Ashok Leyland may be a key beneficiary of macro pick-up

Company's focus on cutting costs and improving product mix to drive profit in FY15

Hopes apart, the Street believes India is at the cusp of an economic recovery. This will have a cascading effect on corporate India. While some companies will see early recovery, others will take a little longer. The market is beginning to look for such winners that will bounce back once growth revives, even moderately.

Ashok Leyland has captured the market’s fancy in recent times, as the company could retain its marketshare even in times when commercial vehicle volumes plummeted 26-28 per cent year-on-year in FY14.

Even as Tata Motors, analysts claim, has seen its marketshare decline in the medium, heavy and light commercial vehicle (MHCV) segment, Ashok Leyland has maintained its 20-23 per cent marketshare in the segment and seven per cent in the light commercial vehicle segment. According to Religare, the company’s capital expenditure cycle is nearing an end, debt levels are set to reduce, and a series of product launches would aid volume recovery.

The other factor that analysts believe will aid the company’s profitability in times to come are the cost rationalisation measures taken by the management. The company is focused on paring long-term debt and selling non-core assets.

Between FY08-13, the company was investing Rs 630 crore every year on capital expenditure, which is largely over. The company has even lowered manpower cost through salary cuts to reduce the break-even levels at the factory.

As hopes of an economic recovery strengthen, Credit Suisse has analysed stocks on the basis of their earnings volatility factor and early cycle score to determine which companies will benefit from a recovery early on. Ashok Leyland figures in the list of companies that are set to be early beneficiaries of a growth recovery. Credit Suisse says Ashok Leyland, now being the only pure play commercial vehicle company in India, is a preferred play assuming a pickup in investment activity. The company has one of the highest EVF and ECS scores.

This apart, the company is already seeing a pickup in demand and its new product launches will aid demand further. Analysts believe the company is already seeing some traction on this count. In the quarter ended March 2014, analysts expect the company to report an operating profit growth of 3.4 per cent, compared to a decline seen in the previous quarter. According to IDFC Securities, higher volumes and mix boost Ebitda sequentially.