M&HCV market share loss throws a wrench in Ashok Leyland stock

Demand revival, new launches and mix change could aid volumes, margins

The September quarter performance of the country’s second largest commercial vehicle maker was in line with street estimates. On a weak base, revenues were up 57 per cent over the year ago quarter, aided by volume gains (light commercial vehicles and exports) and price hikes. Despite higher raw material prices, operating profit was better than estimates due to lower operating expenses.

The stock, however, corrected in trade shedding 3.4 per cent on loss of market share, weak product mix and profit booking. The stock has gained 20 per cent since the start of September and 55 per cent calendar year-to-date.

The near term concern for the street is the sharp 460 basis point sequential drop in market share and 710 basis points YoY to 22.4 per cent in the medium and heavy commercial vehicle (M&HCV) segment. The dip in share was due to slowdown in the South India market where it has a stronger presence, lower bus volumes and lack of models which run on compressed natural gas (CNG).

The company is planning to launch CNG variants in the intermediate commercial vehicle portfolio. This will help plug portfolio gaps as CNG variants account for 40 per cent of the ICV industry. Recovery in the bus segment and increased demand for heavy trucks due to infrastructure projects and replacements are expected to help the company recover some share.

Even as it lost share in M&HCVs, its share in the light commercial vehicle segment in the 2-3.5 tonne category is at a record high of 23.3 per cent. Higher volumes in the LCV segment is due to the need for last mile connectivity to service ecommerce, agri sectors.

While brokerages believe that the company will be a beneficiary of the revival in M&HCV demand, they have cut the earnings estimates given market share losses and lower volume assumptions. Rishi Vora of Kotak Institutional Equities has a reduce rating on the stock as he believes that the potential upside in volumes as well as market share gains in the M&HCV segment are priced in.