Ashok Leyland Limited (ASHOKLEY) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Ashok Leyland Q1 FY '26 Earnings Conference Call hosted by Axis Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishit Jalan from Axis Capital. over to you, sir.

Thank you. Good evening, everyone. Welcome to Q1 FY '26 Post Results Conference Call of Ashok Leyland. We are pleased to host the senior management team of the company today. We have with us Mr. Shenu Agarwal, Managing Director and CEO; Mr. K.M. Balaji, CFO; and also the Investor Relations team. I'll now hand over the call to the management team for the opening remarks, post which we can have the Q&A. Over to you, Shenu.

Thank you, Nishit. Good evening, ladies and gentlemen. Thank you for joining in and for your trust in Ashok Leyland as always. I am pleased to share that we have had yet another quarter of remarkable performance with highest ever Q1 revenue, EBITDA and PAT. Our net profit in Q1 FY '26 was at INR 594 crores, higher 13% on Y-o-Y basis. Revenue was at INR 8,725 crores, higher by 1.5% and EBITDA at INR 970 crores, higher by 6.4%. EBITDA margin was at 11.1%, higher by 50 basis points over Q1 of last year. Our cash position net of debt continues to be positive at end of Q1 at roughly INR 800 crores. At end of the same period last year, our net debt was INR 1,200 crores, reflecting a swing of approximately INR 2,000 crores on Y-o-Y basis. Our MHCV market share, excluding defense and EVs in quarter 1 this year improved to 31.1% vis-a-vis 29.8% during the same period last year. The 0 to 7.5 LCV VAHAN market share also improved to 12.9% during Q1, which is 120 basis points improvement on Y-o-Y basis. Our focus on product premiumization, cost leadership and service excellence are helping us deliver improved profitability while growing our market share. This corroborates well with our strategic imperatives of profitable and sustainable growth. While the domestic MHCV industry volume in Q1 declined by 2%, this was on a high base of last year, wherein Q1 last year, the industry volumes had grown by approximately 10%. Despite decline in the industry volume, Ashok Leyland domestic MHCV volume, excluding defense, grew by 2% to be at 25,641 units for Q1 this fiscal. Ashok Leyland domestic LCV volume was at 15,566 units, higher by 1.4% Y-o-Y. LCV VAHAN sales was at 15,436 units, higher 8% Y-o-Y. Our export volume was at 3,011 units, higher by 29% on Y-o-Y basis. Our home markets outside India with GCC, Africa and SAARC are going well despite all the geopolitical uncertainties. Ashok Leyland products are gaining increasing acceptance in these markets with our approach of developing strong local presence and building products suiting the local requirements. Our non-CV businesses are also growing as per the plan. Our aftermarket revenues were higher 8% Y-o-Y and revenue from Power Solutions business was higher by 28.5%. Our defense order book and tender win pipeline is stronger than ever, basis which we are confident to post a double-digit revenue growth in FY '26. Material cost as a percentage of revenue for Q1 was at 70.6% at the same level as Q4 FY '26 -- '25 and 1.6% lower than same period last year. This was a major achievement given the material cost pressures created by steel safeguard duty and tariff volatilities. This was achieved by our continued focus on material and other cost savings, along with better price realization and a healthier model mix. As mandated, we introduced ACs across our product lines in Q1. The migration was smooth and the entire operations and supply chain was fully aligned in the transition. To offset potential impact on mileage from the AC introduction, we introduced Ashok Leyland's new i-VAC system, which is Intelligent Vehicle Acceleration Control system in many of our products to improve fuel efficiency. We are preparing to launch a slew of new products in the balance of the year in both MHCV and LCV segments. These includes our foray into 280, 320 and 360 horsepower tippers, tractor trailers and multi-axle vehicles with industry best peak power and torque, heavy-duty aggregates and a host of other premium features. We are also preparing to launch our first offering in the LNG segment later this year with multiple models catering to different applications. On the anvil are also our upgraded 13.5-meter bus and an entirely new 15-meter bus with a very unique value proposition. We shall also be unveiling a bi-fuel product in the LCV range to cater to the demand in the large metros. Many upgraded products for our international markets are also slated for launch this year. Our e-trucks, both on BOSS and AVTR platform are gaining traction and proving their technical superiority as we continue to gain more customer orders. We hope that these products will further help us improve our market share across all the product segments in times to come. We are continuously augmenting our fully built capacity to cater to the growing demand. Our new plant in Andhra Pradesh inaugurated in Q4 of last fiscal is in the ramp-up stage and will reach a capacity of 200 units per month by end of the year. Our newest and most modern bus plant at Lucknow, which is under construction, will be operational from Q3 FY '26. We are also looking at enhancing capacity at our bus plants at Alwar and Trichy. We continue to expand our domestic network. We added 23 MHCV touch points and 13 LCV touch points during the quarter, with most of the additions in North and Central part of the country. With these additions, total touch points for MHCV are now at 1,073 and for LCV at 851. By end of the year, we hope to cross 2,000 touch points for both the product segments combined. Internationally as well, we are expanding our network in all our 4 home markets with SAARC, Africa, GCC and ASEAN. One of our key initiatives towards premiumization of our products is to achieve global standards on customer experience by transforming our service operations. This initiative has already started yielding initial results. Ashok Leyland ranking has improved to #1 in dealer satisfaction index and #2 in customer and sales satisfaction index. Switch India is going from strength to strength. While last year, Switch India turned EBITDA positive, we are happy to share that in Q1, the company has achieved PBT breakeven as well. As indicated earlier, our goal is to achieve PAT positive status for Switch India in FY '26. The current order book for Switch India stands at 1,500-plus buses. Regarding Switch U.K., the redundancy process is in progress, which is likely to get concluded by early Q3 FY '26. This will lead to complete cessation of manufacturing and assembly facilities in the Sherburn, U.K. facility. The production of e-buses for U.K. and European markets is being moved to our other global production facilities. OHM, our E-MaaS subsidiary is operating more than 850 buses with fleet availability of 98% plus. During the quarter, OHM added more than 200 buses to the operating fleet and is progressing well on its target of operating 2,500-plus buses within the next 12 months. All the GCC projects under execution are at healthy double-digit IRR. OHM is working diligently on the 10,000-plus PM E-DRIVE tender to further add to their growing fleet. Hinduja Leyland Finance and Hinduja Housing Finance continue to do well. HLF's stand-alone AUM was at INR 50,430 crores and HHF AUM was at INR 14,265 crores, both registering 25% Y-o-Y growth. Total income for the finance subsidiaries was at INR 1,855 crores, and the book value at end of the quarter was at INR 7,222 crores. On a consolidated basis, the NNPA has come down to a healthy 1.63%. Very recently, HLF also received the final clearance from RBI to initiate a merger process with NXTDigital, paving the way for its listing. We are making continuous progress on our ESG commitments as well. We have now signed 4 franchisee partners for [ AL Harith ] our platform for RVSF, registered vehicle scrappage facilities. In our commitment towards RE100, we have achieved 81% RE status as against 69% at end of FY '25 with our TN plants, Tamil Nadu plants now at 95%. Our Road to School and Road to Livelihood programs continue to grow, extending their reach to about 5 lakh students now. As part of RTS, capacity building sessions and career counseling were delivered to more than 11,000 students in the last quarter. More than 200 women from 15 villages were enrolled into Road to Livelihood program. Looking back at the quarter, we believe we have moved well on our strategic goal of delivering profitable growth. Given the high base of Q1 FY '25, we feel satisfied delivering record revenue, EBITDA and PAT in Q1 of this year. We are optimistic about the growth prospects in both MHCV and LCV given the low base of Q2 last year, where especially the MHCV market was down. The fleet utilizations are holding up and freight rates and operational profitability are moving northwards. So far, we have remained largely immune from tariffs and other geopolitical uncertainties. We believe the uncertainties pertaining to commodities, especially steel would also settle down in the coming quarters. RBI interest rate cuts have not yet fully transmitted to the ground, but are likely to happen soon. The government CapEx spend also has been higher and is expected to further improve. On back of these and basis our upcoming new product launches across different segments, we remain optimistic of volume and margin uptrend for Ashok Leyland in the second half of the year. Thank you once again for your continued trust in Ashok Leyland. I now hand it over to moderator for Q&A.

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

Just firstly, on the margin side, can you give us some color on what were the key variables and we did see commodity pressures in this quarter. There was this mandatory AC cabin regulation as well despite that we've somehow managed to keep the margins -- gross margins stable. So if you can give us what were the drivers to it? And how should we sort of think going forward? Are there more commodity pressures to bear in mind in the next couple of quarters?

Yes. I'll give you a short answer, then I'll ask maybe Balaji can give you a more detailed one. But like Gunjan, we told you last time, while we were all worried about AC introduction a bit, whether we will be able to pass on the cost to the market. But to our surprise, actually, there is a huge amount of traction that we have seen in our customer base to adopt air conditioning. A lot of customers actually asked us even before the implementation date if we can provide them AC vehicles. So I think there is a kind of a mindset shift happening in the customer base also. And we are very happy that we could pass on the complete cost impact of AC. And beyond that, we were also able to improve our pricing and to some extent, our model mix as well because multi-axle vehicles, which are the higher-margin vehicles for us, they really improved on volume in quarter 1. So yes, I mean, overall, it was a good period. Commodity, we had a certain pressure, especially on the steel side, emanating from the safeguard duty. But I think that is also coming down right now. So when we look at the spot prices in the market in July, it is actually moving south now steel prices. So we'll see how it goes in quarter 2, but we think steel should also settle down to favorable levels. Balaji, you want to...

Yes. Even on the overhead side, you would have noticed our other expenses, we have reasonably controlled compared to the last quarter where it was around INR 1,060 crores. You would have seen in absolute terms, the fixed costs have come down. So in terms of lower revenue, the percentage looks a bit higher. But in terms of absolute amount, it has come down. As Shenu indicated, it is a combination of better mix, price recovery, commodity cost controls as well as the overhead controls. All these have helped us. On top of it, the rest of the businesses like the spare parts has registered a good 8% growth year-on-year. The Power Solutions business has registered a growth of about 35% -- 29% -- 28.5%, compared to the same period last year in terms of revenue. Exports, it has gone up. Export numbers, volumes have gone up to -- it has crossed 3,000 vehicles in the current quarter compared to the last -- same period last year, it is up by about 29%. So all this, the non-CV businesses have really contributed to the bottom line.

Okay. Got it. And my second question is on Hinduja Leyland Finance and congratulations. I think this was a long, long due. Now what is the process forward? How soon do we see the conclusion of this restructuring that we were pursuing? And along with that, if you can also sort of comment on what is happening to the financing landscape for CVs because when I go through a lot of lending -- lender or NBFC commentary through this results season, it has indicated that there are some asset quality issues cropping up on the CV side. So is that something that you are also seeing either in Hinduja Leyland Finance book or otherwise from your customer segment? So just these 2.

Yes, we have a very long-drawn process. Initially, the shareholders of both the companies, they will have to meet and then you will have to, I mean, fix the ratios, the swap ratios with the shares. And then you will have to go to the company law Board, the NCLT. You have a long list of processes, which needs to be complied with. And it will take a minimum of 2, 3 quarters in my guess, but I don't want to hazard a guess because, I mean, whatever time it takes, it takes.

Okay. And on the financing side?

Yes, Gunjan, on the financing side, we have been hearing in the news about some distress on the CV side. But upon deeper checking, we -- I mean, we think like this is normally the phenomenon at the end of Q1, beginning of Q2 as soon as the monsoons start appearing, right? So because, I mean, monsoons, I mean, definitely, the fleet utilization goes down substantially. And therefore, every year, this is what it is. But we have -- I mean, internally, we have checked with HLF and they don't see any red flags right now.

Next question is from the line of Kapil Singh from Nomura.

Congratulations on a resilient performance and also the dealer satisfaction ranking. That's quite important. My question is on the demand -- MHCV demand itself. You've talked about a lot of positive variables we have seen like the freight rates and operator profitability, but it's somehow not translated into demand and also replacement demand potential, which we have previously discussed. So just your assessment of the situation, like what is holding back that replacement demand to come back? And what is your outlook for the full year demand for both domestic as well as international?

Yes, Kapil, thank you for that question. Let me just comment on the domestic first. Definitely, we are all expecting that this huge aging of the fleets that we are seeing kind of more of a flattish industry for the last couple of years or maybe 3 years. I mean, this doesn't gel very well, especially given that macro factors -- macroeconomic factors are quite okay. So I mean, the only reason we can say what is holding it is that the CapEx on the ground has to really be a little bit more higher. Last year, we were in a situation when the CapEx was not that good as we were expecting. Now it has started turning out well and now the interest rates are also getting better. So at some point in time, it should open up. And -- but it's hard to say when it will be. Like I said, Q2 had a low base, so maybe Q2 could start -- could be a trigger for a better cycle. July already, we have seen that the MHCV market has grown by about 5%. So let's see. I mean, all the factors are pointing towards something better, some better demand. So let's see when that happens.

Any outlook, sir, for the full year for domestic?

Full year outlook remains the same, which is mid-single-digit growth for MHCV and slightly higher than that for LCV, but still mid-single.

And on the international side?

On international side, we are seeing a very good growth. I mean, from all the markets. Actually, Bangladesh or SAARC and Africa have been a little bit short against our plan for Q1, but those were temporary reasons. But I think SAARC and Africa would also bounce back. In Q1, we had a 60% plus growth in GCC. We are actually running out of capacity in our UAE plant now. So I think GCC is doing very well and will continue to do well, both UAE and Saudi. So 29% growth in Q1, we have achieved, and we do hope that we will continue the momentum in the balance part of the year.

One question I also had on OHM. We have put in some capital, I think, around INR 300 crores over there. So what is the total investment plan that we have for this entity since you're talking about a number of buses that will cross, I think, 2,500 in the next 12 months. So how much capital requirement is there for these 2,500 buses, if you could help us understand that? And is there a plan to monetize this investment or make the balance sheet lighter?

Yes. So we are looking at some of those options. But just to clarify, OHM has 800 buses right now, which are on their balance sheet. They will induct another, I would say, maybe 700 more by March of the year. The rest of the 1,000 buses that they would have would be actually on the Switch balance sheet, but OHM would be operating those, right? Because these are the tenders that Switch had won prior to OHM's existence. But OHM is actually running those because OHM is a E-MaaS company. However, coming to the funding part of it, previously, we had invested INR 300 crores. Now we are investing INR 300 crores more. And this will be sufficient to take care of OHM's buses, OHM's operations up to March of '26. And beyond that, we are very open at looking at some other options of fundraises also. But we'll let you know in maybe a few months from now.

Next question is from the line of Chandramouli Muthiah from Goldman Sachs.

My last question is just around the upcoming capacity that you discussed in the prepared remarks. So you mentioned that you expect mid-single-digit demand growth in volumes through the course of the year. Interest rates have been getting cut. I just want to understand sort of in the context of that, how you think about volume growth in the medium term? And what is the current capacity utilization? What is the current plan in percentage terms in adding capacity over that time frame?

Yes. Thank you, Chandramouli. So on the capacity front, our overall capacity is fine for, I think, next 2 to 3 years. We don't need to really look at the capacity expansion. However, in certain areas, we are expanding capacity, for example, the fully built bus capacity. Now what has happened in the last 2 to 3 years that this -- the whole bus demand is now shifting more and more towards fully built buses. Earlier, people used to buy chassis from us, and then they would go to external body builders and get the body made. I think that was more efficient at those times. And there was also this tax advantage because the bus body had 18% tax, while the chassis would have 28%. But I think customers are now realizing that, that is very cumbersome for them. It takes a lot of time, and then they don't get a final product with one manufacturer behind it. So I think this whole shift is coming, even not just private, but also STU. STUs are now more and more interested in buying from the OEM, the whole bus. So while we were still expanding the capacity when we started the Lucknow plant and then we started to revive the AP plant, but it has got -- this shift has caught us by a little bit of surprise. And now we are seriously considering enhancing the capacity of fully built buses even more. We have capacity of about 950 buses per month right now, and we want to go to 1,650 buses a month, including Lucknow. So we are putting those efforts in to increase that capacity. But otherwise, overall, whether it is LCV or trucks, ICV or heavy-duty, capacity-wise, we are fine. Overall capacity utilization is still at around 70% or so.

Got it. That's helpful. Second question is just around one of your competitors, there's been a proposed acquisition of a European trucking company. So I think with IVECO in the past, you have disclosed that they have been technology partners to you in prior years. I just want to understand if control of that entity changes, if there is anything to disclose in terms of technology sourcing and alternates that you have to think about?

No, not. I mean it's true that we had a partnership with IVECO, but that was several decades ago. I mean, many years ago. And right now, there is no relationship, existing relationship for the last many years of any kind, whether it's technology or product platform sharing or any other kind. So this recent news would not impact us in that manner.

Next question is from the line of Pramod Kumar from UBS Securities.

Sir, my first question is just a general reminder to us on the financials or the economics of Hinduja Leyland Finance and Hinduja Housing Finance for the Ashok Leyland shareholders as to what is the carrying value you have and what are the latest financials you have there in terms of financial -- PAT performance? And anything you can help on credit cost and asset quality parameters?

Currently, we -- actually, prior to this investment of INR 200 crores, Pramod, in Q4 of last financial year, our holding portion was about INR 60. Now it has gone slightly up at around INR 64 per share. And that is, I would say that much better. This is our holding value.

And Balaji, anything on the latest quarterly financials in terms of credit costs because there's been concern about asset quality on the CV financing side. So just any [indiscernible] was there.

Shenu has already covered this. Their asset under management on...

AUM is INR 50,000-odd crores. The PAT number -- anything on the ROAs or...