Gains on margins, market share help Ashok Leyland

Competitive pressures, however, remain high resulting in a fall in realisations

Ashok Leyland’s results for the quarter ended June 2016 beat the Street’s expectations across all parameters, with the performance on the margins front standing out. While revenues, riding on an 11 per cent increase in volumes, grew 10 per cent year-on-year (y-o-y) to Rs 4,258 crore in the quarter, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins at 11.2 per cent were higher by 110 basis points (bps) y-o-y and about 120 bps above consensus estimates. Higher operating leverage helped the company improve its profitability.

Net profit, adjusted for forex gains, too, was higher than estimates. It was up 63 per cent y-o-y at Rs 256 crore for the quarter. The impact of the new accounting standard, Ind AS, has been minimal with analysts at Emkay Global saying revenues and Ebitda were one per cent higher for the year-ago quarter as compared to the previous standard.

While volume gains were good with sales of medium and heavy commercial vehicles (M&HCV) growing 12 per cent and light commercial vehicles up seven per cent, realisations were down one per cent compared to the year-ago period. Analysts say competition from smaller players has meant there is still pressure on the pricing front, with discounts still relatively high. Given competition in higher tonnage vehicles, the company sold fewer vehicles in this category, leading to an inferior product mix.

While the company’s domestic volume growth at 18.5 per cent for the quarter was better than the 14.5 per cent growth reported by the industry, competitive pressures are likely to continue with limited scope for gaining more share. Exports, however, were a disappointment, but the management expects this segment to perk up in the September quarter.

In the domestic truck segment, analysts expect the company to maintain its market share of 30.1 per cent (compared to 29.2 a year ago) given its product portfolio, new launches and geographic presence, even as competitive pressures are expected to continue. Market share gains in the bus segment though were higher at 270 bps. Ashok Leyland’s market share stood at 35.9 per cent in the June quarter. Orders of 3,600 buses from various state transport units last week will only add to this.

Overall, the company’s and sector’s prospects look healthy. Since muted May and June volume numbers for the sector and Ashok Leyland were not encouraging, analysts say the M&HCV space would record an 8-10 per cent volume growth in the first half of financial year 2016-17. However, growth is expected to double in the second half ahead of the BS IV deadline, taking the overall growth for the financial year to 15-18 per cent. This is still good given that it comes on a high base of FY16, when volumes grew around 30 per cent.

Most analysts have a buy on the stock, which gained 3.6 per cent in trade on Thursday. The consensus target price of analysts at Rs 109, indicates a gain of 13 per cent from current levels.