Ashok Leyland: Budget, robust sales positive triggers

Ashok Leyland yet again outperformed its commercial vehicle (CV) peers in the month of February. Its medium and heavy CV (M&HCV) volumes for the month grew a strong 31% year-on-year as against the segment's growth of 28%.

The performance was driven by a strong growth in South India, benefit of expansion in North and East and recent export orders, say analysts at Motilal Oswal Securities. With the trend likely to continue and given other triggers in the Budget, analysts remain positive on the stock.

Overall volume growth was led by replacement demand with some new purchases from the road and the mining sector. Including light CVs (LCVs; Dost and Stile brands, part of the Nissan JV) which grew by 3%, the overall volumes were up by 24.5% year-on-year for the company in February.

Led by a 38% growth in medium and heavy CVs (M&HCVs) for FY16, the company is expected to end the fiscal year with overall volume growth of 34%. Year-to-date, it has gained about 350 basis point market share from its rivals largely Tata Motors.

Meanwhile, the over 50% increase in allocation towards road construction in the Budget is a key trigger going ahead. The impact, according to Axis Capital, is positive for CV demand, especially tippers where Ashok Leyland is a dominant player.

Tippers and construction trucks are two segments which have so far not seen any traction within the CV space and could witness a recovery in the coming months. The Budget has also increased the defence outlay for M&HCV procurement by 75% and Ashok Leyland, the second largest player by market share will be a beneficiary of this move.

The amendment of the Motor Vehicles Act is another positive as the same will allow the participation of the private sector in the passenger vehicle segment of road transport.

The scrapping of the permit systems should boost bus sales benefitting players such as Ashok Leyland. Likewise, the 20% increase in outlay for schemes such as Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which is the erstwhile JNNURM, will be another trigger for the bus makers.

Led by the positive news flow, the stock has gained 10% in the last couple of trading sessions. While replacement segment continues to be strong, the bigger trigger will be new sales for the company, whose stock is trading at a reasonable 14 times its FY17 earnings estimates of Rs 6.7.