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Truck production costs set to rise on new axle load norms
Gopal Mahadevan, CFO, Ashok Leyland
Jul 20, 2018 | Source: Mint
We did take a call on the price hike. We were the only player to have taken a 1.5-2% price hike in April and that helped us neutralize the effect of increasing raw material prices. I must also complement our sourcing and manufacturing staff because there was a lot of astute planning in buying raw material also. There was some amount of bulk buying that we did to ensure that we were able to take advantage of lower prices. While chasing for volumes, we were also clear about two things. One, we were not going to resort to heavy discounting to achieve volumes and would pursue profitable growth. Two, we did not push credit into the pipe and into the dealerships to try and get a higher offtake. We wanted to ensure that we were managing the working capital very astutely. We still have Rs. 1,200 crore cash in the balance sheet. We ensured that our margins were better. So this has been the 12th or 13th sequential quarter out of 14, where we have had double-digit EBITDA margins. We will have to raise prices if raw material prices continue to go up. There is no other choice, because ultimately, you have to do business, and do it profitably as well. Hopefully, as some pundits have said, we could see some softening of steel prices in the second half of the year. If that happens, it will be helpful for the industry.
We would want to ensure that we have double-digit EBITDA margin for the full year. We have stated that as one of our core targets. We have long-term and medium-term targets for EBITDA margin, return on capital employed (RoCE) and debt to EBITDA. So we would want to ensure that we grow, we grow profitably, we generate cash and also gain high returns on the capital employed. All these aspects have to be factored in on the performance.
Market share for the current quarter is 30.2%. This is on the medium and heavy commercial vehicle segment; we have fallen by about 4.5%. But on light commercial vehicle (LCV), we have gained market share. So LCV has done wonderfully well. It has posted a 34% growth in volumes and we have moved from 15-16% and both products, DOST and DOST Plus, are doing wonderfully well, especially DOST Plus, which was launched about six-seven months ago. The volumes are also going up for the other two vehicles, Mitr and Partner. So, we are very positive about the LCV business. As far as medium and heavy commercial vehicles are concerned, we could have gained more market share by giving more discounts and pushing stock into the system, but we had decided to abstain from this strategy at all cost.
We had decided that we will have to grow this business profitably and, if we were to do that, we decided that we will have to let some other business go and walk away from certain deals. If we were unprofitable, it would have resulted in negative margins. The focus, at the end of it, is not just about a pure market share that is just one of the metrics. Usually, the tendency is to look at the metrics which don’t go well, but if you were to look at our volumes, they have grown by 60%. Our revenues have grown by 47%, our profit after tax (PAT) has grown by 233%. So, one has to look at the performance of the company on multiple metrics and not just market share.
The plan of the company is not to lose anything. The plan of the company is to grow profitably. The plan is not to lose market share, but to grow profitably, which means that we will take deals, which makes sense for the customer. The customer comes first, but it also has to make sense to us. There is a confluence of factors, which affect market share. The demand in north-south-east-west, the market share is a weighted average mix. But having said that, all I can tell you is that we will pursue growth. It is not that we want to not pursue growth. We will pursue growth, but we will pursue it profitably and the business has to generate cash.
I don’t want to pursue growth at the cost of generating cash or at the cost of profitability, because that kind of growth has no purpose. But believe me, our company has grown market share quite visibly over the last five-six years. We have grown from nearly 24-25% market share to 33-34%. We are very much on a trajectory. So, if you were to look at the trajectory of market share and market growth, we have been well above industry average and we will pursue that strategy. Rest assured on that. We may not be carry out a quarter-on-quarter performance analysis, because quarters do not explain this strategy of the company. What we look at is the company’s performance for the whole year, the medium-term. And, in those plans, let me assure you that we are not looking at ceding market share.
If we believe that gross domestic product (GDP) of India is going to grow, the economy is going to grow, that augurs well for the commercial vehicle industry. Like I mentioned, we will have to wait and watch how this new rules pan out. We are seeing only one part of the norm, which is saying that the axle load has been increased. The other part is whether the government is going to be very serious about ensuring that these are implemented. In an overload country like India you may also see certain segments of the industry witness growth purely because of these norms. But we will have to wait and watch. So to answer your question, I believe that 8-10% growth at the end of the year is very much possible.
I do not think that investment is going to be huge, but the cost of trucks will definitely go up. What is that number, we will have to wait again, because it is just two days since these norms have come. At this point, one cannot put a number to it specifically. However, I would say that the cost will definitely go up by anywhere between 2% and 3% because you will have to put in larger tyres. There will also be some changes that will be required for the chassis, the drive train and possibly the steering wheel. If it is going to be prospective, these changes have to be done to ensure that vehicles meet the norms and are safe. If the government decides to extend these norms to existing vehicles also, one must address the point of safety because if some of the vehicles are suddenly permitted to carry 15-20-25% or extra load, the safety of these vehicles will also come into question.
Besides, how the roads will get impacted is another point. But I am sure the government must be thinking through all of this before it provides clarity on the subject about applicability of these norms for existing vehicles also. I think that is very important, given that safety is prime to all of this. So when we are going to have these vehicles recertified, I am sure all players in the industry would want to ensure that these vehicles are absolutely safe and meet the norms completely. Last quarter witnessed very heavy discounting in the pursuit of volumes by players. So discounting continues to be very high. In some place even the credit is extremely high so there was a lot of intense competition in the market. However, one needs to choose the right deals to ensure that you are growing profitably.
Related Keyword
Automobiles
Margin
growth
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