Emission norms deadline to support Ashok Leyland

But, near-term sales would be hit due to demonetisation and falling demand from freight operators

The stock is down 15 per cent since demonetisation, as retail demand for medium and commercial vehicles (CV) is estimated to have dropped 40 per cent in November, compared to October. What this has done is to skew the freight operators' business model, as lower utilisation and weakening freight rates hit their profitability. In addition, analysts at Kotak Institutional Equities say even before demonetisation, there were signs of slowdown in replacement demand for trucks and concerns on new demand, due to uncertainty around fleet utilisation after the Goods and Services Tax (GST) implementation. Though discounts of 10 per cent on toll payments and 0.75 per cent on purchase of diesel through digital platforms are positives, capacity utilisation and freight rates remain key drivers of an operator's profitability, they add. 

December, too, could see an impact of demonetisation. However, volumes are expected to improve from January. Analysts at Motilal Oswal Securities believe the March quarter is likely to be strong, on account of pre-buying ahead of changes in emission norm. Vehicles across the country have to meet the BS-IV emission norms by April 1. Any improvement in volumes in the medium and heavy CV space will help Ashok Leyland, as 80 per cent of its revenues come from this segment. 

While most analysts have reduced their FY17 volume estimates by seven per cent to 11 per cent due to demonetisation, some brokerages such as Geojit BNP Paribas believe the impact will be temporary and Ashok Leyland will be a direct beneficiary of a recovery in demand. Saji John of the research firm says the sector has shown improvement after a gap of three years, led by government initiatives towards de-bottlenecking the stalled infrastructure projects. Further, with the company being the largest supplier of logistic vehicles to the Army (five per cent of revenue), it will see higher traction from the new defence procurement policy. What will aid the volume growth is exports, which have grown 24 per cent in the first of FY17 and are expected to grow 30 per cent for FY17, according to estimates. 

Though analysts have cut their operating profit assumptions, given lower volumes and margin pressures, the long-term prospects look good. Investors could look at the stock, which is trading at 15 times the FY18 estimates, on any further weakness.