Ashok Leyland: Positives priced in

Re-rating unlikely, given gains from de-leveraging; margins and market share reflect in valuations

Ashok Leyland continues to gain market share from rivals with overall sales in September growing at 61 per cent year-on-year (y-o-y) against expectations of a 38 per cent growth. In the medium and heavy commercial vehicles (M&HCV) segment, its sales were up 83 per cent y-o-y, while Tata Motors reported a 53 per cent jump and Volvo Eicher increased its volumes by 27 per cent. Ashok Leyland’s market share in M&HCV has increased from 28.5 per cent in FY15 to 31 per cent — its highest level in a decade. This is due to its strong presence in the fast-growing heavy truck segment.

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 a recovery in industrial activity could happen in the second half of FY16. While the M&HCV sector is expected to grow upwards of 22 per cent over the next couple of years, Ashok Leyland is estimated to grow at 25 per cent. Volumes for Ashok Leyland, which were at 66,000 at the end of FY15, are expected to double by the end of FY18.

Increasing volumes coupled with lower discounts and price hikes have helped the company improve its operating profit margins. The firm’s margins, which had touched a low of 1.2 per cent in FY14, have recovered and are expected to move up on the back of falling commodity costs and tax breaks at the Pantnagar plant. Nomura analysts expect margins, which were at 7.6 per cent in FY15, to move up 400 basis points to 11.7 per cent in FY16. In addition to improving profitability, one of the reasons which led to the re-rating of the stock over the past two years has been de-leveraging. The company raised Rs 660 crore via a qualified institutional placement and sold non-core assets to bring down its debt. In this context, the initial public offering of Ashok Leyland Finance should also help as it will strengthen its capital base and expand lending business.

The stock has gained 77 per cent since the start of the year and six times over the past two years. With the scrip trading near the upper end of its expected trading band of 10 times FY17 estimates on enterprise value-to-operating profit parameter, Nomura analysts believe the positives are already priced in. Long-term investors, though, can consider it on corrections.