Does Q2 see a sharper hit because the lower-cost opening inventory is now consumed? Should we be able to neutralize the impact heading into Q2?
The inventorization impact will be there in subsequent quarters but will not be big - it depends on the quantum of vehicles sold from current inventory. Shenu added that commodity challenges will continue in Q2 with respite expected only from Q3/Q4. They are accelerating levers including product/business mix improvement, pricing (price increase taken from July 1, considering more before quarter end), and cost savings acceleration.
On the overall gross margin outlook for Q2 - is the incremental gross margin hit manageable or does it come in the second half?
Commodity pricing will continue to pose a challenge; the impact purely from the commodity side may be a little bit higher than Q1. Current estimate is that the situation will improve from Q3 and largely from Q4. The levers to manage: focus on more profitable segments like higher horsepower trucks (TAURUS, HIPPO gaining momentum); new air suspension trucks to recover MAV market share lost in Q1; growing defense/PSB/Power Solutions orders; and additional pricing (small increase from July 1, looking for more before quarter end). Cannot predict exact gross margin but commodity costs will be higher than Q1 while levers are available.
What is the domestic truck volume growth outlook for this year?
Q1 went well despite a bad May (only 1-2% MHCV growth) followed by huge June bounce (20%+ growth). July MHCV industry growth also more than 20%; August sentiment looks positive. Against 13-14% growth in Q1, the growth should be much better in Q2. Taking a conservative view for H2 due to the high base from October-November last year (20-21% growth), the industry still has potential for high single-digit MHCV growth for the full year. LCV outlook is slightly better than MHCV.
On commodity outlook - steel prices are elevated, natural rubber hitting new highs. What is driving the Q3/Q4 softening visibility?
We rely on multiple inputs - supplier discussions, SIAM reports, CRISIL reports, and other credible reports. The estimate is that Q2 will be the peak for commodity costs. Q3 should see some level of softening overall. Q4 should see some kind of a turnaround. They acknowledge natural rubber is still elevated.
On regulatory outlook - mechanized load covers, audio/visual alerts, advanced braking norms from next year - what is the potential price increase? And how are BS7 negotiations going between government and industry?
CV industry has always dealt with high regulatory burden and the approach is to comply while creating customer value (positive TCO impact). The AC mandate example: the industry worried about INR30,000-50,000 price increase but customers lapped it on. Market is changing - fleet owners increasingly value TCO over pure price. BS7: final notification yet to come, will take more time; personal opinion is BS7 in India for CV should not happen before 2031, could be 2032.
Can you give more color on the margin delivery for this quarter? What was the gross RM headwind? How were you able to offset through price hikes? And how should we think about Q2 with more elevated cost headwinds and pending RM impact yet to reflect?
There was an increase in commodity prices in Q1 but we could consume most of the item from our opening inventory - about one fifth to one fourth of total requirements came from opening stock which prevented us from charging the full commodity cost increases. Only about four fifths of total costs incurred got into the P&L; the remaining value got added to current stock. We also carried 6,500 vehicles as opening inventory which rose to 8,500 by quarter end, so overhead costs got capitalized into stock rather than P&L. In addition, we accelerated cost savings through the Achieve 2K project and took pricing actions. Price increase during Q1 was about 1.2%-1.25%, which - combined with the inventorization benefit and cost savings - negated the commodity cost increases roughly 50/50.
On the investments - Housing Finance investment rationale given the finance entity was supposed to fund its own growth after demerger? And clarification on Optare debt repayment?
On Optare: They had GBP 80M debt, paid GBP 30M last year, now have GBP 50M remaining. Plan is to pay GBP 25M this year and GBP 25M next year - this is not new, consistently disclosed for 2 years. On HHF: This is growth capital; HHF AUM growing at ~34% CAGR over 4 years with ~24% net worth growth. Capital structure of HLF cannot be disturbed during the NCLT merger process. The HHF investment is at arm's length valuation by an independent valuer.
On truck mix - ICV growth has been higher than heavy truck growth. When do we expect some reversal?
After GST recalibration, the early impact was on vehicles going to retail (non-fleet) buyers who saw price changes immediately. Fleet owners and heavy-duty truck buyers have a lag. Every quarter the situation is improving; Q2 should see a drastic improvement both at industry level and more so at Ashok Leyland level given fully ramped-up HIPPO, TAURUS, and now air suspension on the MAV side.
Can you quantify the price hike taken so far in Q2?
In July: more than 1% on MHCV side, more than 2% on LCV side, with potential for more through price increases or discount optimization. K.M. Balaji added that cumulatively from the beginning of this financial year: approximately 2.25% for MHCV and more than 3.5% for LCV.
On employee costs and other expenditure - how should we see the trend? And is the industry on track for double-digit growth for the full year?
Employee cost: marginal 4-5% increase in manpower cost from Q1 to Q2 due to July increment cycle. Other costs: targeting to contain at current levels or lower through centralized commercial negotiation cell (any amount beyond INR50 lakhs referred to centralized cell to reduce through commercial negotiations). On industry growth: visible momentum until October, after which there is a high base from last year's October-November 20-21% growth. With conservative H2 view, industry has potential for high single-digit MHCV growth full year.
LCV market share has been broadly stable around 11% for last 5-6 years with tough competitive intensity. What are the company's plans to improve market share?
Historically tracked only 2 to 3.5 ton segment; shifted to VAHAN market share (full LCV market) about a year back when Saathi was launched (targeting premium sub-2 ton customers). On VAHAN basis, they have gained market share continuously quarter-on-quarter in each quarter last year and in Q1 (now at 13.2%). New LCV products in pipeline targeting the full LCV range since they are currently participating in only 50% of the industry. Goal is to expand coverage from 50% to cover a much larger portion of the LCV market.
The strong recovery from June continuing into July and August - what are the drivers? Is it freight availability, infrastructure, replacement demand? How is demand from large, medium, small operators?
April MHCV growth was ~12-13%, May was 1-2%, June bounced to ~20%, July also more than 20%. The primary trigger is GST 2.0/GST optimization which kickstarted a replacement cycle - the economics of BS6 trucks vs operating BS3/BS4 trucks have become compelling. Fleet aging from 7-7.5 years to 10-10.5 years means there is pent-up replacement demand. Interest rates, availability of finance, and infrastructure uptick are additional supporting factors. This should continue for many more quarters as it will take a few years to take BS2/BS3/BS4 trucks out of operation.
On export outlook and capex/investment outlook for full year FY27?
Exports: The tough Q1 is behind them. RAK facility (UAE, assembles GCC products) had to nearly shut down in April and parts of May due to labor and local component supply issues from the war situation. June: 600 units, July: 700 units expected, August: targeting return to 800 peak capacity. No significant retail losses in GCC - only wholesale/dealer stock reduction. SAARC and Africa growing 40-60% YoY offsetting the GCC decline. Also expediting new Saudi plant (originally 18-24 months now being accelerated). Capex: increased from INR400-500 crores historically to INR900-1,000 crores in last 2 years; will continue to increase over next 2-3 years as they invest in new technologies and white spaces.
Ashok Leyland has made significant progress in diversifying from core truck business through defense, Power Solutions, aftermarket, EVs. How do you see mix evolving over next 3 to 5 years and margin profile of these businesses versus truck business?
Non-CV businesses offer better margin opportunity and have huge headroom (especially defense). Plans are in place for aftermarket, EVs, IO, defense, Power Solutions - all very aggressive. First milestone: sufficient non-MHCV domestic business to cover all company fixed costs. Progress: the number of MHCV domestic trucks required monthly to cover fixed costs has come down from 6,000-7,000 units to 1,000-1,500 units per month. This is important because MHCV domestic industry is cyclical - reducing dependency means no big hit even in down cycles.
How has market share evolved in non-South versus South regions in the last few years?
Very good progress made. North: was at ~15% about 4-5 years ago, now touching 30% (already at 27%). Progress also made in Central. East has had some new issues and needs more work. The formula for North, Center and East is now clear in mind.
On MAV segment competitive intensity - competition launched higher payload products and now Ashok Leyland launched air suspension which enhances payload further. Is there heightened competitive intensity in MAV? Is this a precursor to discounting?
In confidence, the competitor's MAV product was something Ashok Leyland had evaluated about 3 years ago and decided not to launch due to design concerns. Instead they started the air suspension project which was a better engineered solution - this project started 2.5-3 years ago, not a reactive response. The AL air suspension offers 4-ton extra payload vs 2-ton from the competitor. Others will bring air suspension in 6-12 months but this is the industry first. No discounting expected - this is premiumization strategy delivering TCO improvement to customers.
Were there any issues on the production side for buses? Has it been resolved?
No production issues. The bus market is in two parts: heavy-duty buses (1/3 of market, historically 60-80% market share for AL) and medium-sized buses (2/3 of market, AL was at only 15% market share until recently). Strategy: on heavy-duty, no unprofitable tenders even at cost of market share; on medium buses (school and staff, private not tender), lot of new products and improvements have taken market share from 15% to close to 25% in last 3-4 years. Q1 bus volume decline was a deliberate choice not to participate in unprofitable heavy-duty bus tenders.