Ashok Leyland Limited (ASHOKLEY) Q3 FY23 Earnings Concall Transcript

Ashok Leyland Limited (NSE:ASHOKLEY) Q3 FY23 Earnings Concall dated Feb. 02, 2023.

Corporate Participants:

Dheeraj Hinduja — Executive Chairman

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Analysts:

Nishit Jalan — Axis Capital — Analyst

Jinesh Gandhi — Motilal Oswal — Analyst

Kapil Singh — Nomura — Analyst

Pramod Kumar — UBS — Analyst

Raghunandhan NL — Emkay Global — Analyst

Gunjan Prithyani — Bank of America — Analyst

Hitesh Goel — CLSA — Analyst

Chirag Shah — Nuvama — Analyst

Arvind Sharma — Citi — Analyst

Mukesh Saraf — Avendus Spark — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Ashok Leyland Q3 FY’ 23 Conference Call hosted by AXIS Capital Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nishit Jalan. Thank you, and over to you.

Nishit Jalan — Axis Capital — Analyst

Thank you. Good afternoon, everyone. Welcome to Q3 FY ’23 post-results conference call of Ashok Leyland. From the Management team, we have with us Mr. Dheeraj Hinduja, Executive Chairman; Mr. Shenu Agarwal, Managing Director and Chief Executive Officer; and Mr. Gopal Mahadevan, Director and Chief Financial Officer.

I’ll now hand over the call to Mr. Hinduja for his opening remarks, post which we can move to Q&A. Over to you, Mr. Hinduja.

Dheeraj Hinduja — Executive Chairman

Thank you. Good afternoon, ladies and gentlemen. It gives me immense pleasure to be in touch with you, and I thank you very much for the interest shown in Ashok Leyland. I will quickly run you through the Q3 performance as well as some of the latest developments.

Extremely happy to share that Q3 FY ’23 continued to be good, aided by strong performance in domestic truck sales with 32.6% market share. This is almost a 7.3% increase over our market share during the same period last year. This is the fourth consecutive quarter of 30%-plus market share for Ashok Leyland. In Q3, MSCB truck volumes have grown more than 1.3 times than the industry growth, resulting in AL market share improving to 32.6% as compared to 25.3% in Q3 of last year. EBITDA for Q3 was at INR797 crores, 8.8%, as against INR224 crores, 4% in Q3 of last year.

Our LTV volumes in Q3 are higher than last year by 15%. Q3 domestic after-sales at INR507 crores grew at 28% over the same period of last year. Q3 operating profit was at INR560 crores as against the loss of INR15 crores in Q3 of last year. Working capital has reduced by about INR135 crores during the quarter. Capital expenditure for the quarter was at — around INR100 crores. Our profits during the quarter has helped with the reduction of net debt by about INR635 crores. Debt equity is at 0.3 times versus 0.4 times during the same period last year.

During the quarter, we have launched Partner Super in 9, 10 and 11 tons; OYSTER Wide CNG, OYSTER Wide diesel double door; 13.5-meter bus with drum brakes, Lynx Smart Staff bus chassis and expanding our range further with new products. I’m extremely confident that with these launches and the continued expansion of the network, we will sustain the market share gains achieved in the last four quarters. The growth in MHCV trucks, CIV in Q3 and LTV truck is backed by recovery in macroeconomic environment, replacement demand and pickup in infrastructure, mining and construction activity.

Healthy growth in the end user industries like cement, steel and infrastructure, as well as increase in general manufacturing activity and consumption trends continue to support demand from fleet operator. Supported by these factors, the industry volumes are inching towards the previous peak registered in FY ’19. The viability of fleet operators is expected to continue to remain healthy despite some moderation in freight rates, post the festive season.

For FY ’23, the industry volumes are expected to grow at a healthy rate supported by steady straight demand and economic recovery. The government focus on infrastructure spending and boom in e-commerce are further supporters of this growth. However, inflation concerns driven by hike in interest rates and continued high fuel prices and its impact on viability of fleet operators would have to be monitored in the near future. We are very encouraged by the resumption in the MHCV passenger segment, which reported a year-on-year growth of 132% supported by almost full resumption of offices and educational institution. However, the volumes are yet to reach the pre-pandemic level of 10,000, 12,000 per quarter.

LCV year-on-year growth of 5% is supported by healthy demand from agriculture and allied sectors. The increase last mile transportation requirements, especially from e-commerce and stable macroeconomic environment, while the pace of growth is slowing down as the base effect catches up, the volume have already surpassed the quarterly levels reported in FY 2018 and FY 2020 level and are close to industry high seen in FY 2019. The softening of commodity prices in particular steel [Phonetic] has impacted on the margins positively.

Ashok Leyland even while growing market share sequentially has been raising prices owing to higher input costs. What is good to see is that the retention of such increases is better. LCV, both DOST and BADA DOST, are gaining inroads and have been growing stronger by the day. Both these products hold immense potential for exports and are a perfect fit in our addressable market.

Aftermarket also continues to perform very well. We are putting tremendous efforts in reducing costs, both product costs as well as overhead. I know there has been a lot of interest in Switch, which is an important initiative and we are committed to developing Switch as a global electric vehicle company. We have established a name and a platform as a credible EV manufacturer. Our sales order pipeline is robust. We are chalking other plans to utilize growth opportunities fully by chasing high quality cost-effective product. After I finish, I will ask Gopal to brief you further on the results at Switch and the status with potential investors.

Finally, before I open the floor to questions, let me share the financials in brief. Revenue for Q3 at INR9,030 crores, which is 63% higher than Q3 of last year. Manpower cost in Q3 is higher than previous quarter by INR30 crores due to variable performance pay and bonus provision restatements, reflecting the current performance level. EBITDA is at INR797 crores, 8.8% in Q3, up from INR224 crores last year. Profit after tax after exceptionals for the quarter was at INR361 crores worth INR6 crores in Q3 of FY ’22.

Operating working capital for Q3 was at INR355 crores as against INR490 crores as of September ’22. Net debt was at INR2,043 crores in December ’22 as against INR2,677 crores in September 2020 — September ’22. Debt equity at the end of the quarter was at 0.3 times. Capital expenditure for the quarter was at INR104 crores. Cumulative spend till December 31, 2022 was at INR322 crores. Capex spend for the full year is estimated to be up around INR600 crores.

So before we open the floor for questions, I would request Gopal to brief you a little more on Switch.

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Thank you, Chairman. So, good afternoon to all of you. Thank you very much for the interest in Ashok Leyland.

Just to very quickly brief on Switch, I think the company is doing very well, all of you must have read about it. We just recently — the company recently has got 2,100 bus order from CSL, one of the largest orders which we have — the industry has witnessed. And this has been followed through with another 500-bus order from the Telangana State Road Transport Corporation. Of course, all of this would be finally — some adjustments may happen in the volumes when final rollout happens, but this is a very large order which is very material for the company and also for the industry. We can really see that the potential of EV is growing very fast in India.

We are also kind of poised — this company is poised to launch spectrum of exciting products. I think, the double-decker which was launched last year — the end of last year has created a lot of excitement and has raised the bar on the industry in terms of already finish and total cost of ownership and also the viability of double-decker as a transportation EV alternative.

Switch UK is also poised actually to launch the E1 bus sometime in the middle of the current — current middle of — early part of next year or later part of this year, and we are also waiting — the whole industry is waiting for the BADA DOST EV to be launched, which should happen somewhere in June or the third quarter of the current year. So there’s a lot of activity on the product development also. We have had order bookings coming in. We are waiting– the Switch UK is waiting for the European markets to recover. As you know, there has been a lot of challenge on the European and the UK side because of, not only the economic turmoil, but also the impact of the war, etc. So we believe that once this happens, we are going to see the potential of Switch UK also to kind of scale up very quickly.

Hope you would be keen to understand where we are. As we had discussed earlier, it is taking a little bit longer than expected not because there is a lack of interest from investors into it, but we just want to ensure that we are getting the right strategic partners who will kind of partner Switch and its management team in growth. There are active discussions going on with several investors both for Switch and for Ohm, which is the e-Mobility-as-a-Service company that has been structured and we’ll have more to update you maybe in the coming quarter.

We will keep you posted, but business is continuing and I think the leverage that the Switch team has been able to obtain in getting orders on product development has actually been very much on time.

So, back to you, Chairman.

Dheeraj Hinduja — Executive Chairman

Yes. Thank you, Gopal. We will be happy to take your questions now.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have the first question from the line of Jinesh Gandhi from Motilal Oswal. Please go ahead.

Jinesh Gandhi — Motilal Oswal — Analyst

Hi. Congrats on good set of numbers. Quickly if you can talk about the drivers of margin expansion in this quarter, how much would have been contributed by commodity cost benefits? And is there any reduction in discount which we are seeing, if you can talk more about that?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Okay. Let me take a shot at this. Jinesh, essentially we have seen a confluence of factors which drive margin expansion. I would say, there are four reasons for it. And you rightly observed, you mentioned two which are the most important ones or the critical ones. One is, there has been improvement in realization, and we have been consistently raising prices over the last few quarters. We have done that even in the month of January, because we believe that with the growing demand, we also need to raise the prices because there has been a switch from BS IV to BS VI. And while metal prices are coming up, which is extremely positive for the industry, we also know that there has been an increase in steel prices, which has happened over the last two, three years. So, we continue to kind of raise prices as efficiently as possible.

The second one is, again, as you mentioned, steel prices have come off quite sharply. And as Chairman had mentioned, our expectation is that they will continue to be at these levels or even a little softer in Q4, which will kind of help in improving margins as we move forward.

The third thing, which has also improved, as I mentioned, for and now I kind of explain to, the other two are the mix of the products. We have been continuously working on the mix to ensure that the higher profitable SKUs are being sold, and this has helped.

And finally is the absolute volume itself. We have seen significant improvement in market share. Just one year back, in August 2021 or so, our market share was at about 18.5%. We have scaled about 30%, significantly about that in the current quarter. And we hope to kind of pursue growth as we move forward. This has been possible because of the exemplary performance of the AVTR range of vehicles.

The modular range of vehicles has been accepted very well in the market, and there is quite a bit of pull in certain segments for AVTR vehicles. And I think in terms of quality, cost, delivery, total cost of ownership, fit and finish, I think AVTR range has actually proved itself. The light commercial vehicles have also been doing reasonably well. They have seen some headwinds occasionally, but they are on a growth trajectory and all of this volume growth has also helped in the operating leverage, if you notice.

Jinesh Gandhi — Motilal Oswal — Analyst

Okay, okay. And are we seeing a real moderation in discounts now? I mean, one of the largest player has talked about moving towards demand pull model. So, are we seeing benefit of that on the ground now?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

I hope that the industry will — given the fact that this is a very unique industry where it is actually there’s so much of demand which should actually be a sellers market, so to speak, but we have seen that there has been deals were getting won based on price, which was absolutely not necessary. We are seeing that discount levels are coming off a bit. We are expecting that we would see a little more consolidation on that in the fourth quarter.

Finally, Jinesh, as you know, and to all the other investors also who have joined on the call, what we do at Ashok Leyland is, we monitor the net price realization. Finally what matters is what is the net delivered price to the company, and that has been improving month-on-month, [Speech Overlap] because it’s not enough just to grow, which is very important for us. It is not growth or profitability, it is growth and profitability.

Jinesh Gandhi — Motilal Oswal — Analyst

Okay. That’s good to know. Secondly, can you talk about transition towards BS VI Phase 2, how do we plan to transit for that and the kind of price increase we would need to take to pass on the cost?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Well, I think the industry would — the industry is expected to raise prices on OBD-II and different players have got different technologies. So, we will be — we would continue to ensure that we are more than covering our costs and recover the same. The actual kind of numbers on the cost increase, we’ll have to wait and watch. Like I mentioned, Jinesh, each of the industry players have got slightly different technologies, but you can derisk. The only thing that I can say at this moment, while one can’t be 100% confident on this, but we are reasonably confident that we are not going to get impacted severely by this OBD-II.

Jinesh Gandhi — Motilal Oswal — Analyst

Got it. And then, last question is on the tax rate. Do we plan to move to new tax regime in FY ’23 or we will continue on the old tax regime?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

We’ll have to study the final points and details and then take a call, because there has been — I think this has been a very good budget, will be positive for the industry infrastructure and also some rationalization that has happened on the tax structure. But we have more to share our guys — our tax pundits in the company are pouring [Phonetic] over the finer details. But at this point, I will not be able to share anything here.

Jinesh Gandhi — Motilal Oswal — Analyst

Okay, great. Thanks. I’ll fall back in queue.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Kapil Singh from Nomura. Please go ahead.

Kapil Singh — Nomura — Analyst

Hi. Good afternoon, sir. Congrats on a great set of numbers. My first question is on demand. If you could share your outlook for 2024, you mentioned about some of the positive catalysts as well as the risks [Phonetic] on the balance. Do you expect like a double-digit growth next year? And also, for this OBD-II norms, is the last date March 31 for production or this is the last date for registration? And do you expect any element of pre-buy?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Okay. Dheeraj, do you want to take the one on demand or…?

Dheeraj Hinduja — Executive Chairman

Sure. Well, I think, we’ve seen a very strong recovery during this current financial year. And based on all the initiatives that we heard in the budget yesterday and the special focus on the capital expenditure and transportation, we do expect that this strong momentum to continue. In terms of quantifying it, I would say that depending on finally how the GDP growth rate moves, our industry is very closely correlated with that. But I think all indications are that it will continue to remain very strong year next year as well. Gopal…

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Yeah, go ahead.

Dheeraj Hinduja — Executive Chairman

Yeah. So, Kapil, on OBD-II, we’ll have more to share possibly closer to the end of the quarter, as I had mentioned to Jinesh also, because we need to get some clarity overall. But all I can tell you is that we are well positioned in terms of the technology that we are currently offering in OBD that we would be able to kind of seamlessly move forward on that.

Kapil Singh — Nomura — Analyst

Yeah. The question was also because we all know prices will go up, we don’t know to what extent. But normally that leads to a pre-buy. So that’s where the question was coming from.

Dheeraj Hinduja — Executive Chairman

Yeah. So, it’s a good question. I mean, the only point is, see, the pure — my viewpoint is this, while it’s so easy to say that because there’ll be a pre-buy, I don’t think that, that will be a huge driver in terms of a change. Like, for example, if you notice in 2019, ’20, right, which was pre-COVID, the entire industry was expected to have a heavy pre-buy because of the implementation on BS VI from April 1. But we saw that quarter-on-quarter in ’19-’20 actually the demand was not going even though the cost of the vehicles was supposed to go up quite significantly. Of course, unfortunately after that, we had an immediate outbreak.

I think what we’re going to see is that if the prices that’s going to be raised by the industry is going to be quite material. You could see some amount of pre-buy, but I’m sure that the whole — see, the best part of — let me put it this way. The best part of this current year’s demand has been that this has been a quite a pull from the customers. There is genuine demand on the ground, all industries are doing well, there is huge amount of interest spend. So, I think even if that continues, that would be — this trajectory is sufficient for posting a healthy growth in the current quarter. On top of it, if there is an OBD to pre-buy, well, that’s going to be positive, but I don’t think we are planning for a material demand increase because of OBD-II, but we’ll have to wait and watch.

Kapil Singh — Nomura — Analyst

And sir, second question is on margins. I just wanted to understand how you think about the evolution of margins, sir. So you can probably throw light upon three areas. One is, whether you expect further commodity benefit, second is on pricing, and third is on operating leverage, because we are seeing that your other expenditure is not rising as much as the revenue growth now. So, are most of the costs related to, say, travel or KMC and all are already there or you expect R&D or other things — they are already there in the numbers now or do you expect any material increase there? So, just how you think about these three buckets of costs as we head into next year.

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

I’ll possibly give a general view and then possibly request Chairman or Shenu to add. You see, what we are doing in the company today is to drive operational efficiency across the company. We have been doing it over the last several years, of course. We have had various programs and material cost reduction, overhead reduction and all that. But what we’re now trying to do is slightly larger, and this has been kind of disseminated to the operating teams itself. So there is a separate team that’s looking at manufacturing, planning and manufacturing cost, for instance. There is a separate team on BAV and product cost.

The third one that is there is on sales realization itself. We are actually doing a detailed heat mapping of what’s happening on the market, what are the realizations across the various markets, how can we keep tweaking the mix and the distribution to look at improving the net price realization. I talked about realization, I’ve talked about distribution cost, I’ve talked about margins. There are teams on overheads, but what we’re trying to do is to use digital in a more wholesome way to drive productivity and reduce costs, which does not add value either to the customer or to the vendor or to any of the people in the chain. So, there is a lot of substitution of effort that is happening.

Finally, we are also looking at productivity of people, and there’s a lot of engagement that is happening at the ground level. There is a huge effort in actually ensuring that the whole team is working towards one goal, and not giving any forward-looking statements, but our plan is to do three or four things; one, to get deeper penetration and grow the share of business in India; the second one is to ensure that we grow businesses, which is LCV, international, defense, power solutions, aftermarket, grow even at a faster rate so that this helps to devolatize the company and secondly also improve the margins. As I told you, the group businesses have significantly better margins than the main MHCV business.

And exports is going to be something that we are looking forward to, because currently the international markets are very, very choppy and they have not given us the opportunity for growth as we would like, even though we have been growing in the Middle Eastern markets. So, this is going to be, for us, very important and we would want to ensure that we are also introducing very relevant and differentiated products as we move forward. These may not be very large offerings. But one thing that has happened to us has been that the AVTR range and the BADA DOST have done exceptionally well because these have been completely differentiated products that Ashok Leyland has offered, and that has helped us. So we will continue to look at the benefits of better deeper penetration, cost management and, more importantly, operating leverage driving the profitability of the company as we move forward.

Kapil Singh — Nomura — Analyst

Thank you very much. Thanks for the detailed answer.

Operator

Thank you. We have the next question from the line of Pramod Kumar from UBS. Please go ahead.

Pramod Kumar — UBS — Analyst

Yeah. Thanks a lot for the opportunity, and congratulations on an excellent set of operational number. Dheeraj, my question is on the demand side. You did mention about segments like cement, steel and infra which are doing well. If you can just help us understand better given that the data availability has got really good nowadays. If you can just help us understand what is the split of demand for the first nine months for you in terms of broader end user applications where these stocks are going and categories which are kind of performing better or categories which can still come back in a good way like Tipper and other categories, which you haven’t spoken about? If you can just give us some more color about the demand — end user demand and what are the sectors which you are kind of optimistic and what sectors can do better.

Dheeraj Hinduja — Executive Chairman

Yeah. As I had mentioned, Pramod, I mean, it’s quite a bit of detail, but broadly let me tell you. What’s happening is that one of the reasons why the industry profitability is also moving better is because we’re seeing that there is — the demand has increased quite significantly in comparison to the other sectors, in multi-axle vehicle, in tractor trailers and in tippers. These are the more profitable.

The second one that is happening is the demand is also going for the larger tonnage. So that is why we are seeing that the vehicles that are getting sold are the 40 tonners and 49 tonners. So that becomes — that drives — that’s why I mentioned earlier that this helps in the profitability of the industry getting better. ICVs are important for us as a company as well and as a segment as well. We have been gaining growth and share in the ICV segment. But obviously the ICV segment is lesser contributing than the heavy commercial vehicle.

Now, the other point is with respect to sectors. I think almost all significant transport, I would say, inducing sectors are doing well. Real estate has again continues even in the new budget, I think, with the impetus that has been given [Indecipherable] real estate grow. Real estate is very, very important for — the transportation is very crucial for this. Infra, the government continues to kind of pursue on infrastructure and investment as a growth trajectory for the economy itself. And we are also seeing that almost all industries are posting good growth. So, if you look at the core sectors, if you look at cement, steel, chemicals, all of these sectors are — paper — all of these are doing very well.

The other that is doing well, where we are seeing some bit of ICV growth is of course e-commerce. I think there has been a lot of change in demand patterns, especially after COVID. You’re seeing that e-commerce has now become very crucial for the average consumer. And even what is happening is, it is not only this that is also optimization of logistics that is being looked at. So, today, the focus has become that we need trucks which will perform, which will deliver on time, which will reduce the total cost of ownership. So why I’m mentioning this is the good possibility trend where the replacement cycle of some of the BS-II, BS-III trucks which are there or even to a certain extent BS-IV, would actually start happening faster because today it is not about just having wheels on the road, it’s about getting things on time, point to point and all organizations are becoming very, very efficient in their inventory management.

So, we see a whole host of opportunities coming in. But at the end of all of this, what is most important is, the economy has to grow. That is where I think India scores, and possibly we will see industry growing over the next maybe two years at least going by the global forecast.

Pramod Kumar — UBS — Analyst

Fair enough. And Gopal…

Dheeraj Hinduja — Executive Chairman

I think just one point to add to that, equally on the passenger side, as you will see, there is growth coming in, in all areas right from staff transportation to school, and also huge growth in the electric vehicle buses as well, as you heard from Switch. So, across the board, all the segments are showing very strong recovery.

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

That’s right, Chairman. Actually I missed on the passenger side completely. I think that’s going to show, as you mentioned, a faster growth because we have quite far from the peak volumes that we’ve had. That’s a very good point.

Pramod Kumar — UBS — Analyst

Yeah. And just a follow-up on that. On the utilization side, Gopal, because the factors which are headwinds for the sector like rising interest rates, moderating growth rate, but despite that, the industry has really surprised everyone on the monthly velocity in terms of the volumes Voltas — what are getting added. And one cannot forget the fact that the tonnage addition is significantly higher than the previous cycle, because the average size of trucks have gone larger. So given all that, what is the feedback you’re getting from the end users like — if you have to get confidence on next year being a good growth year, utilization of the fleet will also be very important, and hence the replacement cycle or whatever contractual or regulatory, new — purchase of new trucks. How are you looking at utilization level, let’s say, different categories and the haulage is something which I think you did not mention in a positive light. So is that category is still not doing that great — haulage?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

No, no, no. I’ve mentioned haulage also. I said that, what is happening — I did mention haulage also. That’s also another sector that’s growing. I said all the large trucks are doing well, and so is the ICV. But the pull from the larger trucks, especially in tippers haulage, and I had mentioned tractor-trailers, all three, that has actually also improved the profitability. See, as far as next year is concerned, as we had mentioned, at the moment, we see the overall — all of you and all of us are confident that next year is also going to be a growth year. And given the forecast of the GDP, which we have recently got not only for the current year, for the next year as well, we don’t see any logical reason why the demand for trucks should come off, because there is nothing unusual that has happened.

In the past, you must remember that we have had a lot of shocks, or I would say sudden developments like an axle-load norm coming in or suddenly GST getting introduced or other factors, NBFC crisis coming in which had actually resulted temporary contraction but axle-load had a much larger impact. Today, what we’re seeing is, as Chairman had mentioned, one is, we have not yet fully seen the demand of buses coming back because the impact of COVID is just waning, and we are actually seeing people having — getting pulled back up into offices, schools. Inter-city transport is going to become crucial, and other SKUs would want to place orders. And now, again, as Chairman had mentioned, we are not only going to see demand possibly in internal combustion, but also EV. There is — that is why, for us, Switch is very, very important. Switch is not — it’s not a portfolio, it is for ensuring that Ashok Leyland is future-ready.

The third bit is, if the economy is going to grow and we’re going to see growth happening in all the major sectors, including the sectors that impacted, there is no reason for us not to plan for growth, because it’s not just about hoping for growth. This is a very complex industry. We need to plan for it also.

Pramod Kumar — UBS — Analyst

Thanks a lot, and wish you guys all the best. Thank you.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Raghunandhan from Emkay Global. Please go ahead.

Raghunandhan NL — Emkay Global — Analyst

Thank you, sir, for the opportunity. Congratulations team on very strong number, and welcoming Shenu sir on the platform. My first question. Ashok has been doing very well on market share, favorable mix, network expansion, new products have been supporting factors. Can you share your thoughts on how you see the sustenance of market share ahead?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Dheeraj, do you want to take it?

Dheeraj Hinduja — Executive Chairman

Yes. The last few quarters, we have gradually been increasing our market share, and that’s been a long around effort right from the product itself, which are performing very well, as Gopal was just explaining. And at the same time, the network expansion. Geographically, you would see the growth is happening across the board, across the country, and we’ve been able to increase our market share in every zone that we are operating in and every segment as well. Going forward, I would say that our aspiration is very much to continue this growth. And as I think something I’ve said earlier as well, but to continue this growth on a profitable basis, we’re not looking to buy market share, we want to do this through our better product performance and our customer care and service. So we do — we are looking forward to continuing our growth in market share.

Raghunandhan NL — Emkay Global — Analyst

Got it, sir. Good luck with that. And specifically coming to Q3 revenue performance, can you also indicate how was the performance in the non-vehicle side of business? In press release, you have alluded to aftermarket and power solutions business doing well.

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Yeah. I think — yeah, aftermarket has done well. I mean, while we don’t give specific breakdowns on this, it has been growing at about 20%, 25% as well, and power solutions in absolute term for Q3 has been flattish. But on a YTD basis, if my memory serves me right, they have posted nearly about 18% to 19% growth. So, I think these are very important business for us like we said.

Defense business has seen some bit of, I would say, challenge now because of the ordering. It’s got nothing to do with the business, but I think what — we are waiting for the government orders to happen, especially on the kit side. So we’ll have more to share with you at the later part of this year. But otherwise — and exports has also, in YTD terms, has grown. Last year itself, it had grown by about 30%, 40% to 11,000 units from the previous year of 8,000. We are certainly expecting the growth in the current year as well. But we are waiting for the markets to kind of open up, international markets to open up, because there is a lot of uncertainty in the international waters currently.

But having said that, the international team has also kind of chalked out its plan pretty clearly. There are teams now specifically looking at project orders and there are teams which are looking at retail distribution. So, in countries like Africa, while it’s a little too early to share those developments, what we have been looking at is, how do we get the network in place, how do we get the financing in place which is going to be important not only for the dealer but for the end customer as well. But you possibly would see that the export volumes, if things start to return to normalcy in the international markets, you would possibly see that our export volumes will start to gain momentum.

Raghunandhan NL — Emkay Global — Analyst

Thank you for that, sir. Just lastly, can you indicate what is the kind of investments you expect for ’23 and’ 24?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Again, we will have to — we are having our budgeting season now. So it’s a little too early to share what next year’s capex will be. All that I can give you as an indicator is, on the regular capex, we do not see any major chunk of investments. Every year we give a forecast that we would go about INR750 crores, including capex plus investments. So we’ll come back with you — come back to you possibly in the fourth quarter earnings call. That would be more appropriate.

Raghunandhan NL — Emkay Global — Analyst

Thank you, sir. Wishing all the best.

Operator

Thank you. We have the next question from the line of Gunjan Prithyani from Bank of America. Please go ahead.

Gunjan Prithyani — Bank of America — Analyst

Yeah, hi. Thanks, team, for taking my question. Most of my questions have been answered, and very few — very quick follow-ups on the margin side. Would it be possible to give us some sense as to the 170, 180 basis point gross margin improvement that we’ve seen? Is it fair to assume that this is — bulk of this is coming because of commodity easing? And do we expect that we can — similar sort of improvement kicking in, in quarter four as well or bulk of the commodity correction is reflected in this Q3?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Gunjan, we do have the numbers per se, because we do slice and dice it internally. But what I would say is that this has been a conference. You have seen price increases happening in June quarter, September quarter. We did a price increase, I think, again in the third quarter, and then we have announced a price increase. So, obviously we have got about 4%, 4.5% of price increase happening to-date. That’s a net price increase. I’m giving some broad numbers. These are not absolute on the dot.

The second bit is, of course, steel prices have come off. So that has also kind of helped in the overall margin improvement. So these are the two large things that have actually helped in the margin improvement. And finally, of course, we have also seen, since you’re talking about contribution of material cost, so I will not talk about operating leverage. But the third bit that has happened has been the mix of the products, which I had mentioned that the industry is moving towards slightly larger tonnage, which is good for the industry.

Gunjan Prithyani — Bank of America — Analyst

Okay. And this commodity tailwind will still sustain going into quarter four is what I’m like just trying to understand?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

We are hoping that that will happen, because it’s good for the industry. We’ve had, I think, ’20-’21 and ’21-’22 partially were very tough years for the industry, not only because of COVID but also the soaring steel prices that were there. And it’s good to see that prices have softened. So, it’s very difficult — it’s a conjecture at this moment in time whether the reduction that has happened in Q3, will we see the same amount of reduction happening in Q4 further, we don’t know. But like I mentioned earlier, we are expecting that prices will continue at least at the exit rate of Q3, which is lower than the entry rate of Q3. So, to that extent, there is some benefit.

Gunjan Prithyani — Bank of America — Analyst

Okay. Got it. The other one was — and I may be wrong on this — Leyland Finance, I mean, I do see some pref allotment there. I mean, is that something which AL has also participated, some color on incremental investments have gone into the finance business?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

No. Actually, just to kind of give a brief update on Leyland Finance, there was — they had a qualified institute — QIB placement happening for about INR910 crores, which was announced. So, they are adequate on capital. And that is, in a way, for folks who are looking at the Ashok Leyland balance sheet, will be positive because there is no demand that will come in from Ashok Leyland for funding, Leyland Finance growth plans. They are adequately funded.

I also wanted to share that they have also announced that there will be a merger with NXTDigital, which is a court-approved process, and that is also underway. So, with the regulatory approvals and all the necessary shareholder approvals they come through, then the outcome would be that Hinduja Leyland Finance will become a listed company.

Gunjan Prithyani — Bank of America — Analyst

Got it. And lastly, on scrappage, if you can share some thoughts, anything that we should read into the budget incremental impetus or any progress on that scheme, do we see that as an industry growth catalyst for the next one or two years?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Okay. I’ll just quickly give a — see, we are also waiting for the detail of the budget notification to come in. But what the government has said is that all vehicles above 15 years would be scrapped, and there’s a lot of focus mentioned. It includes past cars [Phonetic], etc. I think, if I’m not mistaken, the government representative or is it the Honorable Minister, I’m not too sure, had mentioned the potential of nearly about 9 lakh units, but that’s spread across vehicles, okay? It’s not — but we believe that this is definitely a positive, like we have been mentioning earlier. Any sort of a policy announcement like scrappage means the government is signaling towards exiting the older vehicles, right? And we believe that this acceleration will happen even faster because there is [Phonetic] changes in technology. We can’t have a situation where our BS-II, BS-III, BS-IV, BS-VI all plying together when the government is also commented on the environment side.

So, like our Chairman mentioned, we see two opportunities. One, the replacement cycle should — we could see that because of this scrappage, there’ll be some addition to the replacement cycle. The second one is, we are also seeing that because of the trust on the government, including PLI, we’re going to see maybe faster adoption of EVs, which is again good for Ashok Leyland.

Chairman, do you want to add something?

Dheeraj Hinduja — Executive Chairman

No. I think, Gopal, you’ve covered it. We need to see the finer details. And I think since — while the government has been talking about the scrappage policy and if there is some form of support that comes in from the center to the state governments, I think that will expedite it. But if more firmer or more clear directions come on this, it will definitely have a good impact for our industry.

Gunjan Prithyani — Bank of America — Analyst

Okay. Got it. Thank you so much.

Operator

Thank you. We have the next question from the line of Hitesh from CLSA. Please go ahead.

Hitesh Goel — CLSA — Analyst

Yeah. Thanks. Most of my questions are answered. Just wanted to touch base more on the scrappage policy. Do you guys are also setting up scrappage centers or you are looking at doing that in anticipation of this policy? Because I think, like you said, there’s a lot of focus from the government on this, and maybe post elections, we could see something on this front. So, have the government started talking to industry on scrappage centers?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Chairman, would you want to take that?

Dheeraj Hinduja — Executive Chairman

Sure. We have, of course, been considering this since a while. We’ve explored the contours of what this would involve, but we have not gone into any capex mode at this point of time, just waiting for the finer details to be announced. And then, once we know exactly what this would entail, we would be able to fine-tune our investments accordingly.

Hitesh Goel — CLSA — Analyst

Okay. So, I just wonder — so, second question. Gopal, you said that the freight rates have kind of softened — I think Mr. Hinduja said that — after the festive season. So why has that happened was, because when I see — there is some slowdown in consumption for sure, but when I see the E-Way Bill data, that is growing pretty rapidly. So, truck utilization should not have come off. So can you shed some more light on this? Is it more seasonal or you are seeing softness in freight rates going ahead as well?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

I don’t think — I think what we mentioned was more an overall — overarching kind of view of what is happening in the industry. That is certainly not a trend. And I think we should see that — we don’t see any major impact on freight rates, and we have no data to state that freight rates will soften further.

Chairman, would you want to add something?

Dheeraj Hinduja — Executive Chairman

No. I think you’re right. I mean, what I said is, the viability of fleet operators remains healthy, although there has been some moderation in the freight rates during the festive season. But I think going forward, the way the market is moving, I do not see softening on the freight rates to happen.

Hitesh Goel — CLSA — Analyst

Yeah. Great. Thank you. Thank you, Mr. Hinduja. Thank you, Gopal.

Operator

Thank you. We have the next question from the line of Chirag Shah from Nuvama. Please go ahead. Mr. Shah, can you hear us?

Chirag Shah — Nuvama — Analyst

Yeah, hello. Thanks for the opportunity. I have two questions. First question is on market share. If you can elaborate just a bit, is it coming from — because bounced back in traditional strong markets or the gain is largely coming from non-South markets where we have been making more inroads?

Dheeraj Hinduja — Executive Chairman

Well, Chirag…

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Go ahead, Chairman. Please go ahead. Please go ahead.

Dheeraj Hinduja — Executive Chairman

No, I was just going to say that, as I mentioned, our market share growth has come across the country. In fact, we’ve had a stronger growth in the North and East in terms of the overall percentage. And we see — I mean, it has been due to the increase in the expansion of our network. But also, as Gopal has been explaining as well, there has been a strong product pool, which has also helped us. So, it is not only Southern market growth, but it is an all India growth that we’ve seen, the Western markets, North, East, Central, across the board.

Chirag Shah — Nuvama — Analyst

This is helpful. Sir, second question was on the nature of demand again. I’m getting some consulting reports which indicate that small truck operators/first time operators are still not coming to buy. They are still trying to use the replaced vehicle and older vehicle, and the demand is coming largely from medium and large fleet operators. Is this information correct or you are already seeing some insights coming from small truck operators also?

Dheeraj Hinduja — Executive Chairman

I think, leads today, if I’m not wrong, comprise anywhere between 60% to 70% of the overall industry volume. And what you’re also seeing is that the smaller operators in some way are getting tied up with the fleets as well. And we are seeing a lot of purchases from the first-time users as well. Of course, from a content perspective, fleets buy in 50s or 100s of units. But I would say that we actually see that the demand coming from all segments, it’s not only restricted to the fleet operators.

Chirag Shah — Nuvama — Analyst

Yeah. And just a clarification. You indicated that at least for Q4, the commodity benefit is going to be similar or maybe a little bit soft, right? So, is it the large part of the benefit has come through and then how Q1 would play out will depend upon how the prices behave from hereon? Is this the right way to understand on the commodity basket?

Dheeraj Hinduja — Executive Chairman

Gopal, will you respond to that?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Yeah. See, you are asking a very tough question, and asking us to pear into the crystal ball. We’ll have to really wait and watch how the commodity plays out, right? I mean, even after — initially for a day or two or three, it was actually when the export duty was removed on steel, for example, there was a perception that steel prices will harden but they haven’t, because the point is that the Indian prices still continue to be higher than the global prices. So, at the moment, all we can say is, visibility till fourth quarter and even the fourth quarter the commodity prices continue to be at the third quarter level or at the exit level as we kind of believe it will be. Then it would have a positive impact. Of course, if it falls even further, then it has a greater impact, but these are all imponderables at this moment. But we haven’t seen — all we can say at the moment is, sitting on February 2, we haven’t seen a further decrease happening in commodity but neither has there been any increase.

So at the moment, it looks like it is at the third quarter levels. April 1, I mean, in Q1 of next year, we’ll have to really wait and watch to see what happens in the global commodity markets, because this is not just about Indian commodity, right? A lot of things is going to depend on the global demand-supply condition also. So, we will have to take — cross the bridge when it comes in.

Chirag Shah — Nuvama — Analyst

And we have kind of a quarter lag, right, so the impact to flow through for us?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Yeah. In a way, yes, because of two reasons. There is inventory as well, right? I mean, so we are seeing the benefits. So there is FG inventory, there is RM and WIP, which is there. Then — so when that needs to get used, and then typically the industry also doesn’t settle on a month-on-month. The steel price — you know the steel industry, these are done on a quarterly basis. So we have to really kind of have actively engaged with them to actually settle these prices.

Chirag Shah — Nuvama — Analyst

Thank you. Thank you very much.

Operator

Thank you. We have the next question from the line of Arvind Sharma from Citi. Please go ahead.

Arvind Sharma — Citi — Analyst

Yeah. Good afternoon, sir, and thank you for taking my question. Sir, just one question on the net debt. If you could just explain how it has progressed from last year-end, essentially the free cash flow generation, capex and how the net debt has progressed over last three quarters? Thank you, sir.

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Yeah. Our net debt now is about 2,000 — just give me a moment, I have the number. So, our net debt is INR2,043 crores. And I think in Q3 of FY of ’22, last year it was INR2,697 crores. I think the number was almost the same, INR2,677 crores in Q2 of FY ’23. The capex is roughly about INR346 crores, INR350 crores. So, I think we are well on track. You know that we are pretty conservative on the — I mean, we are tight, not conservative. We are pretty tight on the capex and there is multiple levels of discussions before we spend money on that. And overall, if you look at it, the net debt levels have been kind of improving, and we don’t see an issue on that. I mean, I don’t know whether you have specific question on that.

Arvind Sharma — Citi — Analyst

No, sir. And would you have any — no, since you have some idea about the capex in the fourth quarter, any idea about where we could end up fiscal ’23 at? Because, I mean, the EBITDA margin is expected to be better given the volume. So, do you think that this could improve significantly over the next quarter?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

So, you see, as I mentioned, I stand corrected on this, it’s not INR343 crores, it’s INR321 crores, right? So, the capex was INR321 crores. We had, at the beginning of the year, if my memory serves me right, we had said that it will be around INR750 crores, maybe we’ll end up with INR600 crores. All I can tell you at this moment is, we have two months more left. It should be lower than INR600 crores definitely. Maybe we will even take it a little lower than that, but we’ll share that. So, all I can tell you, it’s not a material amount of capex that we have today in the current year.

Arvind Sharma — Citi — Analyst

Sure. Thank you so much, sir. Thanks. That’s all from my side.

Operator

Thank you. We have the next question from the line of Jinesh Gandhi from Motilal Oswal. Please go ahead.

Jinesh Gandhi — Motilal Oswal — Analyst

Hi. My question pertains to the capex itself. I mean, given that we’re expecting a strong growth to continue in FY ’24 and given our other investment programs, should we look at increase in pace of investments going forward for the future growth both on product and capacity side?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

Chairman, would you want to take that?

Dheeraj Hinduja — Executive Chairman

Yes, sure. I think on the capacity side, we are — as Gopal was saying, we are looking at all the internal efficiencies that we can bring in, debottlenecking within the plants wherever there are possibilities. So, based on the current volume that we foreseeing, I think, we should be able to manage with the capacity that’s on ground. We do not want to get into creating more overheads at this point of time.

With regard to the product, as you recall, the introduction of AVTR as a modular platform, the benefit of it is that there is very minor modifications. We are able to meet whatever the customer requirements are and in alternate fuels as well. So, moving to whether it’s CNG, hydrogen, LNG, and I think that’s the benefit of the AVTR platform. That was the high capex that we went through. There are certain product categories that you are not currently present in, and we would be looking in to setting up any gaps that we have in the portfolio. But at this point of time, I think we are not seeing anything substantial to hit our capex requirements.

Jinesh Gandhi — Motilal Oswal — Analyst

Okay. Okay. And just to clarify, the investment on the electric vehicle products, particularly in the LTV side, will be done through Ashok Leyland and not through Switch. Is that correct?

Dheeraj Hinduja — Executive Chairman

No. Like all the products coming out of Switch, the capex will be borne by Switch directly. And so, of course, there is agreement between Ashok Leyland and Switch based on which these products would be utilized, but all the capex required for the electrification would be borne by Switch directly.

Jinesh Gandhi — Motilal Oswal — Analyst

So within the product, those EV would be invested by — product investment would be at Switch level, not at Leyland level?

Dheeraj Hinduja — Executive Chairman

That’s right.

Jinesh Gandhi — Motilal Oswal — Analyst

Got it. Got it. Great. Thanks and all the best.

Dheeraj Hinduja — Executive Chairman

Thank you.

Operator

Thank you. We have the next question from the line of Mukesh Saraf from Avendus Spark. Please go ahead.

Mukesh Saraf — Avendus Spark — Analyst

Good afternoon, and thank you for the opportunity. Just the one question from my side on the fleet operators. What we are hearing from large ones such as VRL is that the smaller and more unorganized fleet operators are losing out. So, the question here is, what does this mean for us? Do we see the product mix probably shift towards larger trucks or maybe even fully loaded trucks? And on the other side, does it also mean that the pricing gets a lot more competitive, given that the large operators might bargain harder? So, how does this play out for us?

Dheeraj Hinduja — Executive Chairman

I think, from a product segment perspective, irrespective of the buyers, whether it’s first-time users or whether its fleet operator, what we see is that there is a clear segmentation on the delivery models that people require, right, from an LCV. ICV is still remaining the larger segment of the market. So, we are looking at the fleet between 9 to 18 tons — or product range between 9 to 18 tons. Still it’s a very large segment. So, while we’re looking at the whole distribution cycle, the last mile delivery to the long distance that’s needed across the country, I think we will continuously see all the different product categories are growing based on the market demand.

And on the — yeah, sorry, what is the second part of your question?

Mukesh Saraf — Avendus Spark — Analyst

So, it is basically when you deal with larger operators, would it also mean that you don’t get that much of a pricing power with them?

Dheeraj Hinduja — Executive Chairman

Well, I think a lot of it also depends on the demand itself and, today, the demand remains very strong. And the competitiveness of the other OEMs as well how they are pricing. But as are seeing currently, the prices would be — improving realization based on the current demand requirements. So, I’m not seeing any decline or reduction in terms of our ability to price our products.

Mukesh Saraf — Avendus Spark — Analyst

Sure, sure. Thank you. That’s about it from my side.

Operator

That was the last question. I would now like to hand it over to the management for closing comments.

Dheeraj Hinduja — Executive Chairman

Thank you, and thank you for your interest in Ashok Leyland. And I think, as we mentioned, we’ve had a good quarter. We are seeing this trend to continue, the government’s commitment towards their capex and possibly the scrappage scheme introduction as well, all hold good promise for our sector. And we have grown our market share in the last few quarters, and we continue to do so. And this is across the country market share growth and across the various product segments as well, including the passenger vehicle side. So, all in all, we remain very upbeat in terms of the prospect for this industry and for Ashok Leyland as a whole.

Gopal, would you like to add anything further?

Gopal Mahadevan — Chief Financial Officer and Whole Time Director

No. I think, you kind of wrapped it up, Chairman. So, I think we hope that we are able to continue with the performance, and the macroeconomic factors continue to support the growth of the industry. And we’ll have more to share in the fourth quarter. Thank you very much.

Dheeraj Hinduja — Executive Chairman

Thank you.