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Increase in market share helps Ashok Leyland's stock

Ashok Leyland hit a fresh all-time high on Friday due to multiple triggers, chief among which was yet another month of sales outperformance. The other positives over the last week were the company’s plans to list its subsidiary and a defence order. 

Sales of its medium and heavy commercial vehicles were up 32% year on year for March, while the number for FY16 stood at 41%. 

In comparison, market leader Tata Motors reported sales growth of 26.5% for March 2016 and 24% growth for FY16. 

Analysts highlight various reasons for the continuing outperformance by the company which has helped it gain market share across the tonnage segments in trucks. 

Strengthening of its distribution network which was earlier more prominent in South India has obviously helped. 

Analysts at Motilal Oswal Securities attribute the March performance to strong growth in South India, benefit of expansion in the North and East of the country and recent export orders. Ashok Leyland’s market share has increased by 700 basis points over the last couple of years to over 33% currently, with market share in every region (more so North and East) crossing the 20% mark. The largest gains have come in the intermediate commercial vehicles (7.5-12 tonne capacity) where it was a bit player earlier. In addition to network expansion, a shift towards higher tonnage vehicles and product introductions too aided volume and market share growth.

Another reason, according to analysts at Credit Suisse, is the higher production at the company’s Uttaranchal plant. About 40% of the company’s production comes from this plant which enjoys tax sops. It is these exemptions which allow the company to offer higher discounts than peers. The company could benefit going ahead as well as the tax sops cease only in FY20. 

Among other triggers is a fillip from the defence segment where it recently won a Rs 800 crore order for supply of field artillery tractors, ambulances and other vehicles. Any repeat or fresh orders from the defence space could significantly boost volumes and market share. The company is also looking at listing its finance arm Hinduja Leyland Finance where it has in the last five years invested about Rs 800 crore.

Given the market share gains, expectations of strong volume growth and improvement in financials, analysts have raised their earnings projections for the company by 10% for FY17.  While the new target prices are above Rs 120 and the stock is trading at a 25% premium to its historical valuations, analysts at Deutsche Bank believe these valuations are justified given the significantly higher market share. 

In addition to the market share gains, the analysts believe that the stock’s rerating reflects a better visibility on the recovery and strong free cash flows which will reduce its leverage.