On OHM - we have put in around Rs. 300 crores. What is the total investment plan? How much capital is required for the 2,500 buses target in 12 months? Is there a plan to monetize this investment or make the balance sheet lighter?
OHM has 800 buses on their balance sheet right now. They will induct another 700 by March; the rest of the 1,000 buses would be on the Switch balance sheet but operated by OHM as those tenders were won prior to OHM's existence. Previously we had invested Rs. 300 crores; now we are investing Rs. 300 more, sufficient for OHM operations up to March of '26. Beyond that, we are very open to looking at other options of fundraising and will let you know in a few months.
On the margin and volume linkage - last year was a record year with 12.8% EBITDA margin. How should we look at margin in context of volume assumptions, and if volumes were not to see uplift, what would be the implication for your margin trajectory on a YOY basis?
Margins are not simply relatable to volumes per se. There are many factors - mix of revenues (more non-CV is higher margin), within trucks higher tonnage drives margins, commodity costs, cost control measures, price recovery. It is very complex and difficult to say what the margin outlook will be on a full-year basis. Shenu added directionally we do not sacrifice margins for market share - market share has to come through premiumization, service excellence and frugal cost control. Our overall aspiration would be to beat the last year margins by a handsome margin.
On the margin side, can you give some color on the key variables? We saw commodity pressures and the mandatory AC cabin regulation. Despite that we kept gross margin stable. What were the drivers and how should we think going forward? Are there more commodity pressures in the next couple of quarters?
Like we told you last time, while we were all worried about AC introduction, to our surprise there is a huge amount of traction we have seen in our customer base to adopt air conditioning. We were able to pass on the complete cost impact of AC and beyond that improve pricing and to some extent model mix - the multi-axle vehicles, which are higher margin, really improved on volume in Q1. On commodity, we had certain pressure especially on steel from the safeguard duty, but that is also coming down right now - spot prices in July are moving south. Balaji added that other expenses have been reasonably controlled and fixed costs in absolute terms have come down, with spare parts growing 8% YoY and power solutions up 28.5%.
On Hinduja Leyland Finance - what is the process forward and how soon do we see the conclusion of the restructuring? Also, given some lender/NBFC commentary indicating asset quality issues on the CV side, are you seeing any of that in the HLF book or your customer segment?
We have a very long-run process. Initially the shareholders of both companies will have to meet, fix the swap ratios, then go to the company law board, the NCLT. There is a long list of processes, taking a minimum of 2-3 quarters in my guess. On the financing side, Shenu added we have heard about distress on the CV side but on deeper checking, this is normally the phenomena at end of Q1, beginning of Q2 as the monsoon starts. HLF internally has not flagged any red flags right now.
On MHCV demand - you have talked about positive variables like freight rates and operator profitability, but it has not translated into demand or replacement demand. What is your assessment? What is holding back replacement demand? And what is your outlook for full year domestic and international?
Macroeconomic factors are quite okay - the only reason we can say what is holding it is that CAPEX on the ground has to really be a little higher. Last year CAPEX was not as good as expected; now it has started turning out well and interest rates are also getting better. At some point it should open up. July already we have seen MHCV market grow by about 5%. Full year outlook remains the same - mid-single digit growth for MHCV and slightly higher than that for LCV but still mid-single. On international, GCC had 60%+ growth in Q1, we are running out of capacity at our UAE plant. SAARC and Africa were a little short to plan in Q1 but should bounce back.
On capacity - you mentioned mid-single-digit demand growth and interest rate cuts. How do you think about volume growth in the medium term? What is current capacity utilization and the plan for adding capacity?
Overall capacity is fine for the next two to three years. However, in certain areas we are expanding - for fully built bus capacity, the whole bus demand is shifting more towards fully built buses as customers find external bodybuilding cumbersome and STUs are also more interested in buying the whole bus from the OEM. We have capacity of about 950 buses per month right now and want to go to 1,650 buses a month including Lucknow. Otherwise, whether LCV, ICV or heavy duty, capacity-wise we are fine. Overall capacity utilization is still at around 70%.
On a competitor's proposed acquisition of a European trucking company - given Iveco was a technology partner of yours in prior years, if control of that entity changes is there anything to disclose in terms of technology sourcing and alternates?
It is true that we had a partnership with Iveco, but that was several decades ago. Right now there is no relationship, no existing relationship for the last many years of any kind, whether technology or product platform sharing or any other kind. So this recent news would not impact us in that manner.
Just a general reminder on the financials and economics of Hinduja Leyland Finance and Hinduja Housing Finance for Ashok Leyland shareholders - what is the carrying value, latest financials in terms of PAT performance, and anything on credit cost and asset quality parameters?
Prior to the Rs. 200 crore investment in Q4 of last financial year, our holding position was about Rs. 60. Now it has gone slightly up at around Rs. 64 per share. PAT is Rs. 160 crores, Net NPA is about 1.63%, capital adequacy ratio is about 18.2% and AL shareholding is at 61.12%. On the merger - there is a series of steps including board approval, valuers, swap ratio, intimation to RBI/stock exchanges, NCLT, SEBI/RBI approval, EGM and final NCLT approval - it will take more than 3 quarters. Shenu added two to three quarters at the minimum.
At Euro V stage 2 norms, safety and cabin norms, is there a significant technology arbitrage between European/Western and Indian markets where an alliance or acquisition could be a significant factor? Historically there was a worry foreign players would have a bigger play but it has not materialized.
I think it's a long way out, 15 to 20 years from now. The difference is not so much in the technology - the big difference is in the sizing itself. Trucks in Europe or America run at 100-120 km/h cruising speed; in India the maximum speed is 80, and cruising speed is 45 to 55. That requires bigger engines and heavy duty aggregates, which makes sense for Europe given more trips and tonnage kilometers. India would need a lot of time to upgrade infrastructure to those levels - at least next 10 to 15 years.
In Q1 cargo and CV industry fell 4% YoY but within that, share of about 25 ton trucks has reduced a little. How do you see the mix for the remaining part of the year? Will intermediate and medium commercial vehicles continue to do better than HCV or can the above 25 ton segment do better?
We definitely think the heavy duty truck will do much better after the monsoon stops because we are seeing a lot of offshoots in heavy duty - mining, construction, car carriers. We are more optimistic this year in the second half about heavy duty than the ICV sector. ICV performs better in the first half. In the second half tippers, trailers and multi-axles will all do well. Balaji added that even in Q1 multi-axle vehicle growth was much better than industry growth.
On defence - you indicated full year growth can be in double digits. How large is your order book and what are the expectations in terms of potential going forward? Also, can you clarify how much was the decline in defence revenue in Q1?
We are very bullish on defence for this year and next. Q1 last year had an aberration with a large order shipped, so Q1 this year is optically not so good. We have about Rs. 1,000 crore plus of orders in hand and also one tender of Rs. 2,000 crore plus of which we are awaiting orders - already won. Going forward orders are not going to be a concern for at least the next year, year and a half. Defence capacity we are increasing on a month-to-month basis. On Q1 decline - 400 to about 150 (Balaji corrected: 120 versus 400).
On OHM - operating at healthy double-digit IRR. Would the operations be covered under the payment security mechanism for existing and new additions?
Not the existing, but everything that will come from the new PM E-DRIVE tender of 10,900 buses would be under the payment security mechanism. Existing orders are mainly from Tamil Nadu and Bangalore which have been very good paymasters - so not overly concerned about existing buses. Any new orders will be covered under PSM.
How much is the plan for investments in FY'26 given OHM funding and any incremental funding on HLFL?
Incremental funding on HLFL we will not be doing anything this year. If other subsidiaries require funding we might give them funding - for example Switch India which has become profitable may require temporary working capital funding given high bus manufacturing costs and inventory. We don't see any major investments in Q2 or Q3; we will decide in Q4. Shenu added nothing significant other than OHM Rs. 300 crore - if subsidiaries need temporary funding we may not do it through equity but through some other route.