Ashok Leyland: Riding on multiple tailwinds

Ashok Leyland (AL), India’s second largest commercial vehicle manufacturer, reported a strong set of numbers for the final quarter of FY18 led by robust volume growth and increase in realisation. We see numerous tailwinds for the company such as more organised players in the economy, strong exports, its defence strategy and focus on electric vehicles (EVs).

With the impact of regulatory headwinds such as demonetisation, implementation of the Goods & Services Tax and shift to BS-IV emission norms behind it, the company posted a significant year-on-year (YoY) growth of 32.6 percent in net revenue from operations. Growth was driven primarily by strong volume growth (23.4 percent YoY) and increase in realisations (7.4 percent YoY). Net realisation improved on the back of a better product mix and higher prices.

On the volume front, medium and heavy commercial vehicle (M&HCV) segment, including exports, grew 15 percent YoY, whereas the light commercial vehicle (LCV) segment grew 59 percent YoY.

For the full-year, net revenue grew 31.1 percent (YoY), helped by a 20.5 percent YoY growth in volumes and 8.8 percent YoY growth in realisation. The company achieved its highest ever domestic MHCV and LCV sales at 101,905 units and 43,441 units, respectively. It also gained market share across all segments during FY18.

AL’s operating profit margin in the March quarter rose 80 bps on stable raw material prices and better efficiencies.

For the full year, operating profit margin fell 70 bps due to steep rise in raw material prices. There was some relief in the form of a lower wage bill, but not good enough to offset higher input costs.

The management sounded positive on future growth, citing multiple tailwinds.

In the Q1 FY18 conference call, the management said Hinduja Foundries would be EBITDA positive going forward. It turned EBITDA positive in Q2 itself and performed well in Q3. On a full-year basis, it was EBITDA positive.

For the full year, the company gained market share across segments driven by new launches — 17 of them — and wide acceptance of its iEGR technology. The management expects to maintain its market share going forward as well.

It sees robust demand for commercial vehicles continuing over the next one-to-two years given the government’s thrust on infrastructure and mining. The management said the strict ban on overloading would continue to increase demand for its vehicles. While admitting to the competitive intensity, the management was confident about its products and position in the market.

The company has a focused strategy for developing electric vehicles. The management expects EVs to constitute a large part of its business in future.

Towards this end, AL is making significant investments in various technologies. It is not clear at this stage which of those would deliver the optimum result. Its focus is on keeping the vehicle cost low as that will be a critical factor in wider adoption.

The company recently launched India’s first electric bus with battery swap technology. It would be supplying the vehicles to the Gujarat government in the next four-to-five months.

Given the government’s increasing focus on defence, the management confident about the long-term opportunities in the sector. It does not see any slowdown in defence spend in the near- to medium-term and sees huge potential. During FY18, the company bagged 12 defence tenders and expects this momentum to continue.

At the current price, the stock trades at a reasonable valuation of 20.3 times FY19e and 17.3 times FY20e earnings. Investors can start accumulating the stock.

We remain positive on the stock. It has also bolstered its position in the market and looks set to gain from infrastructure spending and increase in the number of organised players in the economy.