Landmark Cars Limited (LANDMARK) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Landmark Cars' Q2 FY '26 Earnings Call hosted by ICICI Securities Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] I now hand the conference over to Mr. Vivek Kumar. Thank you, and over to you, sir.

Thank you, Padha. Good morning, everyone. On behalf of ICICI Securities, I welcome you all to Landmark Cars' Q2 FY '26 Conference Call. From the management side, we have with us Mr. Sanjay Thakker, Promoter, Chairman and Executive Director; Mr. Aryaman Thakker, Executive Director; and Mr. Surendra Agarwal, Chief Financial Officer. We'll start the call with opening comments from the management, followed by Q&A. Thank you, and over to the management team.

Good morning. Thanks, ICICI Securities team for hosting us. On behalf of the company, I extend a sincere welcome to everybody who has joined us today. And as informed, we have Aryaman Thakker as well as Surendra Agarwal, our CFO, with me on this call. The results and the presentations are uploaded on the stock exchanges and the company website. I hope everybody has had a chance to look at it. We have witnessed a defining movement for the automobile industry. We navigated one of the most significant tax transitions in the recent memory that was also long awaited by the auto industry, revision of GST rates. What unfolded over the span of just 45 days is fundamentally reshaping the consumer behavior, dealer operations and overall industry dynamics. Although this period coincided with the festive period, it was impact of the GST transition that truly dominated the automotive market outcome in Q2 of this financial year. With the announcement of GST rate revision on 15th August, buyers chose to defer their purchases in anticipation of better pricing from 22nd September. While the revision of GST rates was welcome -- a very welcome change, the abolition of the compensation cess significantly brought about ambiguity at the dealer level. Dealers were left with uncertain as the cess was removed under the new regime, leading to challenges in utilizing the accumulated cess credits. To mitigate this, selective discounting and incentive schemes were introduced by us on new as well as demo cars. While these short-term measures helped maintain customer engagement, they also exerted temporary pressure on the gross margins. If we had not proactively liquidated inventory with cess credit, our gross profit margin would obviously have been much higher. We made a conscious and prudent call to implement this strategy. While the matter remains subjudice at present, only time will reveal how the situation ultimately unfolds. Currently, the cess credit in our books is not a very meaningful number. The matter regarding Compensation cess is widely reported in the media, but not really understood that well. Under GST 2.0, compensation cess was abolished. That meant that from September 22, no cess would be recovered from the customers. This meant that only if one wanted to recover cess paid on vehicles in stock, one had to sell the vehicles before 21st of September, an uphill task considering announcements of reduction in effective GST rates already as well as the inauspicious period. The cess is not allowed to be adjusted against the GST payment and thus would have effectively lapsed, hitting our profitability as well as cash flow. The poor sales during this period entailed higher discounts, extra incentives, marketing as well as transportation costs. The higher growth in sales versus after-sales has also played a role in this subdued gross profit margin in this quarter. Coming to the final 9 days of September, that is 22nd September till 30th September, these were arguably the most action-packed phases of our life. Pent-up booking for the previous 40 days, coupled with the festive demand had to be fulfilled merely in those 9, 10 days. The sudden spike tested the resilience of the supply chain logistics across the network. Nevertheless, Landmark responded with agility, ensuing swift deliveries and customer satisfaction despite the operational intensity. The passenger car industry in October has seen a double-digit growth in reaching nearly 5.5 lakh cars for the first time in October. We are of the opinion that the demand for passenger cars has entered a fast lane due to GST reduction across all ICE cars and reduction in interest rates. Having achieved the desired top line, the entire focus will be on getting the robust profitability back on track. We are aware that our current quarter GP percentage is lower, and we believe that it is an aberration due to the onetime discounts and free accessories that we just spoke about. We are guiding that the gross profit percentages going ahead for the balance part of the year will increase by over 100 basis points. Our expansion has come at the right time when we have favorable wins behind us. Our large relationships like Honda have announced very aggressive plans for India, indicating a fivefold increase in the volumes in the next 5 years. Overall, the GST transition, though complex, proved to be a necessary recalibration of the industry. The old regime was a really complex one with nearly 6 different cess slabs. This is now history. The global OEs are now having clarity on which products to introduce in the future. We are also hearing that several trade agreements and free trade agreements included will be signed soon to further help the cause. In the past, whenever taxation is reduced in India, the subsequent year has seen good demand growth. The industry, which promised so much, but has grown only at approximately 4% CAGR in the last over 10 years looks finally poised to break out. As we move into October, our demand remains robust with limited need for incentives in sales. Sales are happening at a much better margin in the -- than what happened in the previous quarter. While we are aware that some supply chain and delivery constraints still remain, we expect them to ease out in the coming time. The aftersales business, the monsoon plays an important role. Flood-affected cars give decent amount of aftersales revenue. This year, due to erratic monsoon, we have seen the cars -- these cars being pushed to quarter 3 instead of quarter 2. Looking ahead, we anticipate the demand momentum to sustain by a great model lineup and the promotions and the pricing that are still being offered by the OEs. The wedding season that is on us, the highest number of weddings are in November and the year-end demand. I now hand it over to Aryaman for his thoughts.

Thank you. The GST rate transition during the quarter was a defining event for the entire industry. Although the transition phase brought short-term uncertainty, the overall reform has been received with optimism. The revised rate, which on a rupee basis have a substantial impact on the premium and the luxury segment are attracted -- are expected to attract a larger base of buyers, benefiting the entire value chain in the near as well as long term. The VAHAN numbers for October, which was the first full month post the new rates, show a 12% year-on-year growth for the price for the 4-wheeler market. Many of our OEM partners have long recognized the immense potential of the Indian automotive industry, which has gotten trust due to the GST transition. During the Navratri phase, Mercedes-Benz delivered 1 car every 6 minutes and went on to record its best ever monthly sales in September. We at Landmark being the largest partners contributed meaningfully. Our average selling price in Mercedes-Benz has now reached just under INR 70 lakh, and this is evident from our highest ever ASP in new car sales posted by us in quarter 2 of FY '26. Mercedes India so far this year has not grown in volumes on a year-on-year basis. Globally, they will be going on a massive product offensive from 2026. This is expected to result in a significant volume boost across. Honda's plan to introduce 10 new models in India by 2030 signals a fresh chapter for the brand's market presence. The focus will be on SUVs with hybrid as well as electric powertrains. They have an ambition to substantially increase volumes by 2030. This move is expected to strengthen Honda's competitive position significantly in India. At Landmark, being the largest partners, we are very well positioned to benefit from this momentum. In October, BYD crossed the 1,000 unit sales mark, reflecting robust demand for models like the Atto 3, Sealion 7 and the eMax as well as the growing customer acceptance. To put this in perspective, the brand sold around 3,500 units in the entire calendar year 2024. The demand for models like the Sealion has been far higher than expected, which has resulted in us running out of stocks. The next lot of cars are expected to arrive in January of '26 for which we have already started taking orders. Landmark being their largest -- to reiterate, Landmark is the largest partner for BYD, contributing upwards of 20% to their volumes. Renault India posted a healthy growth in sales in October. The surge in sales was largely fueled by the successful launch of the updated Triber as well as Kiger models and the new -- and the favorable impact of the GST 2.0 reforms. January will be the launch of the all-new Duster. This will be the first of a series of new Renault models expected over the next few years. For MG, our outlets have stabilized and started contributing as expected. The recent launch of the MG Select vertical is also seeing robust demand. We remain optimistic about the continued growth potential of this segment. In Mahindra & Mahindra, our outlets are stabilizing and growing as per expectation with a healthy launch of new products planned over the next few years, we remain optimistic and will look for further opportunities to grow with the brand wherever possible. The positive momentum from October has carried forward in November too. The demand continues to be robust. And in the beginning of November, we have seen a healthy year-on-year growth in terms of both bookings as well as customer inquiries. We expect this momentum to sustain until the end of the year due to the effects of GST, new model launches as well as ongoing schemes from OEMs. I will now hand it over to our CFO, Surendra Agarwal, to take us through the financial highlights. Thank you.

Thank you, Aryaman, and a very good morning to everyone. Let me now take you through the financial highlights for the quarter and the half year under review. Our total pro forma revenue for the quarter stood at INR 1,657 crores as against to INR 1,268 crores in the corresponding quarter last year, reflecting a strong year-on-year growth of 31%. Within this, new car pro forma sales contributed INR 1,403 crores, registering a growth of 35% year-on-year across all our OEM partners, while aftersales revenue stood at INR 254 crores, up 11.2% year-on-year. The gross profit for the quarter stood at INR 196 crores with a gross margin of 16.2% on reported revenue. As explained previously, the GP was slightly lower in this quarter due to discontinuing in new as well as demo card to utilize the sets in the period of 17 August to 21st September. One can notice that the lower GP as compared to last quarter is due to revenue mix also. Our new car sales have grown at a much faster pace than service in the last quarter, which mathematically compressed the GP margin in percentage. It is also worth noting that the GST on spare parts have also been reduced to 18% from 28%, making genuine parts more affordable and authorized workshop more competitive against the local garages. Due to this, in Q2, we saw some postponement in repair during this quarter where the customer opted for benefit from lower cost of repair due to lower GST. Our EBITDA for the quarter stood at INR 59 crores with an EBITDA margin of 4.9% on reported revenue. Depreciation for the quarter was INR 38 crores, marginally higher on Q-on-Q basis due to opening of new outlet during the quarter. Finance cost for the quarter stood at INR 20 crores, in line with the inventory level maintained for the quarter. In quarter 2 FY '26, our profit after tax before the net impact of Ind AS stood at INR 3 crores, while cash PAT for the quarter was [Audio Gap] The average selling price of new cars in quarter 2 FY '26 came in at INR 23.16 lakhs, an improvement supported by higher sale of higher-end cars such as Mercedes-Benz. It is the highest ever ASP. In Q2 FY '25, the per car service revenue was over INR 26,000. Coming to our performance in half yearly FY '26, we posted highest ever pro forma revenue, reported revenue and gross profit despite various macro challenges. Our total pro forma revenue grew by 26.4% on a year-on-year basis, was booked at INR 3,720 crores as compared to INR 2,432 crores in H1 FY '25. Within this, new car pro forma sales contributed INR 2,584 crores, registering a growth of 30.1% year-on-year while aftersales revenue stood at INR 489 crores, up 9.7% on a year-on-year basis. Reported revenue for the period stood at INR 2,273 crores, leading to year-on-year growth of 30.7%. Gross profit of H1 stood at INR 380 crores with a gross margin of 16.7%. EBITDA was INR 125 crores with EBITDA margin of 5.5%. Our profit after tax before net Ind AS impact stood at INR 11 crores versus INR 6 crores in H1 FY '25. In H1 FY '25, we generated net operating cash flow of INR 177 crores, surpassing our FY '25 level of INR 152 crores. With this, we now open the floor for question-and-answer session.

[Operator Instructions] The first question is from the line of Aranav Sakhuja from Ambit.

So my first question is what kind of growth did you see in the pre-owned segment?

Yes. So Arnav, as you know, thankfully, we have not been holding a lot of inventory of preowned cars. If we had -- if we were actually holding, the loss would have been much higher due to the reduction in the prices. So in fact, the -- what we are seeing on an industry basis is that because the new car prices have become affordable, there has been a pressure on used car sales because the difference between those prices have reduced.

And so my next question is with regards to BYD. So correct me if I'm wrong, but currently, these cars are being fully imported. So is there any talks of local assembly of these cars with the help of any JV partner?

Yes, this is something which has been going around for a very long time and one can't really say until it actually happens. So currently, as you know, there are 4 models of BYD cars that we sell. The Atto 3, the eMax 7, which are both homologated and as such, do not have any restriction on the number of vehicles that can be sold for these 2 models. We believe that the Sealion, which Aryaman spoke about and which kind of ran out and did very well. That is in the process of getting homologated. So that ceiling would also go away, and the Seal. So these are the 4 models that we sell. I think the company is looking at themselves assembling these cars. They are looking at maybe some advanced rulings to take away the challenges of regulatory interpretations. Once that happens, the prices could come down. Right now, I think the volume for this year would have grown 3x over last year, and this seems to be like the beginning of very good journey with BYD.

The next question is from the line of Pranay Roop Chatterjee from Burman Capital.

My first question is on the gross margins. Obviously, you have adjusted quite deeply. I was trying to look at it from another cut. So if I separate out your stand-alone and subsidiaries gross margins and look at on a quarter-on-quarter basis, what I noticed is something interesting. It seems that the entire quarter-on-quarter consol gross margin dip on which you commented can be explained by the stand-alone gross margin dip which has sort of taken a substantial hit, which is essentially your Mercedes business. Whereas your subsidiaries, if I just add up, which is basically consol minus stand-alone, if I do that, it is almost flat quarter-on-quarter. So any reason why specifically your Mercedes stand-alone business has taken a hit? Or am I not reading the numbers correctly?

Look, Pranay, congratulations on reading the numbers right. And you are doing it in a quick time. Now what happens in Mercedes type of business, there are 2 things which happened to compress our margins in Mercedes-Benz. We have a decent amount of demo car stock in our Mercedes portfolio, which is in our books. Now we had to liquidate a lot of demo cars because of the reasons that I have -- and we have stated at length in our presentation and all. So this is something which has impacted us mainly. This is, I think, the main reason we should answer you.

So is that liquidation done sort of currently, how is it looking?

Yes, it is done.

Great. Second question is on your operating expenses. If I look at it on a quarter-on-quarter basis, your employee expenses have risen by about 15% to 16% quarter-on-quarter after remaining stable at around INR 64 crores to INR 65 crores for the prior 3 quarters. So is it because of -- can it entirely be explained by store openings plus a sort of salary hike? Or is there some other one-off...

So it is -- again, you have read it right. The point is that it is store opening, plus there has been an increment of our company, which has come into play from this quarter. And there have been some additional incentives that we had to pay out, out of line to liquidate some tough cars to sell in this quarter.

Got it. Great. My final question will be a quick one is on your ASP. And I noticed something, while ASP is rather an output, right? By itself, it makes 0 sense. It's more like an output of the mix of cars you sell. But if I look at it on a quarter-on-quarter basis, the mix has not drastically changed, right, because your product mix changes very, very slowly across the quarters. So -- but this time I see it's gone [Audio Gap] this quarter, which is like if I see Y-o-Y, it's a 15% growth. Is there anything worth calling out here from a new car ASP perspective?

BYD. So BYD Sealion, which was selling at upwards of INR 50 lakhs, we ran out of it. And if you ask me one thing, this is the top of the mind thing.

The next question is from the line of Lokesh Manik from Vallum Capital.

Sir, my question was on the gross margin. I know you've clarified in detail, including in the previous question. In your presentation you mentioned that the cess is limited to 5% and you have been very well supported by OEMs. And then you have gone ahead and given further discounts over and above that. So this is purely demo cards and not to do with new cars, would that understanding be right?

Lokesh, I didn't understand the question. Cess at 5%?

Cess impact you have been able to limit to mid-single digit cess liability.

No, no, it is not 5%. We are saying that currently the cess liability which is standing in our books, which is then subject to what the Supreme Court opines is in the region of around INR 5 crores to INR 6 crores, not 5%.

No, I understand that. So that has been limited, and that is driven by both the OEM schemes and also you giving further discounts?

Yes.

Yes. So the question was the further discounts that you gave, that was only for demo cars or there were other cars also where you had to...

No, no, that -- no, it's also for other cars in, say, a Honda or a Kia or a Mahindra. So it was across brands in all ICE cars. Demo [indiscernible]. For Mercedes, it was only demo cars. But for others, it was all ICE cars.

Okay. Now if I see the comparison Y-o-Y, about 100 basis points can be attributed to the mix change and 100 basis points can be attributed to the discounts. And you can correct me if I'm wrong on that, in your gross margin impact. So when you're guiding for next -- the second half revision of 100 basis points or an addition of 100 basis points, does the aftersales mix not come into this because Q3, Q4 is expected to see aftersales mix also come in through the service workshops ramping up?

Yes. So in this business, we have -- this is the first time that we are trying to stick our neck out because we are feeling a little more confident right now and given a number. We actually thought deep and hard without -- before giving this guidance and internally, we were -- I was challenged as to whether we should really go ahead and do it. This industry, as you know, Lokesh, is dependent on a lot of external factors, consumer behaviors, et cetera. So [Audio Gap] the table and say that this will happen. In the past, we have kind of delivered what we have said, and I want to keep that record intact. So let us kind of wait and see how things kind of pan out for the balance part of the year.

Right. Sir, on the cess liability, if you can clarify, on 2nd September, what would have been your outstanding liability, cess liability, which caused you to take this decision? Just to understand the severity of the situation, what we were...

Yes, so it was not actually 2nd September, Lokesh. It was actually August. So the announcement which came on 15th of August, that's when the whole thing has started, though 2nd September when it kind of put a number to it. But my back of the envelope thing is that we have been able to recover approximately INR 15 crores plus of cess in this period.

Okay. So we've incurred about 1% discount to recover INR 15 crores. Would that be a fair assessment?

I would not say. No, I would not say that we have incurred 1%. We have incurred a lesser amount. I don't -- and the expenses have gotten kind of into various heads, including incentives, including advertisements, including transportation discounts, incentives, all kinds of things. But it was nowhere near 1%. It was lower than that. The other thing is attributable to the revenue mix that is there. I wouldn't want to kind of put a number to it right now.

Fair enough. Fair enough, sir. Sir, last question is on the interest expense that has come up this quarter to about INR 25 crores, if I look -- for the first half, if I remove the impact of Ind AS lease liability. So given that inventory days are down, the CapEx that we have done as per the cash flow statement and the cash PAT, which funds the CapEx. So why are we seeing such an increase in interest expense? And your second half guidance for the same, how do you see this tapering off?

So Lokesh, the interest cost, if we remove -- in the quarter, if we remove the Ind AS activity, it is at INR 12 crores versus INR 10.5 crores in the last year. So it is like a INR 2 crore increase in the quarter with the higher sale. And the inventory, if you look at is always be at the quarter end. So the quarter end, obviously, with the GST and the liquidation of more and more stock, the quarter end inventory is lower. So the benefit which we see on the lower inventory will come in the coming quarter.

So we see a tapering down of interest expense. Would that be a fair assessment?

Yes, yes.

-- that the RBI also reduces the interest rates in the December meeting.

The next question is from the line of Bhavya from Tamohara Investment Managers.

Just a quick question. Service margins fell Q-on-Q even with the same set of workshops. So what explains that decline?

So Bhavya, it is not the same set of workshops. What has happened is that in this quarter, many of the newly set up workshops got added into it. So the workshops of Mahindra, of Kia and MG, for example, are working currently not at the same level as our, say, Mercedes or Honda workshops are working. So it is a mix effect, which will over a period of time go back to its level.

Okay. And if I can just squeeze in one more question. Sir, what was the average discount level that was given to offset the cess credit?

I mean this is the most difficult question that you have asked or this is a question has been asked on this call. I do not know because we were actually, during that period, we were having kind of, if not daily kind of every 2, 3-day calls to figure out what discounts we would give to offset the cess credit in which state and all that. So there is no answer. The thing to kind of take back today is that those discounts are a thing of the past, and things are looking good as of now.

The next question is from the line of Bhargav from Ambit Asset Management.

Congratulations on a good performance. Sir, in your opening remarks, you did mention that Honda is likely to have a fivefold increase in volume over the next 5 years. Is it possible to give some more details in terms of whether this will be back-ended or you believe that new launches can kick start from next year? And related question to Honda is that obviously the number of dealers for Honda are far lower. So is it fair to say that margins in Honda would be higher for us on new car sales?

Yes. This is Aryaman here. I was at the conference last week in -- at the Japan Mobility Show. So the -- yes, so there are 10 new car launches, which they have publicly announced. which will start from 2026, all the way till 2030. This will primarily be, out of the 10, I think 7 are SUVs, which are mainly going to be hybrid as well as battery electric cars. And some of these are also going to be India-focused, developed for India, manufactured here and then exported to other right-hand drive markets. So I think starting from next year, we will start seeing a couple of new launches every year all the way till 2030. And I think the brand will increase in volumes, and they will also start catering more to this growing premium segment that they have currently not been participating in. So we expect that I think '27 onwards is when we can start seeing a jump in volumes for Honda at an India level.