Defence order wins, market share gains positive for Ashok Leyland

Muted sequential Q1 performance may cap near-term upsides

The stock of the country’s second-largest commercial vehicle maker, Ashok Leyland, hit its 52-week high after the company announced order wins in the defence sector.

The company indicated that it has won two orders -- worth Rs 800 crore -- for the supply of field artillery tractors and gun-towing vehicles to the Indian Army. This could boost its plan to meet its three-year target of winning Rs 3,500 crore worth of tenders for the defence business. The company has won orders worth Rs 2,000 crore over the last five years.

Says Himanshu Singh of Prabhudas Lilladher Research, “Ashok Leyland has a very high tender win rate of more than 80 per cent of land mobility tenders and they are the largest supplier of logistics vehicles to the Indian Army. Additionally, the higher proportion of defence business should also help the company in reducing cyclicality in its business.”

The other trigger for the stock, which has gained 18 per cent since the start of June, is gains in market share. The company ended the 2022-23 financial year (FY23) on a strong note and increased its market share by 500 basis points (bps) year-on-year (YoY) to 31.8 per cent.

Even in regions such as north and east India, where its presence and share are weak, the company was able to expand its market share by 300-600 bps last year. The company is looking at expanding its presence through dealerships in these regions, given the mining-related opportunities for its medium and heavy commercial vehicles.

In the near term, the June quarter (Q1FY24) performance could have a bearing on the stock price. The company is expected to post a 4 per cent YoY growth in volumes and a 6 per cent growth in realisations. On a sequential basis, however, volumes and revenues are expected to fall by 31-32 per cent. After a strong showing in Q4 due to pre-buying, there was a dip in the volume of the Commercial Vehicle (CV) sector in the June quarter. The fall was on account of the implementation of tighter emission norms, leading to price hikes across the board and the impact due to seasonality.

Brokerages expect the operating profit margins of the company to fall by 220-270 bps on a sequential basis. Elara Securities believes that a pure-play CV player such as Ashok Leyland may post the steepest sequential (quarter-on-quarter) margin drop (among peers) due to a sharp volume dip.

The operating profit margin, according to Nomura Research, is expected to decrease by 230 bps, sequentially, to 8.7 per cent due to higher staff cost to sales and other expenses to sales. This is partly offset by lower raw materials to sales. The company is eyeing a double-digit margin in FY24 and mid-teen profitability in the medium term.

Going ahead, the company is optimistic about CV growth in FY24 and its ability to outperform the sector. It expects the sector to grow by 8-10 per cent over FY23, supported by government infrastructure spending, strong replacement demand and healthy traction from core industries like steel, cement and mining. Given the growth outlook, it expects the CV demand to surpass the previous peak of FY19.