at all. The second aspect, which you said on the HHF, the HLF actually, it is an investment. It is a growth capital which we are giving. The merger is in progress as far as HLF is concerned. And the capital structure of HLF cannot be disturbed at this point of time. So we have -- we thought that this HHF growth will be quite good. And the AUM of this, Housing Finance, it is growing at about 34% CAGR in the last 4 years. The growth trajectory has been quite good. And the net worth growth is about 24%. So we thought that we will invest and the valuation also will be at arm's length, and it is done by an independent valuer. So we thought that we'll invest some money in the Housing Finance because we cannot also disturb by way of investment since this NCLT -- the approval from the NCLT is very -- at an advanced stage now.

The next question is from the line of Binay Singh from Morgan Stanley.

Just carrying on the earlier question, I -- just on your comment on future gross margins. Is it -- did you say Q2 is challenging? I mean, I couldn't sort of capture what were you trying to convey? Is the incremental gross margin hit manageable, or it comes in second half? Just to sort of be clear on that.

Binay, thanks for your question. You are asking about this inventorization bit, or you want to understand the overall margin outlook for Q2?

Just overall, the gross margin outlook that is this -- would you be -- like, looking at the commodity pressure that you see today, do you think you'll be able to sustain this pressure, this margin level?

Yes. So listen, there would be a few things we have to keep in mind while looking at quarter 2 gross margin. One thing I clearly said that the commodity pricing would continue to pose a challenge, which means that the impact purely from the commodity side may be a little bit higher than what we faced in Q1, okay? So -- and this situation will only improve, what is our current estimate is from Q3 and largely from Q4, okay? But there should be some turnaround in the situation starting Q3. So that is one. Now how much we can manage this is basically 2 or 3 factors. One is that our focus now has turned into more profitable segments, which is like higher horsepower segments. In my note, I described that TAURUS and HIPPO that we had launched are gaining a lot of momentum. And these are high horsepower, heavy-duty trucks where margin equation is better. Also, we have just launched these air suspension trucks. We had lost some margin and market share in quarter 1 on the multi-axle trucks. But now with air suspension trucks, we hope that we will more than recover that, right? So also, we are like trying to see, as in Q1, you have noticed that Power Solutions business, defense business, LCV business, their growth rates were much higher. So similarly, we are trying to see that how we -- how much orders from defense, PSB, et cetera, we can execute. And like I said, we have already taken a small price increase from July 1, and we are looking or we are trying to get one more before the end of the quarter, right? So I cannot like, at this time, tell you exactly what the situation would be on gross margin. But yes, you keep 2 things in mind that gross -- that commodity costs will be even higher than Q1. But we have a few levers at our hand to work around that.

That is helpful. My second question is on the truck mix. We talked about it earlier also that we've been seeing ICV growth has been higher than heavy truck growth. And we were expecting sort of some reversal in trends. So how do you see rest of the year truck mix to play out?

Yes. So, so far, ICV growth has been higher because earlier, like in the previous calls, we explained, after GST recalibration happened, the maximum impact or the early impact was supposed to be on vehicles which are mostly going into non-fleets into retail market because those buyers would have -- would see this impact immediately in terms of pricing. For other buyers, like fleet owners or users of heavy-duty trucks, this will happen with a delay. So every quarter, we are now seeing that the situation is improving. I think in Q2, the situation should actually drastically improve, both at the industry level and more so at Ashok Leyland level. Now since we have fully ramped up our HIPPO and TAURUS and now we have the air suspension on the MAV side also, so you would see that -- I mean, I'm saying industry level should also improve, but I'm saying we should be able to improve even more.

And lastly, any just comments on domestic truck growth that you expect this year?

Domestic truck?

Yes.

Sorry, what about domestic trucks?

The volume growth outlook, the volume outlook.

Yes. I mean, quarter 1 has gone pretty well, and that was despite a bad May. I mean May growth was only, I think, 1% or 2% in MHCV, but June then bounced back very sharply. Like I said in my note, I mean, we have never seen this happening in the CV industry actually, because whenever there is an external factor which is affecting the sentiment, I mean, it takes a lot of time for the industry to recover from this. But here, in this case, as soon as the situation stabilized towards end of May, we saw that huge momentum coming back in June, and June industry grew by more than 20%. And that momentum continued in July because July MHCV industry growth was also more than 20%. And August, the sentiment is looking also quite positive. So definitely, I mean, against a 13%, 14% growth in Q1, the growth should be much better in Q2.

The next question is from the line of Pramod Kumar from UBS.

My first question is a clarification on the commodity outlook what you gave that from 3Q, you see a bit of a softening. I just want to understand what is driving that visibility, sir? Because generally, what we understand is steel prices are elevated, natural rubber is hitting new highs, which are our 2 biggest cost items. So I just want to understand what is your -- what the visibility you are having and what kind of inputs which is driving that assessment, sir.

Yes, Pramod. So basically, I mean, we rely on a lot of factors. We talk to the suppliers. We look at various credible reports, the SIAM report, CRISIL report, other reports. So based on that, we are -- I mean, current estimate is that quarter 2 will be the peak. Quarter 3, there should be some softening. Of course, you are right about natural rubber, et cetera, right? But quarter 3, overall, I'm talking, there should be some level of softening. And then quarter 4, we should see some kind of a turnaround. So based on several factors -- I mean, yes, we can maybe separately talk about these in detail later.

Sure, sir, sure. And the question is on the price hike, can you quantify the price hike what we have taken so far in this quarter?

In July, we have taken -- on the MHCV side, we have taken more than 1% in July. And on LCV side, we have taken more than 2% in July. So as I said, we are trying to see, either through price increases or through discount optimization, we can improve price realization even beyond this.

Okay. And finally, on the other cost -- Yes, Balaji, sir.

Cumulatively, you would have taken about 2.25% price increase for MHCV and more than 3.5% for light commercial vehicles from the beginning of this financial year.

Beginning of this financial year. That's helpful. And on the other cost elements, Balaji, as in, on your employee cost, other expenditure, how should we see the trend going forward? Because that will be the additional which we need to watch out for when we talk about margins. And another follow-up to Shenu, sir, as in, would you -- given the current momentum in the first 4, 5 months, would you kind of say that the industry is on track to achieve double-digit growth, sir, on a full year basis?

On the cost side, actually, you will see a marginal increase in the manpower cost because our increment cycle, it starts from July of every year -- every financial year, so you will see a marginal 4%, 5% increase in the manpower cost over the previous quarter. As far as the rest of the costs are concerned, we would like to contain and then operate at the current levels or maybe we will target to operate at the lower levels because we have started many programs internally to monitor the cost, especially on the administration overhead side, we have created a centralized team to monitor to do the commercial negotiations and bring down the cost. So the cost -- administration overhead cost, which was as well decentralized and was decided at the various parts of the country now, any amount which is beyond INR 50 lakhs, it gets referred to a centralized cell, which monitors and then reduces the cost by way of commercial negotiations. So you will see and you can expect a tighter control on the costs in the coming quarters also.