Mumbai: Ashok Leyland Ltd, the country’s second-largest commercial vehicle manufacturer, on Tuesday reported a decline of 16% in its net profit and a 11% slide in its operating margins but expects the second half of the year to be better, chief financial officer K Sridharan said in an interview.
He said the Hinduja-group-owned company’s thrust on non-cyclical business, price increases and a significant decline in commodity prices will help it retain last year’s operating margins, and that all its investment and expansion plans are on track.
However, owing to scarce finance, he expects the commercial vehicle industry to see a 5% decline in volumes. Edited excerpts:
What’s your outlook for the industry and Ashok Leyland for the remaining quarters?
In terms of the industry growth, we believe that the steep fall in the months of August and September will get moderated in the ensuing months as it’s primarily a function of the availability of finance and not so much of the fundamentals. Hopefully, with the RBI taking measures to make more money available, we hope (for) some sanity coming back to the (money) market. However, we expect the industry to end the full year with 5% lower volumes. As a company, we will be maintaining our market share, if not marginally improving it.
What impact will commodity prices, which have declined significantly in the recent past, have on your operating margins, and what measures are you taking to ensure they’re healthy?
Certainly all commodities prices have crashed. We are very clear that we do not grant any further increases (in input prices to suppliers) in the second half. On the contrary, (we will) take back the increases given in the first half. We had a point-to-point increase of 0.7% increase in metal prices, which needs to be moderated. Essentially, we expect to soften it by bringing it down on the sheet side and tyre side. On the pricing side, we had taken a price increase of 2% on 9 October, the real effect of which will be seen only in November. We had also hiked prices in April and July by 3% and 2.5% respectively. Both the factors — commodity price and price increases — should help in ensuring that we do not have margin erosion going forward. Our target is to at least reach last year’s level of operating margins. On the other income side, sales of engines have more than doubled. That, coupled with increase in margins on the vehicle side, will help us achieve significant growth in the second half.
Won’t it have an adverse impact on operators’ viability?
I always hold the point that this is not a price elastic product (commercial vehicles).No doubt, any increase in price will have a dent on the operator’s viability. I, for one, would say it will not lead to a situation when an operator decides not to buy a vehicle just because i’ts costlier by Rs20,000. (The) moment he finds that the vehicle can be put to use, he will go for it, that’s the deciding factor. Moreover, this is not a product where price increase has a significant impact on the EMIs (equated monthly instalments). A 1% increase in price will lead to an increase in the EMI from Rs 800 to Rs 1,000 even at an interest rate of 14% to 15%. The guy is not going to bat an eyelid as long as the business is good.
Time and again, Ashok Leyland has reiterated its focus on non-cyclical business,. What will be its share in your revenue by the end of this fiscal?
Share of non-cyclical business, which includes non-automotive engines, exports and vehicle sales in the defence sector, should reach 40% from the current levels of 32.9% Share of engines has increased from 2.5% to 5% and volumes have grown from 5,000 to 10,000. We envisage exporting 11,000 vehicles this year against 7,000 last year. Moreover, demand from the defence sector will continue to be good ... Even the bus segment is insulated from the cyclicality as long as the state transport undertakings have finance..