Ashok Leyland: Short-term stress continues


India’s second largest manufacturer of commercial vehicles (CVs), Ashok Leyland, has been hit by some adverse news recently. For starters, analysts claim the management now expects volume growth in FY13 to decline by 5-10 per cent, compared to the earlier expectations of a flat volume growth. The company expects to end FY13 with 85,000-90,000 units.

Evidently, with volume growth decline, even earnings downgrades are a possibility. This indicates the overall outlook for CVs remains rather challenging, as dealers are reporting sluggishness even in the light CVs segment. Centrum believes that since the company has delivered better volume growth year-to-date compared to industry growth, it might be able to hike its domestic market share to 26 per cent this year from 23.3 per cent in FY12. The reason: improvement in its distribution.



However, export volumes are expected to see challenges this year. The Sri Lankan government has increased duty on automobiles imported from India. The duty on trucks will be increased from five per cent to 20 per cent and in some cases the levy will be as high as Rs 10 lakh. This will impact Ashok Leyland negatively, as the country accounts for eight per cent of its overall volumes and 40 per cent of its overall exports. The company has conveyed to analysts that overall export volumes will be in the range of 10,000-11,000 for FY13, compared to 12,852 units in FY12. The other concern analysts have is the weakness in free cash flow (FCF). The company has seen its FCF generation decline since FY11 and this has led to higher borrowings and, consequently, higher interest payouts. Also, slowing demand has led to much higher discounts and build-up of inventory. Increase in inventory levels would lead to higher working capital requirement in the third quarter, analysts say, putting pressure on its interest cost.

Given that the revival in Cvs’ demand is still some time away, analysts believe that the stock will remain under pressure for some time. Deutsche Bank Market Research expects volume growth for medium and heavy CVs to be 10 per cent in FY14 and 11 per cent in FY15, while small CVs are likely to grow by 20 per cent and 15 per cent in the same period. The only other downside risk, besides the slowdown in volumes, would be an increase in competitive intensity in heavy CVs, which could temper margin gains.