Ashok Leyland Limited

Ashok Leyland Limited
Conference call transcript
January 28, 2008
Moderator: Good afternoon ladies and gentlemen. I am Rita, the moderator for this conference.
Welcome to the Ashok Leyland Conference Call hosted by Edelweiss Securities. For the duration of
the presentation, all participant lines will be in a listen-only mode. I will be standing by for the
question and answer session. I would now like to hand over the floor to Mr. Ashutosh Goel from
Edelweiss Securities. Thank you and over to you sir.
Ashutosh Goel: Thank you Rita. Good afternoon to everyone. On behalf of Edelweiss, I welcome
you all to this third quarter post earnings conference call of Ashok Leyland. We have Mr. K.
Sridharan, Chief Financial Officer of Ashok Leyland representing the company. Mr. Sridharan, we
can start with the brief comment on the third quarter results and then we can have a question and
answer session. Over to you sir.
K. Sridharan: Thank you Mr. Goel. Good morning to all of you. Let me quickly give an overview of
the third quarter and the nine months performance and also give some broad indication of what we
expect for the current year and the year following that. In the third quarter of course, the volumes are
well known earlier. We had drops in volumes compared to the previous quarter. That have been
primarily due to the sluggishness in the total industry volume, but we could manage to maintain our
market share and marginally improve our market share. As of December 2007 end, we are
marginally up in our market share compared to the corresponding period of the previous year. We
also had the benefit of growth in the engine segment, which we have been highlighting earlier that
we are now venturing into the selling of power gensets. We have been importing the engines from
China, and we have been branding them with our other accessories and selling them as Leyparts
gensets. We have also had significant growth in spare parts sales. To a great extent, we have been
benefited also by the sales to the defence sector. Vehicle Factory Jabalpur registered a marginal
growth. All these mean that even though there has been a drop in volumes by about 1,000 to
1,500, we could maintain our market share, we could contain the drop in our margins in the current
quarter compared to the previous quarter. I will come to margins specifically in a short while from
now, but on the volumes side, I must say that the drop has been more on multi-axial vehicles and
the tractor part and the market share loss has been in the North and eastern sides, while we gained
market share in the South and western markets—our strongholds. On the passenger side, the has
been a runaway growth, both on the private sector as well as on the STU segment. In fact, we
crossed our market share by 50% threshold level. In the STU side is where we are in fact more than
54% in the market share. That has been the position on the volumes side.
On the margins, we lost out on the margins primarily because of the, partly on account of the staff
cost which have been somewhat depressed than the previous year’s third quarter and to a
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significant extent in our other operating cost which resulted in about 100 to 120 basis points drop in
the gross operating margin compared to the previous quarter. But I must say that the material cost
as a percentage of sales, though registered an increase in the third quarter, will subside in the fourth
quarter, primarily because the pricing action that we took in October got affected only in the later
part of December and that hardly we could realize much out of that INR 16,000 per vehicle pricing
action that we took on an average in October. Secondly, we made significant additions to the
manpower; the head count increased by about 600 people. We also had considerable increase in
executive compensation, which increased in November 2006, so primarily you are seeing the effect
of the cost increases primarily for the two months period in the current quarter. But going forward,
you will not see that sort of significant jump in manpower cost because the fourth quarter of the
previous year also had these executive compensation increases. Apart from the pricing action, on
the material cost side, I must say that pressures on the cost barring for the steel has considerably
subsided. We have been able to contain metal cost increases, net of the pricing action by about 100
basis points, which is one of the reasons why you will find that the metal cost as a percentage
compared to the previous years for third quarter has shown about 120 basis points drop.
On the capital expenditure side, we have so far incurred about INR 350 crores, mainly focusing on
capacity creation in our Ennore factory for engine and the gearbox and also in our new facility
coming up in Uttarakhand. A portion of it has also been spent significantly on the R&D side where
we are spending considerable amount on developing the new generation engine, as we call it, which
will meet Euro IV and V emission norms. On the capacity creation based on that, we expect that by
March 2008, our capacity should be at about 110,000. It could be anywhere between 100,000 and
110,000, subject to the capitalization and commissioning of those facilities and by June 2008, the
first module of that 50,000 would get completed, so our capacity would stand at about 130,000 by
end June 2008. In terms of our capex for the capacity buildup, once the Ennore facility creation gets
over by June 2008, our focus will be shifted on to the Uttarakhand side where we expect to pump in
about INR 1,800 crores or so towards creating the facilities which would get done by mid of FY09-
10, that is September 2009, we expect that 50,000 module to be created. That is going on stream.
The land acquisition is complete. Order placements have already happened. Close to about INR
100 crores of capex have also been spent between the start of the current year and December
2007. Going forward, we expect another about INR 100 crores to be spent before March 2008 and
we should be spending the balance amount spread between the two financial years FY09 and FY10
for the INR 1800 crores or so to create that 50,000 module. In terms of the working capital side, I
must say that there has been a considerable buildup of inventory, which is usual because we eat
into the stock in the last quarter. Our vehicle stock currently stands closer to 10,000, 9,800 and
odd to be very precise, and we expect to eat into that to the level of about 4,000 vehicles going
forward in the fourth quarter, so we expect a significant reduction to happen on the working capital
side at least by about INR 700-800 crores.
In terms of the outlook for the current financial year, we have so far achieved including our exports
55,998 vehicles, if I can round it off to say 56,000 vehicles, and in the last quarter, our predictions
are based on two key assumptions: (a) we believe that we should be able to sell more than what we
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sold in the domestic market last year. Last year, we sold closer to 24,500 vehicles in the fourth
quarter. We expect the current year to have about 25,500 vehicles, about 1000 numbers more than
the last year. That is based on our discussions with our dealers and also based on the prospects of
new products that we have introduced in the market in the last one month, and on the export front
we expect to complete the orders which we have got on hand and secure closer to 9,000 volume,
anywhere between 8,500 and 9,000 is our target. We have so far done about 4,800, so even if we
do about 4,500 or 4,200, that should take us closer to about 30,000 vehicles in the fourth quarter
between domestic and export market. So this year we expect to end closer to 86,000 vehicles,
certainly above 85,000 vehicles. That is the volume outlook for the current financial year. Going
forward, many of you had in our individual discussions with me had asked about how we expect to
utilize the capacity creation that we have been adding. I must emphasize that based on our
assessment of growth and also the target of market share which we are setting for ourselves, which
is about 35% in the next two years, currently they are closer to 30%, so we believe that this 35% is
achievable and if that were to happen we should be utilizing at least about 75% to 80% of our
capacity that we will be creating in the next two years.
In terms of margin expectations for the current financial year, as I mentioned in the beginning, while
the nine-month ended has registered a 9.8% margin which is at least about 80 basis points better
than the previous financial year nine months period. We expect to be around 10% marginally better
than the last year’s level of 9.8%. Going forward, we expect this 10% margin to be consolidated
and improved by at least 100 to 150 basis points, primarily because of the scales of operation and
also because of all the benefits of the initiatives that we have taken, whether it is the new generation
engine that we are launching or the new models that we are coming up with or due to the benefits of
the scales of production, all that should kick in to give us that 100 to 150 basis points improvement
going forward. In terms of the LCV project, I must conclude by saying that we are progressing well
on the project. At the moment, both the teams are closeted to identify the models that need to be
initially launched. Our plan is to have the capacity buildup in two phases. Phase one will be a
100,000 vehicle which will involve about INR 1000 crores of capital expenditure and phase two will
be scaling up this 100,000 to 180,000 or may be even optimize it to 200,000 vehicles with another
about INR 1000 crores of capex. This is the plan and the share between Nissan and Leyland would
be closer to 50:50, of course in some JVs it is 49 for Nissan and 41 for Leyland, in others we are 49
and they are 51. By and large I would say that it will be a 50:50 project and that is very much on
stream and we expect to commence the construction phase in the new financial year. This is the
broad outlook. I now open the floor for questions.
Moderator: Thank you very much sir. We will now begin the Q&A interactive session. Participants
who wish to questions, kindly press *1 on your telephone keypad. On pressing *1, participants will
get a chance to present their questions on a first-in-line basis. Participants are requested to use
only handsets while asking a question. To ask a question, kindly press *1 now.
First in line, we have Mr. Kumar from B&K Securities. Over to you sir.
Mr. Kumar: Yeah, good afternoon sir.
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K. Sridharan: Good afternoon.
Mr. Kumar: Sir, just wanted details of the spare part sales and engine sales if you can provide us for
this quarter.
K. Sridharan: The spare parts, you know for the quarter we have done about INR 6 crores.
Mr. Kumar: Sorry.
K. Sridharan: It is INR 201 crores.
Mr. Kumar: INR 210 crores sir?
K. Sridharan: That’s right.
Mr. Kumar: Yeah. Sir, as against last year?
K. Sridharan: I do not have the last year number ready with me.
Mr. Kumar: Okay sir. Engines sir?
K. Sridharan: Engines, total sales, engines the quarter three sale is 2,635 engines as against the
previous year quarter of 2,355.
Mr. Kumar: Okay.
K. Sridharan: 2,364 sorry. And cumulative engine sale up to December is 8,100 in the current year
as against 6,150 in the previous year’s nine-month period.
Mr. Kumar: And sir in terms of value if you can provide, like…
K. Sridharan: That will be difficult at the moment.
Mr. Kumar: Okay sir. And in terms of…
K. Sridharan: But on the parts side, I must say excluding the vehicles of Jabalpur supplies, we have
done about INR 106 crores for the quarter and corresponding period of the previous year has been
INR 89 crores.
Mr. Kumar: INR 89 crores. Okay. So, the rest is from vehicle factory, Jabalpur.
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K. Sridharan: Right.
Mr. Kumar: Okay sir. Thanks a lot sir and best of luck for the future quarters.
K. Sridharan: Thank you.
Moderator: Thank you very much sir. Next in line we have Mr. Sahil Kedia from Enam Securities.
Sahil Kedia: Sir, just one quick question, wanted to understand what was the reason for such a
high other income in the current quarter, if you can shed some light on that and secondly what
would be your current position on the defence orders please.
K. Sridharan: Sorry, nice to remind me on the other income, I should have mentioned. We offloaded
close to 1% holding in IndusInd Bank shares and book INR 33 crores profit. That is the reason why
the other income is more. On the defence side, we hold closer to about 400 vehicles order and we
expect to complete the order before March. The supplies from the Vehicle Factory Jabalpur are
continuing on as per stream.
Sahil Kedia: Also sir can you shed some light on the recent iBus that you had displayed at the auto
expo. What is your expectation on that and when is it expected to get launched, etc.?
K. Sridharan: The launching will take at least another about nine months to one year to
productionize the iBus. Our hope is to position it compared to the Volvo buses at a price at least
20% cheaper than what is being offered by competition, so there will be a significant price
advantage while features-wise on a like-to-basis, there are, in our assessment, few features which
are much better than even in the competition.
Sahil Kedia: Alright sir, thank you.
K. Sridharan: Thank you.
Moderator: Thank you very much sir. Next in line we have Mr. Kapil Singh from Lehman Brothers.
Over to you sir.
Kapil Singh: Yeah. Hi sir.
K. Sridharan: Hi.
Kapil Singh: Just wanted to ask that what is the profit at AVIA and sales and outlook over there?
K. Sridharan: At the moment, it is not making any cash profits.
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Kapil Singh: Right.
K. Sridharan: It is incurring cash losses marginally.
Kapil Singh: Okay.
K. Sridharan: The sales are around 1000 vehicles, below 1000 vehicles.
Kapil Singh: Okay.
K. Sridharan: We expect to ramp up the volumes in the next 1-1/2 years..
Kapil Singh: Okay.
K. Sridharan: ..to about 3,000, by which time it will expect to have a breakeven.
Kapil Singh: Okay.
K. Sridharan: The plans are very much on and the cost reduction exercises are also moving as per
our targets.
Kapil Singh: Okay. And secondly, on this LCV project with Nissan, when can we expect the first
launch, commercial launch to take place.
K. Sridharan: In about two years time from now.
Kapil Singh: Two years time from now.
K. Sridharan: That’s right.
Kapil Singh: Okay sir. Thanks
K. Sridharan: Thank you.
Moderator: Thank you very much sir. Next in line we have Mr. Pramod from ABN Amro Equities.
Over to you sir.
Mr. Pramod: Hello sir, Pramod here.
K. Sridharan: Hello Pramod.
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Mr. Pramod: With regard to this Nissan JV, if I understand rightly, you need to do in our balance
sheet investment of around INR 500 crores. Am I right?
K. Sridharan: That’s right. Not only ours it will be along with our other group companies.
Mr. Pramod: Okay.
K. Sridharan: We have got some two-three investment companies and within Leyland and Leyland
Group Companies, it will be about INR 500 crores.
Mr. Pramod: Okay. This includes across the vehicle assembly, gearbox, and transmission and
engine everything ?
K. Sridharan: Right from scratch. And it includes the phase two also. In the initial phase one, it will
be only INR 250 crores, as you know it will be only INR 1000 crores of total investment even on a
1:1 debt/equity 500 and 500.
Mr. Pramod: Okay.
K. Sridharan: Based on taking 50%, ours will be only 250 crores.
Mr. Pramod: Okay.
K. Sridharan: It will get scaled up to INR 500 crores once the phase one is complete.
Mr. Pramod: Okay.
K. Sridharan: Which will happen in about say three or four years’ timeframe.
Mr. Pramod: Okay. And in the recent press reports, there were some talks about you postponing
the Chennai capacity, which you are planning for CV.
K. Sridharan: I must clarify that there is no truth in that statement. In fact, Mr. Seshasayee is also
separately giving clarifications on that. There is no such mention of such postponement. As I
briefed in the beginning,..
Mr. Pramod: Okay.
K. Sridharan: ..we are going as per our schedule in creating capacity at Uttarakhand.
Mr. Pramod: Okay.
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K. Sridharan: We are completing the investment at Ennore, practically the investments in Ennore is
over.
Mr. Pramod: Okay.
K. Sridharan: Hardly less than INR 100 crores needs to be done between now and June 2008, so
there is no truth in any postponement story that was I think done by one Mint or something…
Mr. Pramod: Yeah, yeah right.
K. Sridharan: So, there is no truth in that Pramod.
Mr. Pramod: Okay. But Uttaranchal, as per your plan, it is on schedule?
K. Sridharan: Absolutely, absolutely.
Mr. Pramod: So, the capex for next year still remains at…
K. Sridharan: Yeah, the capex, you know as I was mentioning INR 1,800 crores in Uttarakhand
needs to be done in the two years’ timeframe.
Mr. Pramod: Okay.
K. Sridharan: So, if you factor that and also the other capex that is needed for the new-gen
engine…
Mr. Pramod: Okay.
K. Sridharan: …that we are developing with the AVL Austria support.
Mr. Pramod: Okay.
K. Sridharan: Capex for FY09.
Mr. Pramod: Okay.
K. Sridharan: For the current financial, let me first talk about that.
Mr. Pramod: Okay.
K. Sridharan: The current financial year capex would be closer to about INR 800 to 900 crores.
Currently, we have done about INR 350 crores. Balance about INR 500 to 550 crores would get
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done in the three months’ period and going forward we expect INR 1600 crores in the FY09, about
INR 1,200 crores.
Mr. Pramod: Okay, okay. Fine sir. Thank you.
K. Sridharan: Thank you.
Moderator: Thank you very much sir. Next in line we have Mr. Chirag Shah from Emkay Shares.
Over to you sir.
Chirag Shah: Good afternoon sir.
K. Sridharan: Good afternoon Chirag.
Chirag Shah: Yeah. Just wanted to understand on the margin side. If you look at it, margins have
slightly declined in this quarter. Now, you explained it is because largely on the sect expenses have
increased and also the raw material costs have increased. What I am trying to understand is that we
have been looking at VRS very actively, so just to, if you can share some light on this because we
have done 600 odd additions in employee, so what is the net addition that we have looked at and if
you can share some light on employee status, that the VRS programme, how are we looking at it
and because if you look at even year-on-year basis, there is significant increase in the cost while
some of this is also because of wage agreement that you have done.
K. Sridharan: Yeah the first point I must say Mr. Shah is on material cost at the quarter…
Chirag Shah: Yeah.
K. Sridharan: There is a reduction by about 120 basis points.
Chirag Shah: Sir, I am also looking at you know there is a new classification that has come in which
requires you to, the traded goods, now it requires to be included, earlier it was not a part of raw
material cost in terms of classification.
K. Sridharan: No, it was part of it. Now it is being split between raw materials and trading goods,
so I would request you to look at it together.
Chirag Shah: Okay.
K. Sridharan: If you combine it together and look at it..
Chirag Shah: Fair enough.
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K. Sridharan: Like basis.
Chirag Shah: Okay.
K. Sridharan: The total material cost as a percentage of sales would be 73.2% in the current year.
Chirag Shah: Okay.
K. Sridharan: Against the previous year’s third quarter, it is 74.4%.
Chirag Shah: Okay.
K. Sridharan: It is about 120 basis points reduction, that is number one.
Chirag Shah: Okay.
K. Sridharan: At the same time, what you said is also right, that the operating margins the last year
third quarter was 10.4% as against 9.2% for the current year.
Chirag Shah: Yeah.
K. Sridharan: The 120 basis points drop is primarily on account of the staff cost.
Chirag Shah: Okay.
K. Sridharan: There the 600 and odd numbers, the addition that I mentioned is again primarily on
the executive side.
Chirag Shah: Okay.
K. Sridharan: And also for the new plant Uttarakhand.
Chirag Shah: Okay.
K. Sridharan: And the VRS part of it is over and practically you will notice from the VRS charge,
there is hardly any amount that is getting charged now.
Chirag Shah: Yeah, that is what precisely I was coming to.
K. Sridharan: Exactly. So.
Chirag Shah: Yeah.
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K. Sridharan: The VRS part of it is complete, that plan is over.
Chirag Shah: Okay.
K. Sridharan: Whereas, we are now, we need to augment the manpower, both at the executive
level.
Chirag Shah: Okay.
K. Sridharan: The 600 is in fact by majority, practically everything is only on the executive side in the
current year.
Chirag Shah: Okay.
K. Sridharan: Looking forward in Uttarakhand and all that, we may have to add manpower, so this
phase is a phase of development where you may not see the benefit coming into the bottom line.
Chirag Shah: Okay.
K. Sridharan: Cost may have to be incurred in that.
Chirag Shah: Okay. What is the, if you can just help us understand kind of additions that you would
require at your Uttarakhand plant in terms of overall employees.
K. Sridharan: That will be about 1200 and odd.
Chirag Shah: 1200 and odd would be incremental addition that you will be requiring. Okay. And if
you can just share with us this traded good numbers of last quarter, comparable quarter of last year,
because this quarter it is INR 440.6 crores if I am not wrong, and what would be the figure for 3Q
FY07, or I can take it later on if it is…
K. Sridharan: Yeah, one minute.
Chirag Shah: Yeah. And also what would be the defence sales in terms of value?
K. Sridharan: In goods, for the current quarter as you would have seen, it is 405 million.
Chirag Shah: Yeah.
K. Sridharan: Against 328 million…
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Chirag Shah: Okay. Thank you very much. And on the defence side, what would be…because the
order executed or delivered in this quarter in terms of vehicles, you said that you had 400 odd
vehicles as the balance order.
K. Sridharan: Vehicle sales in defence for the quarter is practically nothing, I mean you know it was
ordered only now.
Chirag Shah: Okay.
K. Sridharan: Executing it in the fourth quarter.
Chirag Shah: So, there were not much of defence sales booked in this quarter. Would it be right or
we did have some other defence sales?
K. Sridharan: I mean, hardly about 26 vehicles were sold in the third quarter…
Chirag Shah: Okay.
K. Sridharan: …of the financial year, but the order book that I mentioned about 400 vehicles…
Chirag Shah: Okay.
K. Sridharan: …that will get serviced in the fourth quarter.
Chirag Shah: Okay. Fair enough. Thank you very much.
K. Sridharan: Thank you very much. Next in line we have Mr. Mahantesh from Centrum.
Mr. Mahantesh: Good afternoon sir, Mahantesh here.
K. Sridharan: Yes.
Mr. Mahantesh: Good results, but sir I am a bit worried about the guidance that you have given
especially on the export vehicles, you said that in the nine month period, whatever sales you have
done, 4,800 vehicles, you will probably exceed that number just one quarter of this year, the
remaining quarter.
K. Sridharan: Not exceed, I said we should be doing about 4,000 to 4,200 vehicles.
Mr. Mahantesh: That is nearly close to the nine-month period number.
K. Sridharan: That is based on the orders that we are sitting on.
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Mr. Mahantesh: Which are these orders sir?
K. Sridharan: Mainly in African countries.
Mr. Mahantesh: And for which vehicles are these sir?
K. Sridharan: For the ICV, what we call as 15-tonner vehicles.
Mr. Mahantesh: And have you, of the 9,800 vehicle inventory that you build so far, are the vehicle
inventories for these ICVs…are these included in that inventory?
K. Sridharan: Obviously.
Mr. Mahantesh: So that inventory will get offloaded...
K. Sridharan: Based on why we said we will be eating into the stock to the level of about 4,000 odd
vehicles.
Mr. Mahantesh: Because of this ICV?
K. Sridharan: Yeah.
Mr. Mahantesh: But then these orders come at lower margins compared to the margins that you do
in the domestic.
K. Sridharan: Margins would be definitely comparable with the domestic side and it is all being done
at the current exchange rates, so we do not really have to get worried about the exchange rate part
of it also. I mean, unless the rupee again further strengthens in the next three months or two
months.
Mr. Mahantesh: Right sir.
K. Sridharan: Yeah.
Mr. Mahantesh: Great sir. Right sir. Thanks for answering my questions.
Moderator: Thank you very much sir. Next in line, we have Mr. Jamshed Dadabhoy from CitiGroup.
Mr. Dadabhoy: Good afternoon sir.
K. Sridharan: Good afternoon.
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Mr. Dadabhoy: Just two quick questions. Sir, first question on your new product. I just wanted to
know why you all have changed over to Cummins engines from Hino engines, which is what you all
use on your current lineup. Second question, sir you mentioned that going forward on your
enhanced capacity you will be looking at moving at about 75% to 80% capacity utilization, did I
catch that correctly?
K. Sridharan: That’s right.
Mr. Dadabhoy: So, on 150,000, we are hoping to do about 120,000 units.
K. Sridharan: That’s right.
Mr. Dadabhoy: And how much of this will come through the plant at Uttaranchal?
K. Sridharan: The first question that you asked, the Hino versus the Cummins engine.
Mr. Dadabhoy: Yes sir.
K. Sridharan: I must say that when we power it with more than 250 horsepowers.
Mr. Dadabhoy: Okay.
K. Sridharan: We use the Cummins engine range, that is number one. Once we have this new-
generation engine which will meet Euro IV norms, we would be having the H series new series
engines also catering to these high horsepower range, but till that time for such high-end power
requirement, we would be using Cummins engines.
Mr. Dadabhoy: So, this is only temporary?
K. Sridharan: This is temporary and if the demand continues to be let’s say at 400 horsepower
engine or 300 horsepower engine which demand is very minimal, we would continue to use
Cummins engine, so it may not be temporary, given the type of power to weight requirements that
the market demands.
Mr. Dadabhoy: Okay. So, what can the Hino engines and the new-gen engines give in terms of
maximum horsepower?
K. Sridharan: Maximum horsepower, the Hino six-cylinder is currently around 210.
Mr. Dadabhoy: No sir, not current, after your engine program is over.
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K. Sridharan: It will be closer to 300.
Mr. Dadabhoy: Okay.
K. Sridharan: So, once that is done, up to 300 horsepower range, we should be in a position to
meet up with the new-generation engine that we develop, we do not need to buy Cummins engine
at that time. But, if at that time, the requirement is say for 350 or a 400 horsepower engine, we
need to have the Cummins as an option available with us.
Mr. Dadabhoy: Okay. Sir, how many production lines do you all have right now, currently?
K. Sridharan: We have about, the engine, we are in three places. Right now, we are only in two
places. One is in Ennore and another is in Hosur. We are now putting it up in Uttarakhand.
Similarly, for the gearbox, we have got it in Ennore and in Bhandara and we will be putting it up in
Uttarakhand also. So, let us say two years from now, we will have in three locations the engine and
gearbox being manufactured and in five locations we will have the vehicles assembled there and
axials being completed in almost all places.
Mr. Dadabhoy: So, engine and gearbox in three places. Could you repeat the next part.
K. Sridharan: The axials and the chassis would get assembled in five locations.
Mr. Dadabhoy: Okay.
K. Sridharan: Yeah. So, that is on the first question. The second part, you asked about how much
from the new plant in Uttarakhand out of the 150,000 or 160,000 vehicles, we expect close to about
45,000 vehicles to be produced and sold going forward in the year 2012-13-14-15 and all.
Mr. Dadabhoy: On 50,000 units?
K. Sridharan: That’s right.
Mr. Dadabhoy: Okay. So, your total capacity your looking at then is somewhere around 160,000
units?
K. Sridharan: 180,000 units.
Mr. Dadabhoy: No sir, it is 100 now, being scaled up to 110, then 130 by June and an additional
50,000...
K. Sridharan: So that will give you 180.
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Mr. Dadabhoy: Okay 180, fine, correct sir.
K. Sridharan: Yeah.
Male Speaker: Okay, thanks.
K. Sridharan: Welcome.
Moderator: Thank you very much sir. Next in line we have Mr. Chirag Shah from Emkay Shares.
Chiarg Shah: Yeah, just a followup question sir. If you can share with your debt and cash on books
and also you had lined up an ECB borrowing in case you needed the same. Status on that, have we
used that money, just an update on that sir.
K. Sridharan: We are currently at 0.6:1. We expect this to be maintained at the year end also.
Chirag Shah: Okay.
K. Sridharan: In fact, it will be even be much better. We have not drawn the ECB as of now. We
would be drawing once we get the RBI clearance, which we expect anytime from now. That will go
to substitute the other loans that we have on board, that is why I said it will be maintained at 0.6:1
and in terms of our fund requirement, the ECB with the internal accruals in the next year should be
adequate to meet up our total funds. The year following that may need some INR 400 to 500 crores
debt to be also pumped in.
Chirag Shah: And sir, in absolute figures if you can share your debt position and cash position, it
would be great.
K. Sridharan: The debt will be less than INR 600 crores as of now.
Chirag Shah: Okay.
K. Sridharan: Yeah. And I do not understand your cash. I mean, cash is, practically we do not sit on
any cash surpluses.
Chirag Shah: I mean bank or any investment surplus balance that you have which has not been
used, or this is the net of investment position debt?
K. Sridharan: Yeah, net, net.
Chirag Shah: Okay. Thank you.
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Moderator: Thank you very much sir. Next in line we have Mr. Amit from Rare Enterprises.
Chetan Shah: Hi Sir. This is Chetan Shah from Rare.
K. Sridharan: Hi Chetan.
Chetan Shah: Sir, just two quick questions. One, I want to understand in terms of the demand, we
have discussed this n number of times in the past, just to wanted to have your sense in this if overall
economy is doing pretty well, why the demand in the commercial vehicle segment is not happening,
just a broad macro number, want to understand from your side, it is like a problem …………………
K. Sridharan: For whatever it is worth, I will just split it into two parts.
Chetan Shah: Yeah.
K. Sridharan: One an immediate prediction and going forward as a medium-term outlook.
Chetan Shah: Right.
K. Sridharan: In terms of immediate prediction, I do see interest rates, you know though they are
supposed to soften, we expect RBI to announce softer interest regime. But for that news to sink into
the market, even if it were to happen, we may not see the surge happening before March 2008. So,
I do not expect the total industry volume to register a growth in the current financial year. It will be a
miracle if it were to exceed the previous year’s volumes.
Chetan Shah: Okay.
K. Sridharan: And in our own case, we should be a touch and go in terms of our previous year’s
volume versus the current year volume, which would mean that you know we will be registering at
least about 100 basis points improvement in our market share. Going forward, I fully agree with you
and I also endorse completely the assessments done by credit rating agencies like CRISIL and Fitch
which talk about compounded annual growth of about 6% to 8% in the next four to five years and if
we superimpose on that, our belief and our target and our expectation of improving our market
share from 30% to 35%, we should be growing at about 15% to 20% year over year in the next few
years. May be in the next immediate year, it may not be more than say 10% to 12%. Going forward,
we expect to move up to 20% level and the growth in Leyland specific case should be happening
more pronounced in the export market where we are making two important developments; (a) we
are launching new product ranges with the cab option available, without which our export would
have been confined only to passenger models in the past. With the cab being made available in
large numbers for such medium duty range vehicles, we expect the truck volumes to improve; that is
one part of it. And second, we are now increasing our presence in the export market with our
manufacturing footprint. Right now, we are in the midst of doubling our capacity in Ras Al Khaimah,
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where we started the operation and it is about to commence in the month of March or April 2008,
where we will be assembling the bus, the Falcon bus and selling it in the Middle East as well as the
Egyptian market. The demand has been so overwhelming there, we have now already put our plants
for doubling the capacity, increasing the capacity to 2,000 vehicles from 1,000 vehicles. Of course
the total investment will not be more than about INR 70 crores or so. Likewise, we are also seeing
quite a few opportunities in Africa, Egypt, Bangladesh, and in Latin American countries, our
products, new product range coupled with the AVIA product, we should be able to make a dent in
the export market. So, exports, Leyland is targeting to grow at more than 25% to 30% year over
year…
Chetan Shah: Right.
K. Sridharan: in the coming year. So, this is the broad-brush assessment as we see it or earmark it.
Chetan Shah: Sir, in terms of our Q4 number which you mentioned about roughly about 25 odd
thousand for the domestic market and 4,000 odd for the export, hence we understand that we are
sitting on a good amount of order from them. But in the domestic market, what is your assessment
of achieving this number? Because I am just trying to understand or taking forward your argument in
terms of the softening of interest rate scenario and you are seeing till March 08, nothing looks like to
be taking a clue out of that. So if you can throw some light in terms of your confidence of achieving
this number in the fourth quarter, because we already completed one month out of that three
months, so are we in line for the domestic market or you foresee something?
K. Sridharan: Based on the one month experience, our discussions with dealers, and the response
received for new models we launched recently, our confidence level is saying that we should exceed
the last year’s fourth quarter volumes by at least 1,000 numbers…
Chetan Shah: Right.
K. Sridharan: ….is fairly, I must say we are very confident of.
Chetan Shah: Right.
K. Sridharan: I may not be able to add anything beyond except to say that the 49-21 and 35-21 all
have been received very well in the market and we are sitting closer to about 1000 vehicles
advance.
Chetan Shah: Right.
K. Sridharan: We have paid money in advance and we are to supply those vehicles. In fact, in
those models, our success will depend upon our ability to crack up our volumes and make it
available before March 31, 2008.
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Chetan Shah: Right.
K. Sridharan: So, by and large, the feedback from our dealers is that achieving large-scale volumes
is not a problem. In fact, all of them are upbeat that in these new models, they should be able to at
least crank up 500 to 600 numbers in each region.
Chetan Shah: Right.
K. Sridharan: On a very conservative assessment, we believe we should be exceeding our previous
year’s fourth quarter volumes by about 1000 numbers, which is what I shared in my confidence
when I said we should be doing about 25,500 vehicles in the fourth quarter.
Chetan Shah: Sir, in terms of taking about the inventory as on date which is roughly about 10,000
numbers of which you shared that roughly 4,000 is the order which we have for the export market,
then what is the remaining 6,000 numbers are for, like which are these models and which are the
ones which is there with us in the pipeline and which we are not able to…
K. Sridharan: I think you need to understand that not all the 4,000 vehicles of export will be met out
of this stock.
Chetan Shah: Okay.
K. Sridharan: So, it is not correct.
Chetan Shah: Okay.
K. Sridharan: We will be producing vehicles in the fourth quarter and also eating into the stocks.
Some of the 15-tonner vehicles that I mentioned which are sitting in stock, we will be able to use it.
Now, the issue is not so much about any stock that is not moving out.
Chetan Shah: Right.
K. Sridharan: It is a pipeline that we will have to keep filled up. On an average, we need to have at
least 12 days minimum inventory to keep the pipelines full, which in itself will mean I need to carry at
least about 5,000 to 6,000 vehicles.
Chetan Shah: Right.
K. Sridharan: On top of it, we know for certain and that is the reason why we have built up stocks in
the third quarter because our production cannot meet the fourth quarter sales requirement.
Chetan Shah: I understood.
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K. Sridharan: Even if the number that I mentioned, internally we are working even on higher figures,
the total is about 30,000, I may not be able to produce anything more than 26,000.
Chetan Shah: Right.
K. Sridharan: With a bit of a lurch, we may produce 27,000, but 26,000 vehicles is what one can
reasonably expect, which itself will average to more than 8,000 or 9,000, 8,500 vehicles.
Chetan Shah: Right.
K. Sridharan: So, essentially, the eating into the stock of 4,000 comes out of this arithmetic.
Chetan Shah: Understood.
K. Sridharan: And our need for building it up is always there. In fact, if you watch any of our last five-
six years, the volume or the inventory buildup in the last quarter would be significant to meet up with
the fourth quarter surge in demand.
Chetan Shah: Right. And sir one last question in terms of the competition. This time’s auto expo,
there were lot of existing and new players like AMW, like in terms of the looks and the technical
specification, had a decent product range lined up, so your internal assessment, you think that these
guys really be a very significant player going forward in the next two to three years. My contention to
ask this question is purely on the kind of capex program which we are sitting on for expanding our
capacity to 1,80,000, for the present about 100,000 numbers. So just wanted to have your internal
assessment on that.
K. Sridharan: No, if your question is to say that you know are you feeling confident that you know in
spite of such new entrants and good-looking vehicles getting into the market, are you confident of
going ahead with your capacity expansion and utilization of your facilities, etc. Our assessment is,
this is a game, we have been in this business for the last more than 60 years, so we know that
certainly the product that we are launching, the improvement that we are targeting both in the
engine and also in our cabins that we are coming up with, we believe that we should be able to use
at least 75% of our capacity addition that we are making in the next two years. Now, one has to
wait and see and time will test to say whether our assessment is right or not. But we are not taking
competition lightly. We are not taking for that matter say MW or any of the foreign MNCs that are
coming in, lightly. So we are positioning vehicles, for example the Irisbus is one example.
Chetan Shah: Right.
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K. Sridharan: Our positioning the 49-21 is another example. 35-21 again with the existing wheel-
base on the tractor trailer is another example of our assessment of the product niche that we can
claim in the market…
Chetan Shah: Right.
K. Sridharan: …and our ability to meet up with the performance standards both in terms of the
KMPL and also on the overload capability that these vehicles can meet, so this is the, what should I
say, it is our hardcore business, so we should be able to challenge, we should be able to meet these
challenges and increase our capacity utilization.
Chetan Shah: Right sir. Thank you. Sir, I am sorry, one last question. In terms of this trailer
business which we tied up last year with ANG, the ANG, the trailer, factory-fitted trailers with our
trucks, which we tied up with ANG Auto, in terms of the numbers, nothing has been seen in the last
nine months, so what actually went wrong in this entire exercise.
K. Sridharan: No, I mean your information is wrong.
Chetan Shah: Okay.
K. Sridharan: At least 400 to 500 trailers are being supplied by them.
Chetan Shah: Okay.
K. Sridharan: And it is being fitted. I mean, you know, that is the reason why we have been able to
supply the trailers. The point is that going forward once our Uttarakhand project is also in place.
Chetan Shah: Right.
K. Sridharan: We should be able to use those trailers in Uttarakhand itself and supply the trailers
fitted in Uttarakhand with the excise duty benefit.
Chetan Shah: Right.
K. Sridharan: Would make even further dent in the market. So, I foresee this as a very important
opportunity for us to capitalize going forward.
Chetan Shah: Thank you so much. Thank you so much sir.
Moderator: Thank you very much sir. Participants who wish to ask questions, kindly press *1 on
your telephone keypad. Next is a followup question from Mr. Singh from Lehman Brothers. Over to
you sir.
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Mr. Singh: Yeah. Sir, just one more thing. Wanted to know what is the price hike that we have
taken on an average?
K. Sridharan: In October, we took about 16,000. On an average, it will be closer to about 2.5% over
the year.
Mr. Singh: Over the year?
K. Sridharan: Yeah.
Mr. Singh: Okay sir, thanks.
K. Sridharan: Thank you.
Moderator: Thank you very much sir. Next in line we have Mr. Raj from Aim Financial. Over to you
sir.
Mr. Raj: Yeah, my query pertains to the tax rate. The tax rate this time around has been quite low at
20%, so wanted to know what has been the benefit that we have gained there?
K. Sridharan: That is the sale of the shares which suffered transaction tax.
Mr. Raj: What was the tax rate sir on that, if we can have that figure.
K. Sridharan: There is no tax levied on that because…
Mr. Raj: Okay, it is more than a year.
K. Sridharan: No, no, no. Yeah, it is more than a year.
Mr. Raj: Alright.
K. Sridharan: Yeah.
Mr. Raj: And, my second query was regarding your realization sir. You said you have taken a IRN
16,000 hike during the quarter. But the average realization for this quarter seemed to have gone up
more than INR 20,000 sequentially. So where has the incremental realization shown in.
K. Sridharan: I must correct two things. One, even though INR 16,000 has been taken, we could
not implement it. So, do not even give the credit of higher realization to this INR 16,000; that is
number one. Number two, the higher average realization is happening because increasingly we are
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selling fully built vehicles. What I would request all of you to look at is the percentage, metal cost as
a percentage of sale, which would be the key to predict.
Mr. Raj: Alright sir, thank you.
K. Sridharan: Thank you.
Moderator: Thank you very much sir. Next in line we have Mr. Amit from Motilal Oswal. Over to you
sir.
Mr. Amit: Hello.
K. Sridharan: Hi Amit.
Mr. Amit: Sir, just a request. Going forward, can you also share the numbers of fully built-up
vehicles against not fully built-up vehicles because that will give us a sense how this proportion is
moving in Ashok Leyland.
K. Sridharan: Sure, we will do that.
Mr. Amit: Okay, thank you sir.
K. Sridharan: Welcome.
Moderator: Thank you very much sir. Next is a followup question from Mr. Chirag Shah from Emkay
Shares. Over to you sir.
Chirag Shah: Yes sir, just on the tax rate, we have seen a significant increase in the deferred tax in
the current quarter.
K. Sridharan: Yeah, that is because of the capex that have happened. The depreciation has gone
up significantly Mr. Shah.
Chirag Shah: Okay, it is only on account of depreciation.
K. Sridharan: Yeah, the initial depreciation and this is what is being factored in the deferred tax.
Chirag Shah: Okay, okay, fair enough. And lastly, would it be right to assume that in fully built
vehicles, the margins would be relatively lower or the margins are maintained even in fully built
vehicles, because….
K. Sridharan: Right, it will be marginally lower.
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Chirag Shah: Margin would be slightly lower. So, what would be the kind of difference in a broader
basis.
K. Sridharan: Very difficult to…
Chirag Shah: Okay, fair enough.
K. Sridharan: It depends upon, if it is a tractor trailer, it may not be significantly low.
Chirag Shah: Okay.
K. Sridharan: If it is cabin-fitted fully built vehicle, the margins would be low.
Chirag Shah: So, that could have some impact on overall margins based on
numerator/denominator concept.
K. Sridharan: But, by and large, the trend is happening, you would see that metal cost as a
percentage would be a very good parameter to do that.
Chirag Shah: Okay, fair enough. Thank you very much.
Moderator: Thank you very much sir. Participants who wish to questions, kindly press *1 on your
telephone keypad.
K. Sridharan: I think we have exhausted all the questions.
Moderator: Yes sir. At this moment, I would like to hand over the floor back to Mr. Ashutosh Goel
for the final remarks. Over to you sir.
Ashutosh Goel: Thanks everyone for participating in the call and thank you very much Mr. Sridharan
for addressing all the queries of my colleagues. Thank you very much. Have a good day.
K. Sridharan: Thank you Mr. Goel. Thank you everybody. Bye