Tuesday, October 6, 2015

Ashok Leyland: Positives priced in

Ashok Leyland continues to gain market share from rivals, with overall sales (commercial vehicles) in September growing at 61% year-on-year as against expectations of a 38% growth.

In the medium and heavy commercial vehicles (M&HCV) segment, its sales were up 83% year-on-year while Tata Motors reported a 53% jump and Volvo Eicher increased its volumes by 27%. Ashok Leyland’s market share in M&HCV has increased from 28.5% in FY15 to over 31% now, its highest level in over a decade. This is due to its strong presence in the faster growing heavy truck segment. In addition, higher sales for the sector and for Ashok Leyland has been due to pre-buying for meeting the anti-lock braking system that became mandatory from October 1. 

While thus far, replacement demand and a low base have led to a spike in sales growth, for fresh sales to gain momentum there has to be significant improvement in infrastructure and industrial activity. 

Most analysts say that a recovery in industrial activity is expected to happen in the second half of the current fiscal. While the M&HCV sector is expected to grow upwards of 22% over the next couple of years, Ashok Leyland is estimated to grow at a higher rate of 25%. Volumes for Ashok Leyland, which were at 66,000 at the end of FY15, are expected to more than double by the end of FY18. 

Increasing volumes (and leverage benefits) coupled with lower discounts and price hikes have helped the company improve its operating profit margins. The company’s margins, which had touched a low of 1.2% in FY14, have recovered and are expected to move up on the back of falling commodity costs and tax breaks (100% excise duty benefits) at the Pantnagar plant. 

Nomura analysts expect margins, which were at 7.6% in FY15, to move up by over 400 basis points to 11.7% by FY16. In addition to improving profitability, one of the reasons which led to the re-rating of the stock over the last two years has been deleveraging. The company raised Rs 660 crore via a qualified institutional placement and sold non-core assets (including holdings in group companies) to bring down its debt. In this context, the IPO of its finance subsidiary Ashok Leyland Finance should also help as it will strengthen its capital base and help expand its lending business. 

The stock has gained about 77% since the start of the year and about six times over the last two years. Analysts at Nomura believe that with the stock trading near the upper end of its expected trading band of 10 times its FY17 estimates on enterprise value to operating profit parameter, the positives are already priced in. Long-term investors though can consider it on corrections.

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