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Edited Transcript of ASHOKLEY.NSE earnings conference call or presentation 11-Nov-19 4:30am GMT

Q2 2020 Ashok Leyland Ltd Earnings Call Hosted By Edelweiss Securities Ltd

Chennai Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Ashok Leyland Ltd earnings conference call or presentation Monday, November 11, 2019 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dheeraj Gopichand Hinduja

Ashok Leyland Limited - Chairman

* Gopal Mahadevan

Ashok Leyland Limited - Whole-time Director & CFO

* K. M. Balaji

Ashok Leyland Limited - VP of Finance

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Conference Call Participants

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* Binay Singh

Morgan Stanley, Research Division - Executive Director

* Chirag Shah

Edelweiss Securities Ltd., Research Division - Research Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Joseph George

IIFL Research - Assistant VP

* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

* Nishit Jalan

Axis Capital Limited, Research Division - Executive Director of Auto

* Pramod Amthe

CIMB Research - Head of India Research

* Prateek Poddar

Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity

* Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst

* Shyam Sundar Sriram

Sundaram Asset Management Company Ltd. - Research Analyst

* Sonal Gupta

UBS Investment Bank, Research Division - Director and Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Ashok Leyland Q2 FY '20 Earnings Conference Call hosted by Edelweiss Securities Limited. (Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Chirag Shah from Edelweiss Securities. Thank you, and over to you, sir.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [2]

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Thank you, Inba, and good morning, everyone. On behalf of Edelweiss, I would like to welcome you all to Q2 FY '20 Post Results Conference Call of Ashok Leyland.

Ashok Leyland is represented by Mr. Dheeraj Hinduja, Chairman; and Mr. Gopal Mahadevan, the Whole-time Director and CFO; along with other members of the team.

I would like to thank the management for taking their time out for the call. We'll start the session with opening comments from the Chairman and then we'll start with the Q&A.

Over to you, Mr. Dheeraj, for your opening comments.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [3]

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Thank you. Good morning, everyone. And thank you for your interest in Ashok Leyland. With me are Gopal Mahadevan; and Mr. K.M. Balaji.

At the beginning of the financial year, all of us were expecting FY 2020 to be a growth year driven by the prebuy before BS VI introduction. However, owing to a confluence of reasons, especially the weak economic sentiments, we have seen a decline in volumes. Q1 posted a 17% reduction in volume, but in Q2, the volume reduction was 53%. This was completely unexpected. As a strategy since we had gained market share in Q1, we decided to focus on reducing the total inventory in the system, especially that of the dealership at the cost of our market share as this was needed to ensure dealers do not have hefty interest payout. Thus, we saw a market share reduction in Q2 in domestic trucks. As at the end of June, the total inventory in the pipe was around 27,500 numbers and at 30th September, it was 18,200. In October, we have further brought this down to 13,200. We believe this is the right way to move forward.

At the industry level, I think inventories have bottomed out and I believe we will see the realizations firming up. It has happened already in October. While the monsoons have been good, they stretched beyond the expected time line and have also impacted truck movement and demand. Logically, all of this tells me, we should see some recovery, but we need to wait and watch.

At AL, we have started to reduce our operating overheads and this has helped in maintaining EBITDA margin better than industry and expectations. Even with steep falls in revenues at 48%, we have been able to post an EBITDA of 5.8% and a positive PAT. If we adjust the PAT for the exceptional charge of VRS, the PAT would be INR 84 crores and adjusted for tax.

While the situation does appear challenging, AL is making use of this opportunity to implement structurally superior measures, including cost reduction, productivity, new product development processes. This will make the company more resilient in the medium term.

The BS VI program is on course and I'm happy to share that we are the first OEM to be certified by ARAI across the entire M&HCV range. Our Mid-NOx strategy will be a key differentiator. The modular business program, which offers significant advantages to customers will differentiate us from competition and aid us in our cost of growing domestic business. We are redrawing our export strategy and have a much larger stable products to offer than before. LCV is also doing exceptionally well and continues to be accretive to AL.

After -- the aftermarket and customer solutions business can make a huge difference to AL's derisking and profitability. I believe we will benefit from the orders from VFJ in the fourth quarter, which will improve our margins.

I also feel that the economy is bottoming out and things should start to look up pretty soon. When that happens, I expect the demand to spike up sharply. We need to be ready for that change as well.

Before I hand it over to Balaji to read the volumes, I also wanted to share with you a key concern I'm sure many of you have had with regard to the appointment of the CEO. This matter was discussed in our last board meeting as well, and I can confirm to you that the new CEO would be in shape before the end of this financial year.

Thank you. I'll hand it over to Balaji.

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K. M. Balaji, Ashok Leyland Limited - VP of Finance [4]

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Good morning, everybody. First, I'll start with the industry volume. M&HCV industry volume for the quarter 2 was at 48,150, which was 53% lower than the same period last year. For AL, the volumes were at 14,637 numbers. This was against the 35,628 numbers last year, this was 59% down. Consequent to this, our market share was at 30.4% as against 35% last year.

And if you look at the half year level, the volumes for the industry was at 122,500 as against 190,800 last year, it was 36% lower compared to the same time last year. For Ashok Leyland also, the volumes were at 39,970, a shade lower than 40,000 levels as compared to 62,500 numbers last year. This was in line with the industry drop of 36%. Market share for Ashok Leyland was at 32.6%, same at the levels of last year.

On the financial side, for Q2, the revenue was INR at 3,929 crores as against INR 7,600 crores, a 48% drop. As against this, EBITDA was at 5.8% compared to 10.9% last year. PAT was at INR 39 crores as against INR 528 crores last year. PAT is after adjusting the VRS charge of INR 45 crores as indicated by our Chairman.

For the half year, revenue was at INR 9,613 crores as against INR 13,884 crores, 31% lower. And EBITDA was at INR 766 crores, which is at 8% compared to INR 1,501 crores, which was at 10.8% last year. PAT after considering the exceptional VRS was at INR 269 crores as against INR 949 crores last year.

With this, I will hand it over to Chirag for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Kapil Singh from Nomura.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [2]

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Congrats on a decent set of results under the tough circumstances. My -- I just wanted a small clarification. You mentioned about inventory. Could you also give us an indication that -- how are your retail sales for the quarter compared to the wholesale and maybe up to October?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [3]

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See, the market share has just answered this one. This is Gopal, Kapil. The entire market share is affected by the wholesales -- by our sales to dealers. So what happened was, see, frankly, while the newspaper reported there was a lot of stuffing of the pipeline, it was not a stuffing of the pipeline at all. In end of June, what all of us were expecting was that the Q2 and Q3 numbers, there is going to be a prebuy that will happen because of the government formation, there was an expected budget, the mood was pretty optimistic. So what happened is there was a pull from the dealers for the retails that are going to happen. But unfortunately, Q2 saw a steep fall of nearly 53% in TIV. So the dealers had inventory. So when our Chairman mentioned about an inventory of 27,500 in the pipe, it is actually the inventory at the company as well as certain dealerships. So what we said is we will not send any further vehicles to the dealers, but first help them to liquidate that inventory. So the retails were very good. I mean retails were comparatively good. I won't say [really it’s] very good, but the retails were very good, but we held back on the wholesale due to which you would have seen a squeezing of the market share. I hope this answers your question.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [4]

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Sir, I was looking for a normalized retail trend that has been there in the quarter and also what is the dealership inventory level?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [5]

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Well, I would say that, see, I don't have the numbers readily. But approximately, let me tell you that the dealer started with a very, very comfortable position. It's hardly about -- as I speak to, it's hardly about 3,000 numbers to 3,500 numbers, maybe about 3,500 numbers.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [6]

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Okay. And where was -- this has been at the end of June?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [7]

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This is -- no, no. 3,500, that was end of October as I'm talking to you.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [8]

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Okay, okay.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [9]

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The number was nearly about 8,500 numbers. I don't have the number readily with me, but it was pretty large. And it was -- now we noted, if you look at the average TIV, you see that TIV has dropped to such low numbers, really 50 -- more than 50% getting knocked out. So that is -- number of days when you calculate, it looks like very large. But if you look at the average TIV that has been there, it will be, over the last few months, the dealer inventory is not high. But when the demand came up so suddenly, the best thing to do was to ensure that the dealers are not stuck with the inventory, which is why we helped them to liquidate that. Because see, for them the main cost is other than the trucks, vehicle purchase is their interest cost. So we need to ensure that they don't keep having interest as a cost. The only way to do that is to help them liquidate the inventory.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [10]

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I would just add, whilst we exceeded market share in Q2, on a first half basis, for the first 6 months, we are still at 32.6%, which is more or less the same market share as where we were a year ago.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [11]

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Exactly, I think that's an important point here because we did exceptionally well in Q1 and then we used that as a strategy for ensure that we don't keep chasing market share and pushing inventory into the system.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [12]

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Sure, sir. Second question, sir. I just wanted to check on the new launches that you have across various segments, LCVs, M&HCVs and exports. And where are the areas in BS VI to assume that you would look to gain market share?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [13]

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Well, as we have said, we have been working on a modular platform, which effective from 1st April 2020 with the introduction of BS VI, virtually, every new product will have -- you'll see a new product, new platform and we are possibly the only one which have 3 different options of caps and an XDS as well. So what this allows any customer to do is actually customize the product for its utilization rather than taking something off the shelf. Of course, there will be some runner model, but apart from that, anyone can individualize the product based on their need. On the LCV front, we will be making an introduction and launching this towards the end of the financial year. And the new modular platform is coming in a right-hand drive and left-hand drive version. So for the first time, every model made in India would be possible to be sold in export markets as well.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [14]

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Okay. On the export side, if you could also comment what are you expecting because it's been pretty slow this year?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [15]

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Well, our traditional markets of UAE and Middle East in general, including Bangladesh, Sri Lanka, Nepal have been very slow. And as a result that has affected our international operation sales as well. However, we are seeing parts of the Middle East reviving, Saudi, the UAE, and there are some hints of improvement in the Bangladesh market as well. We are quite confident that a lot of the project sales as well, which we do in the African market would be coming through in the second half. So as a result, although for the full year, the volumes might not see the level of growth that we have forecasted. But going forward, with the new model from April onwards, we see a quite substantial growth in international operations. And the whole strategy is being redrawn accordingly.

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Operator [16]

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We'll take our next question from the line of Jinesh Gandhi from Motilal Oswal Securities.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [17]

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My question pertains to, firstly, on the CapEx side. So are we looking to reduce our CapEx? In the past year, you'd talked about INR 1,000 crores to INR 1,500 crores. So do we stick to that?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [18]

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Are you looking at only this financial year, we have...?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [19]

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This financial year.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [20]

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We have brought it down from what we forecasted at INR 2,300 crores to somewhere closer to INR 1,800 crores at the moment. And we're still looking at further reductions in this as well.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [21]

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Jinesh, just as you mentioned [up here], our guys are really working overtime in reducing the CapEx. But at the same time, typically what happens is when the industry volumes are down, everybody is worried about CapEx. And then when the industry volume starts to pick up, everybody is worried that we have not put in sufficient CapEx. So we have to balance it out to ensure that the key things like the modular business program, BS VI, Phoenix project, [shortly] expected electric vehicle and [wheel balancing equipments]. We shouldn't actually start it off because what happens is if there's a demand that spikes up, we suddenly find that we are not able to service that demand. And BS VI and MBP are something that we will have to complete because there is a regulation change. But rest assured that we are looking at every rupee before it is getting spent and we have hardly spent any CapEx over the last 5 years. So this is not really catching up. But this is only on regulation change that we are investing quite a bit as a new capability. The entire Phoenix platform will be -- the entire Phoenix platform is going to bring in a whole new capability to us because that is going be in the 3 to 5.5 months. So we're going to see a huge accretion in our LCV business.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [22]

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Sure. So just to clarify, the INR 1,800 crore is for FY '20, but then first off, you've just spend about INR 550 crores. So do you expect cash flow to happen in the second half in a big way?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [23]

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We expect that, that is a deliberate thing because you did delay so that, what happens is you are saving off the interest costs. I think our manufacturing, planning guys have done a wonderful job in ensuring that they have been able to -- even a month's delay is not delay once put back is useful because it helps in saving interest and cash flows. So that's what we're doing. But as the Chairman mentioned, even this INR 1,800 crores we are really looking at whether we can shave off -- I'm not wanting to give a forward-looking statement, but I will not be surprised if another INR 200 crores to INR 250 crores deficit.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [24]

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Okay. Understood, understood. Second question pertains to the cost saving efforts, which we have been indicating and that seems to be reflecting in 2Q as well. Can you first quantify what kind of savings you would have seen in the second quarter? And going forward, what kind of savings should we look at?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [25]

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Well, actually, I've mentioned, Jinesh, the overall year, we are expecting the cost savings to exceed more than INR 500 crores. So in the first half itself, I think the [ratability], this is a very complex calculation. But what has been addressed is anything, which is not vital has been taken off the books. So no essential or desirable spends are being happening. And we would have, I think, saved nearly about INR 200 crores to INR 230 crores in the first half itself.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [26]

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Okay. Okay. And this would be primarily and largely related to fixed cost or they...?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [27]

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Yes, it is largely -- it is -- other than VRS so if you look at it, we also had a VRS happening. And over and above that, we had all the fixed cost and then fixed cost even at plants. Then distribution cost, we have redrawn our distribution. I mean this is not something that we did as a reactionary measure as you are aware. We've started it at the beginning of the year because this was a planned program for us to build our capability. That the year became a little tough was coincidental, but that has helped us to shore up our margins a bit.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [28]

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Sure. And last question on the new tax regimes. It seems we are still going ahead with the older one. So can you update us on that what is your thought process and....?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [29]

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The reason is it not because, see, what happens is the new tax regime, but to keep it very brief, is extremely useful where you don't have either deferred tax assets or you'll have MAT carry forward. But if we have a MAT carry forward, then it makes sense -- financial sense for us to continue with earlier thing to get the benefit of the carryforward because ultimately it's cash payout, right? So we are looking at it that way. See, ultimately while the EPS is important, we are acutely aware of that. We are also looking at what is the benefit that we'll get from cash flows.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [30]

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Sure, sure. So effectively at least in foreseeable future, we will be on the old regime?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [31]

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I believe so, at least for a couple years possibly.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [32]

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Okay, okay, sir. Great.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [33]

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But I don't see that as a concern at all because I think this requires for some very astute planning and I think that we are doing what is right.

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Operator [34]

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Our next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [35]

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So 2 questions. One is, obviously, on your export strategy. You talked about project Phoenix and left-hand drive and right-hand drive capability getting launched. Is it fair to say that next year, basically, we would see higher growth rates in exports versus the domestic industry growth? Is that a fair understanding? That's question number one. Secondly, if you could talk about the role of Mr. Vipin Sondhi because he's been appointed as an additional director? And lastly, sir, you gave out inventory numbers for the month of June as well as for the month of October. But if I were to just think about it, if I were to add the month -- add the inventory of June, add the wholesales and then back-calculate, retails are far substantially higher than wholesales. Just wanted to ask you if that understanding is correct or not. So 3 questions from my side.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [36]

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Okay. This is Gopal. I'll answer the last one and then hand it over to the Chairman. Your understanding is absolutely right, which is what we said while on a YTD basis, our market share is -- we have been able to maintain our market share. We gained market share in Q1, we ceded a bit in Q2 purely because we wanted to ensure that the retails are higher than the wholesale so that, that is the only step that will help reduce inventory at our dealerships. So that was our planned strategy. Now I'm in a very, very comfortable position as I speak to you in October.

Now I'll just hand it over to Chairman.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [37]

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Regarding your first question on international operations, again, your understanding is correct. We are looking at higher volumes effective April onwards.

With regard to the role of Vipin Sondhi, he will be joining the corporate office of the group in Mumbai and he has been appointed as a director on the Board of Ashok Leyland as well. With his experience and as a director, I see him mentoring the management and also helping on the long-term strategies of the company. Of course, we've also had Mr. Saugata Gupta also joining in. He comes with a lot of experience, again, with the FMCG by branding, marketing, a lot in HR. So I think both of them together will substantially add value to the Board of Ashok Leyland.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [38]

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And lastly, sir, if I may ask. The cost-cutting initiatives, which we have taken, are they sustainable in the future in the sense because this was a quarter where we saw brutal competition in terms of discounting and all? Yet we've been able to control costs in a very substantial way. So just wanted to understand from you how sustainable are these cost-cutting initiatives, which have taken place? And should I assume that with the modular program, which would come in and as you've guided earlier that you would build on to these cost-cutting initiatives?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [39]

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Yes. I think this is very much an ongoing exercise throughout. And as Gopal was mentioning, we started this right at the beginning of April itself. So which was -- I think it has stayed as well in that respect. And of course, this is getting extended into the product as well to try and see wherever the cost reductions can come in. And of course, we believe as a result of this and as a result of the new product, market share should also see growth in the coming quarters.

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Operator [40]

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Our next question is from the line of Pramod Amthe from CGS-CIMB.

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Pramod Amthe, CIMB Research - Head of India Research [41]

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First question is with regard to government initiatives to revive some demand on buses. What's your sense in terms of when this can actually get realized into sales? And what are you hearing from government other than the bus side?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [42]

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Well, one of the initiatives we've taken is on the electric buses, which is under the same tool program of around 5,600 electric buses, and that is already under implementation. The tenders are out and the bids are supposed to close by the end of this week and we've also participated. As we said, we were a little slower in the first round as we wanted to test the vehicles and products. Now we're a lot more confident and have much more clarity on the economic model of this as well. So we have participated well, and we look forward to winning some tenders on this.

With regard to -- there was a first-time test announcement recently with the government looking to incentivize the purchase of close to 25,000 buses, there, we have not heard much beyond what's been in the press.

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Pramod Amthe, CIMB Research - Head of India Research [43]

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So in that sense, since you started late, would that be substantial in the second half to make a difference to you guys as compared to industry?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [44]

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What do you mean by started late? In which sense?

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Pramod Amthe, CIMB Research - Head of India Research [45]

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As you indicated in EVs, you started gradually to test your capabilities.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [46]

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Our products have been ready, but we did not feel that the economic model under the first same model, they were not looking very attractive. And that's why we have bids, we have buses operating in Ahmedabad already. And we are the only new ones who have 2 solutions, which is a battery swap and a fast charge. So now we are able to scale up very quickly. And since the products are tried, tested, I don't think we will be -- we will not be of any disadvantage to anyone else.

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Pramod Amthe, CIMB Research - Head of India Research [47]

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Okay. And the second one is with regard to your modular platform plans, with the rollout of modular platform in BS VI, how do you see structurally your business changing in terms of breakeven points? And hence, how will you be able to handle the cyclicalities in a better manner in the next up or down cycle?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [48]

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Well, basically, the modular program have benefits both at the back end and the production system, where we're dealing with fewer parts. So as a result, the productivity would see improvement. And from a customer perspective, as I explained, it allows them to really choose the product as they like. So as a result, we feel that these products would be far more attractive in terms of a proposition to the customer and they will have the ability to look at various versions depending on the level of sophistication they require on the product.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [49]

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I think, just to add, the modular business program is something that you will see benefits in the short to medium term. The basic thing like Chairman mentioned is it reduces the complexity in the manufacturing. You're going to have much, much lesser number of parts, which means that you'd get the benefit of aggregate purchasing, you'll reduce the number of vendors. The manufacturability itself becomes a lot simpler. And at the customer end, what happens is he can choose the vehicle that he wants, typically on a hub application segment basis. And that's why it helps because it's a differentiator. And we said that we were going to take the big bite now when we're moving to BS VI, let us do the modular design also parallelly because otherwise to do it in 2 steps is a highly time-consuming and expensive process. In fact, if you notice, in the latest design that will be coming out, I mean, the similarity between the various truck models will be the same. Everything is going to be on the right-hand side, including key aggregate, et cetera. So that the repair cost, the ease of repair, the consistency of repairing, the serviceability, everything changes with the truck.

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Operator [50]

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Our next question is from the line of Mihir Jhaveri from Avendus Capital. There seems to be no response from this line.

We'll move to our next question from the line of Nishit Jalan from Axis Capital.

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Nishit Jalan, Axis Capital Limited, Research Division - Executive Director of Auto [51]

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Congrats on a good set of numbers. Sir, my questions are firstly on the industry front. I just wanted to hear your thoughts as to how are you looking at this industry decline? As in what part of it you think is cyclical? And how much of this you think is a kind of structural driven by the fact that axle load norms were changed? And we also saw some faster turnaround in transit time after GST. So just wanted to hear your thoughts on this.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [52]

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Yes. I would say that you should look at the market in different segments. So the axle load norms, GST has affected the long-haul vehicle where they're seeing the turnaround time much quicker. But on the other hand, if you look at the passenger buses, the demand is fairly stable. ICV is seeing -- has seen the lowest decline and the market continues to grow in that segment. And when you look at tippers, we feel the market will revive very slowly going forward as well. So the long haul is the one that you might consider has seen a structural change. But it is then more than compensated by the other segments, and also LCV is looking at revival and the volume should be higher as well as you see the e-commerce business increasing. So the hub-and-spoke model that other countries have adopted is really coming into play over here as well.

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Nishit Jalan, Axis Capital Limited, Research Division - Executive Director of Auto [53]

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Okay. And sir, my second question is in the gross margin front. Despite the fact that industry volumes are down so much and we were -- what we understand is that discount levels had also gone up significantly. Despite that, we have seen an improvement on a sequential basis. Just wanted to understand how much of this is because of lower commodity prices and how much of this is because of maybe pickup in non-vehicle segments?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [54]

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You're talking about the profitability?

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Nishit Jalan, Axis Capital Limited, Research Division - Executive Director of Auto [55]

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On the gross margin front, yes.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [56]

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Yes. You see that one of the cause, obviously, we have had, I would say, 3 factors which have impact -- 4 factors which have impacted the profitability of the company. The first one is the significant reduction in volumes. So that has actually deleveraged the P&L. So we had a problem -- I mean, we have a challenge there.

The second one is the discounting levels continue to be high. So the -- it's been increasing over the past 2 quarters and that has again impacted margins. What was favorable was the commodity price increases -- I mean, decreases which happened, which kind of helped to kind of take off some of the edge off of the discounting. But finally, for us, what has been helpful is the middle line management due to which we have been able to post the EBITDA that we had, even with nearly a 50% erosion in top line.

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Nishit Jalan, Axis Capital Limited, Research Division - Executive Director of Auto [57]

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Okay. And sir, just lastly, you highlighted that CapEx will be higher this year because of the technology-related spend. So should we assume that the CapEx levels will come down significantly next year onwards?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [58]

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I believe so. I mean unless there is -- we're seeing good growth, et cetera, I don't think there's going to be a significant amount of CapEx that will come out. We'll let you know at the end of the year. But the predominant part of the CapEx will happen in the current year. Unless we are able to defer the cash flows out to the next quarter -- I mean first quarter of next year, but otherwise, CapEx has to be ready for our BS VI, for our modular program. Phoenix will be launched very -- as per schedule. We have -- as Chairman mentioned, we are participating in the EV tenders so we need to have some amount of CapEx there as well. But all of this is necessary for us to be sustainable.

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Nishit Jalan, Axis Capital Limited, Research Division - Executive Director of Auto [59]

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Okay. So next year, CapEx should come down?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [60]

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Yes.

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Operator [61]

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

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Binay Singh, Morgan Stanley, Research Division - Executive Director [62]

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Just a clarification on the earlier question. When you said discounts, they were quite high in the second quarter and your retail sales were also a lot higher than wholesale. So is it fair to assume that discounts run on retail, whether the business runs on wholesale, so discounts would have been disproportionately high and your P&L this quarter end would have dragged down profitability?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [63]

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Well, it is a yes and a no in the sense that what happens is that the retails are happening, our margins are impacted by the wholesale, right? The retail to the dealers and the dealers do the retail. Now what is -- where do you possibly need to kind of respect what you have asked is ultimately the dealer cannot sell at a huge loss. He cannot buy a vehicle at 100 and sell it at 80. We will admit it's a straight cash flow. So in some way or the other, we will help at either walk away -- ask him to walk away from the deals or we will have to ensure that he is compensated for the lower realization that happens on the retail. So this quarter has been a mix of both. So while we did push for liquidating the dealer inventory and the total inventory in the pipeline, we also wanted to ensure that we're not losing money when sales are made, which means -- I mean I can't sell trucks at a price lesser than my variable cost. So we needed to be very, very careful about that. And we did let some of the deals go because as you folks are aware, we don't believe in selling trucks at losses. That's not sustainable. It's not good for the company. It's not a good practice either. So we were, in the past, if you notice some quarters, we have ceded share, it was a deliberate setup because we didn't want to sell trucks at a loss. And that's what we did this quarter as well. But more importantly, like both Chairman and I mentioned, our focus was in reducing the dealer inventory so that it improves the sustainability in truck markets.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [64]

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And any number you would share on discounts or the percentage of sales this quarter versus like same quarter last year or more normal quarter?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [65]

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Well, I can. So the overall discount per vehicle, if you were to look at it in the current quarter, was something like about 5 -- nearly about 5 lakhs and 5.25 lakhs per truck. These are very, very average numbers, right? It doesn't mean anything. But in the same quarter last year, it was about 4.2 lakhs. So we have an additional 1 lakh of discounts happening. But having said that, of course, the material costs have also come off, but you can see that there is a pressure, but you know there is a pressure in the industry to perform. But we have been very, very careful about it. Whether it is discounting or whether it is financing, we certainly are looking at growing our share, which we did in first quarter. We are maintaining our share as on a YTD basis. We had a strategy behind this whole thing that we have done in Q2. But at the same time, we are clear that we will pursue -- continue to -- we will pursue to grow our market share but we will also ensure that we are doing it at reasonable levels.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [66]

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Right. And just another question when you talked about CapEx falling down next year. Any number that you would share where you see the percentage of sales can be more like a sustainable level of CapEx for next 2, 3 years? Because like this year we are seeing a lot of bunching up of expensing happening.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [67]

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No, but this is an industry-wide phenomenon. This is not to Ashok Leyland. If you were to look at competition, I can't quote them. I can't quote them. But specifically, if you look at some of the CapEx that has been happening over the last 2 to 3 years in competition, it's significantly higher than what we have been doing. See, what our team -- and I must credit our manufacturing and project planning team here is they have been improving the productivity of existing assets significantly. In fact, the very same -- if I look at the conference call transcripts of March '18, even to the extent of September '18 and even January '18, the concern that investors had was are we investing sufficiently for growth? And are we actually getting into a capacity bind? And then when this -- of course, when the industry has fallen off, people are concerned whether are we overinvesting. We are not at all overinvesting. Let me assure you that, we are investing what is right for the business and what we have to build in capabilities. And we are doing exactly that. In fact, we are trying to see how much can we really defer the cash flow so that it kind of optimizes the whole thing. Next year, yes. There will be a reduction in cash flow rate -- I mean it’s ratably, but what that number is, I'm not able to give you. Rest assured, my dear friends, that we will continue to pursue market leadership. There's no market share growth. We are not in any way ceding anything. But at the same time, we have to do it in a manner which is good for the company. And we will not be overspending on CapEx. We will be very careful about spend. Our debt-to-equity ratio is very, very comfortable as of now. And we will be -- we are kind of monitoring the whole situation very, very carefully even as we are doing other things like driving productivity, we have had a VRS, we have had -- we are looking at middle line cost management, we are looking at working capital management. So there's a lot of action that's happening in the company.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [68]

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And just lastly on BS VI, what sort of mixed changes do you expect, if any, after BS VI? Do you think some segments will sort of get -- like, for example, LCV price hike could be more than M&HCVs or anything or on any of other segment changes that you see happening post BS VI?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [69]

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Okay. I don't think there will be any change in the mix because ultimately whether you are at BS IV or at BS VI, what matters is the application for which the vehicle is going to be used. So a long-haul vehicle will continue to be used for long haul and ICV or an LCV used for their relevant applications. So I don't believe that there will be any mix change that will happen on account of BS VI.

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Operator [70]

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We'll take our next question from the line of Joseph George from IIFL.

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Joseph George, IIFL Research - Assistant VP [71]

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My first question was on how retails are doing. So you did mention that retail in the quarter was higher than wholesale. Could you give us an indication of how retails are on a year-on-year basis? Because I think that's much more relevant than how retails were versus wholesale in the quarter. And related to that, could you also indicate whether the production cut that you talked about for the month of November is from 12% to 14%, whether that's an indication of how retails are, given that you have indicated that inventory is now at a comfortable position?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [72]

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Well, all I can tell you is that the retails were ratably better in terms of sequential months because what we can't measure is again the same quarter last year. Because what happens is we don't have, first of all, an overall industry-wide market share on a retail basis.

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Joseph George, IIFL Research - Assistant VP [73]

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So Y-o-Y growth, sir.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [74]

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Yes. So all I can tell you, I don't have the number readily with me. But obviously, that would not have been a growth over the same quarter last year because, last year, you will understand the total industry volume has come up by nearly 53%. So that's a huge number. It's not a 10% differential. Because a 10% differential and if we adopted the same strategy, let me assure you that our retails would have been much better than the same quarter last year. But the retail this quarter would have been lower definitely because the demand has come off. See, it is not only here, it has been in fast cars, it has been in 2-wheelers, it has been a whole sector of industries. You've also seen that the general GDP growth has come off for about 5, 6 quarters. So there's a larger structural issue that has just something to do with CV industry alone. So we hope that the structural issue will correct itself because when that happens, you'll actually see demand going up.

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Joseph George, IIFL Research - Assistant VP [75]

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Okay. So as things stand right now, do you have some visibility on when you expect to see some kind of a turnaround? Because the commentary that came from some of the other OEs in the space and related component players was the visibility is really low.

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [76]

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It's very difficult to predict at the moment, but there are also indication that there could be some splurge of a pre-buy, even if it's short lived for 6 to 8 weeks. And so at the moment, it's difficult to predict. But we are making sure that with our production flexibility, if there is an upturn, we should be able to meet that.

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Joseph George, IIFL Research - Assistant VP [77]

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Got it, sir. Sir, the second question that I had was on your views on the scrappage policy. So a lot has been written by the media and by some of the government agency about the scrappage policy. Could you give us a sense of your understanding of what kind of a setup do we currently have in terms of ability to scrap vehicles countrywide? And how long will it take for an ideal setup, a big network, to be put up?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [78]

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Yes. I think the infrastructure is yet to be set up fully, including the -- first one is a collection of the vehicles. The first one is the instrument itself, whether it will come as a warrant which can be tradable. The second one is how do we get those vehicles to the parking yards or for the scrapping yards. How the scrapping equipment is going to be done and how is it going to be scrapped. I know there are a few companies who have started on this. I think it will take about 6 to 12 months before we have some significant improvement in the process. But having said that, once it starts happening, I believe that there'll be benefit that will come out for the industry. Because typically, when vehicle scrappage starts, there is a tendency for even the large fleet operators to start using the mechanism and the financial benefits of getting newer vehicles because the end users, let us understand, we are also becoming very savvy in terms of safety, environment, pollution, performance, on-time delivery and logistics, reducing logistics costs overall.

And lastly, most importantly, today, the trucks have got a lot more tech than what possibly a BS II vehicle will have or a BS III vehicle will have. So from an end-user perspective and a customer perspective, which is the industry, whether it is FMCG or chemicals or any of that industry, there is a positive pressure on monitoring the vehicle and also reducing supply chain costs. When that happened, there will be a tendency for the fleet operators to scrap and get new vehicles. I mean that is a calculated guess that we're making at this point in time. But that can happen only when we have the infrastructure, which I believe can take 6 to 12 months before it gets -- the full impact of it can be felt.

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Joseph George, IIFL Research - Assistant VP [79]

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And the last question was, do you have a sense of the system-wide inventory at the industry level? You mentioned you also have about 13,000. But for the industry as a whole, do you have some idea?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [80]

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I just want to clarify, it is not ours. It is ours plus the dealers. Our inventory, our company is investing significantly lower. But I wouldn't have an idea about the industry-wide levels. But when we -- when folks are interacting, what we know generally is that the inventory levels are at pretty low levels currently.

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Operator [81]

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Our next question is from the line of Sonal Gupta of UBS Securities.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [82]

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Just 2 related questions from my side. So sir, just one thing was like last quarter, you indicated the average discount of 350,000 to 400,000, and this quarter it's has gone up to 525,000. So I think that's what a couple of people have asked before me, that still our raw material cost to sales have actually improved on a quarter-on-quarter basis to 70.1. So could you sort of explain what has helped the raw material cost despite the higher discount?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [83]

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Well, that's why I said you see our -- what has happened is, first of all, I don't know whether I said 325,000 to 375,000. I thought last quarter, I indicated the number at about 425,000 or so. Very clearly, there has been an increase in the discount in the current quarter. What has happened is 2 things, which has helped us to look at raw material prices as a percentage to revenue. The first one has been the decline in steel prices. The second one is the judicious mix that we have had. So we continuously keep working on the mix and ensure that we are able to get our margins up a little bit. And we do that at customer level. We do it at segment level. We do it at geography level. So these are 2 large reasons why we have seen the raw material costs as a percentage to sale be better.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [84]

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Sure. And sir, my other question was on really again on the BS VI transition, really speaking. So like you've said, that inventory for you as well as for the industry has come down to low levels. So how do we see this panning out from here? Do you think that Jan, Feb, March, if there is a pre-buy, we can cater to that? Or I mean, I've heard some things like even people saying that you will have to sort of pre-book and then you will get deliveries in Jan, Feb, March. So how do you see this? I mean, can we maybe have a pre-buy or it will be all based on bookings and delivery then?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [85]

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No. I think there can be a pre-buy if there is demand. Then I think all the OEMs will be ready to service that. And I mean Q1, with the new technologies, BS VI, could see some slowness in the system once again. But after that, I think things should revise pretty well.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [86]

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Sure. And lastly, if you could just share what percentage of the revenues came from the M&HCV this quarter. I mean like you -- or I can take that off-line later on?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [87]

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Balaji, can you share the number?

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K. M. Balaji, Ashok Leyland Limited - VP of Finance [88]

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Yes, the revenue for the quarter, for the domestic truck, it is around 45%. For the buses, it is around 13%.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [89]

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Okay. And would you have major from defense or other spares?

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K. M. Balaji, Ashok Leyland Limited - VP of Finance [90]

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Defense, the spares -- exports is again 12% this quarter. And light commercial vehicle is 13%.

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Operator [91]

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Our next question is from the line of Raghunandhan from Emkay Global.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [92]

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My first question was, can you share some details on the Phoenix model on tonnage and possible volume expectations? Secondly, can you highlight plans on the network expansion? And thirdly, just a clarification, tax rate, what should be worked with for the year?

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Dheeraj Gopichand Hinduja, Ashok Leyland Limited - Chairman [93]

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On the Phoenix range, we are not in a position to disclose anything at the moment. We will be doing a launch before the end of the year, end of the financial year. At that time, we'll be providing, of course, all the details and the segments that we'll be competing in.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [94]

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Yes. See, as far as the tax rate is concerned, we'll let you know because what happens is the tax rate comes in based on your estimate about what the advanced tax is going to be and whether that changes quarter-on-quarter. But what we are not doing and that's not a negative at all because we are not taking the new rates, as I mentioned earlier, because we have carryforward MAT credits to be used. As far as network expansion is concerned, I mean we have not -- I mean, while we've been kind of -- our teams are working on looking at the territories, seeing greater penetration happening. So we are doing a whole analysis on which are the stars and which are the tails in terms of network distributors and then seeing how do we add both service and spares to existing sales unit. We have not really significantly been increasing network because beyond a point it can yield negative returns because there should be sufficient scope for a dealership to sell. But at the same time, we are changing the composition of both what we call as 1S, 2S and 3S. 1S is sales, 2S is sales and service, 3S is sales, service and spares. So that has been actually undergoing a lot more because what we want the dealerships to do is to augment their vehicle sales revenue with more service revenues and spares revenues.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [95]

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Understood, sir. I mean debt has increased in H1. Shouldn't it reduce by end of the year? How do you see that?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [96]

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Well, I think that we will continue possibly maybe at the same level by end of the year. That's my expectation based on forecast. Because cash flow is coming not only from working capital, they also come from the P&L. So hopefully, if the P&L is better, we would see the absolute debt levels going down. But we have been very efficient in borrowing and ensuring that we do a judicious mix of both short term and long term and ensuring there is no asset liability mismatch.

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Operator [97]

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Our next question is from the line of Shyam Sundar from Sundaram Mutual Fund.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [98]

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Sir, on the BS VI transition itself, will we have any sort of a hard stop for BS IV production capability? And I mean given the challenges around fuel availability, how do you see retail happening in the last couple of months in the fourth quarter of this year? If you can just share your thoughts, that would be very helpful, sir.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [99]

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Yes, 2 things. One is there is chassis sale and there is fully built vehicle. So fully built vehicles, I think, will extend almost to the last month because there is a -- we have to ensure the clarity that we have to get is whether the vehicle has to be done at a temporary or a permanent registration. Of course, we will be compliant with law completely and will ask our dealers also to be compliant with law. But the point is that fully built vehicles will go on to the last month. As far as chassis sales are concerned, that we will -- what we call (inaudible) structures. I think it may go on until about mid-February or so because that will allow time for people to build the vehicle, build either the cab or the body. But if there is a sufficient demand, see, all of this is a little bit of forecasting, okay? There is no -- nothing that we can absolutely state that this is how things will happen. So we've kind of now reduced inventory. We'll see if the demand goes up, we may build up marginally but then not at significant levels that will endanger our P&L. There's also a specific team that is working on the crossover from BS IV to BS VI. We are reviewing that on a weekly basis. We are seeing what is the level of inventory that we have, how do we liquidate it. It's a very, very complex, I would say -- it's a very complex algorithm but we are on all fours on it.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [100]

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Okay, sir. That is helpful, sir. Sir, just continuing on the previous question. Are we seeing any green shoots for prebuying at any segment as we stand today? Maybe we are hearing, as you also mentioned, there's some very large bus order that the government has come through. Will all this be executed before BS VI on the buses? And on the truck sale, are we seeing any prebuying in any segment or any green shoots there?

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [101]

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Well, on a lighter note, the monsoons have been good, so hopefully the green shoots will start because we require good rains for plants to grow. But having said that, what I would say is that the inquiries and financials and NBFCs have been much, much higher. And I believe that the larger bags and the larger NBFCs, the top 5, 6, 7 of them are lending to financial -- I mean, to commercial vehicles. So that's an important business for them. I think -- I mean at the moment, it's very difficult to state. I think that freight rates also, despite all these challenges, freight rates I believe have been predominately holding steady and that's a good thing. You see the 3, 4 things that we are counting on is like this: why do we say that possibly the best is behind us -- I mean, the worst is behind us is because, one, the monsoon has been extended. The second one is the continued onslaught of negative news also seems to have beaten off a bit. The inventory levels of the industry have come down to significant lows. So hopefully, with all of this, that if the economy were to start reviving and then there has been some measures by the government in terms of reducing corporate tax rates and they have also been saying that they will be introducing other measures to revive the economy. If demand does pick up, then you are going to see freight transportation going up because even retail, I am not talking about truck retails, overall sales even at consumer level including shopping malls, FMCGs, various personal products, personal care products have all come off a bit. Now if that starts to go up, logic demands that freight will have to move. And if that happens, then you're going to see demand going up. So that is why -- I mean that is the perspective of which we are saying that we possibly feel that the worst is behind us and things will start improving. But we will get greater clarity in the next quarter.

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Operator [102]

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Ladies and gentlemen, that was the last question. I would now like to hand the floor back to Mr. Chirag Shah for closing comments. Over to you, sir.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [103]

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Thank you, Inba, and thank you, everyone, for joining the call. Would also like to thank the management for giving us the opportunity. Have a great day, everyone. Thank you.

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Gopal Mahadevan, Ashok Leyland Limited - Whole-time Director & CFO [104]

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Thank you.

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Operator [105]

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Thank you. Ladies and gentlemen, on behalf of Edelweiss Securities Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.