Unprecedented Pricing Pressure In Commercial Vehicles, Ashok Leyland Says
Industry believes the best way to acquire customers is to give discounts: Ashok Leyland.
The pricing pressure in the commercial vehicle segment has reached ‘unprecedented’ levels, with all Indian automakers doling out discounts, Ashok Leyland Ltd. Chief Financial Officer Gopal Mahadevan told BloombergQuint in an interview.
“The industry, excluding Ashok Leyland, seems to believe that the best way to acquire customers is to give discounts,” he said.
The high level of discounts, coupled with higher raw material prices hurt margins in the July-September quarter, Mahadevan said. The Chennai-based company reported a 149-basis-point drop in margins, and lower-than-expected profit in the July-September quarter.
Here are edited excerpts from the interview:
What was the sustaining impact of the Goods and Services Tax?
Compared to the first quarter, when the total industry volume came down by 31 percent, we have seen a smart recovery in the previous quarter, where the industry grew by 22 percent. The total industry volume so far this year is about 7 percent lower than the corresponding period last year.
The automobile industry has gone through lot of challenges. On December 2016 we had the demonetisation impact, which saw the general industry climate coming down. In March, we had Bharat stage – III (BS-III) to BS-IV convergence, the transition which happened overnight.
Given that background, the industry has recovered well in the September quarter. Ashok Leyland has also grown slightly higher than the pace in the industry when we look at SIAM (Society of Indian Automobile Manufactures) volume numbers. Our market share still continues to be higher on a year-till-date basis. But the way the industry is looking at pricing, the level of discounting has become unprecedented. We don’t participate in businesses which don’t make financial sense. We believe that we should acquire customers, but it would have to be done in a reasonably profitable manner.
The main reason for pressure on the margins was pricing but there were other four reasons too. Firstly, in the second quarter of last year, we had exceptional export, which added 400 basis points to margins during the period.
The second reason, we had on-off of Rs 50 crore due to the price adjustment that happened for a defence supply because it was indexed, and that came to the bottomline.
The third reason is the steep increase prices of the raw material prices which felt across the industry and steel prices are going up. But given the fact that the discounting was high in the current quarter, we have not been able to raise prices. We are the only player in industry who have double digit operating margin. Ten out of the last 11 quarters showed double digit growth the operating margin. The strategy of the company is clearly to pursue growth but ensure that it is done in a profitable way.
If you were to remove the exceptional items in the second quarter of last year, what would have been your margin? Have you been able to improve on it or you continue to be in pressure because of the discounts?
If we look at the September quarter and the corresponding quarter in previous year, I think the margins could have been on the same levels if you remove the exceptional. But what we have to factor is how are we going to move forward.
The effort is to always keep our middle line efficient, get down our material cost as much as possible and ensure that we are able to be competitive in the market. Having said that, the investments in our acquiring customers continue, along with the network expansion.
Are you facing margin pressure because your second largest competitor is fighting to regain market share? Are you facing market pressure from Tata Motors? Or are you facing margin pressure because the improvement in truck sales is marginal, and therefore, people are seeing under cutting more volume growth? Can you characterise the pressure and whether it will sustain over the next few quarters?
I will not be able to comment on any specific players and the pricing strategies in the market. The industry, excluding Ashok Leyland, seems to believe that the best way to acquire customers is to give discounts.
For Ashok Leyland, the reasons were purely on account of pricing which was one of the reason. We had other reasons too, which are clear, i.e the on-off export or the defense pricing adjustment that happened. As far as competition is concerned, only they can explain that why pricing strategy is best for them.
But at the same time, we have decided not to participate and pursue business where the level of discounting is so high that we are not going to give customers only the vehicle but also leave some money on the table which doesn’t make sense.
Can you give us sense of what are the factors that are driving volume growth?
It is a mixture of events. One is, we have seen a lot of uncertainty in the industry. Previous quarter was stabilising a bit, so the uncertainty on GST is also moving away. So, you could see the revival of the volume.
Secondly, the rated load legislation which is getting rolled out in the country will help in driving volume growth. Because it is good positive for freight operators, the vehicles and the turnaround times are more efficient. The end customers who, are the freight operators are also happy about it. And also, it helps to improve overall safety on the road. So, it is a win-win situation for all of us...
Third is, we are seeing efficiency building because of the GST and the whole stream of transportation is moving towards hub and spoke and that is why we are seeing tractor trailer volumes and medium-duty vehicle volumes are going up, while the haulage volumes have come off because people are moving towards larger transport. They have to transport bulkier loads, which is good for the industry because the larger the vehicle you sell, the better is the profitability.
If this continues and the government pursue such investment-led growth strategy, and there is also recovery of the economy in the second half of the year, then it will be well for commercial vehicles.
Can you tell us the range within the volume growth should settle and how it is compared to last year?
I didn’t have a crystal ball in front of me and the level of uncertainty that we have witnessed over the last months is very high. If investment strategy of the growth could be rolled out quickly and if we see the revival and the growth in Indian economy, I feel that second half could be a recovery in overall year basis.
It is possible that the total industry volume could grow by 5-10 percent. Remember, the size of the vehicles has grown. If you look at the industry, it is grown because the industry is moved from 20 tonne trucks to the 37 tonne and 49 tonne.
The shift has been to 39 tonne and 47 tonne which is increasing the overall quantum of goods that is being transported.
Have you managed to maintain market share this quarter?
Yes. Pretty much, we have been able to maintain market share. According to the SIAM data, we have marginally gained.
Watch the full interview here.