Ashok Leyland: Volume, margin gains ahead

With its commercial vehicle sales growing faster than peers resulting in market share gains as well as improvement in margins, Ashok Leyland has outperformed its peers in the auto pack. The stock, over the last three months, has been flat as compared to 20-25 per cent drop for Tata Motors and Maruti Suzuki and 11 per cent for M&M.

For the nine months ended December, the company's commercial vehicle sales have grown by 56 per cent as compared to the sector's 30 per cent. This has helped the company gain market share which currently stands at 32.1 per cent as compared to the year ago number of 28.5 per cent. Importantly, the gains for the company have come across geographies and segments.

The other area where Ashok Leyland has done well is on the margin front. For the December quarter, the company's margins at 10.5 per cent were the highest in ten years. Operating profit margins over the year ago period were up due to improved mix, lower raw material costs and cost reduction efforts. The higher margins came in despite steep discounting which is prevalent in the sector and the higher share of light commercial vehicles which are not as profitable as the heavy trucks portfolio. While discounts per vehicle continues to be high at over Rs 200,000, the company has been taking regular price hikes which helped keep the net discounts levels under control. Analysts expect margins to move up further and are pegging it at around 12.5-13.5 per cent for FY17.

Going ahead, volume growth is expected to come from replacement demand as fleet operators upgrade their truck portfolio as well as better operator profitability due to steady freight rates and the steep fall in fuel costs. The sector will also be expecting a pick-up in infrastructure and mining activities to boost new truck sales which have so far largely been confined to replacement demand. What could act as a big trigger are the scrappage incentives to phase out vehicles, which are 10 or 15 years old, from the government which could boost sales. Analysts at Nomura believe that the commercial vehicle sector will see a volume growth of 22 per cent annually over the FY15-19 period and given that Ashok Leyland is a pure play on commercial vehicles it will stand to gain the most. The stock is trading at about 10 times its FY17 EV/EBIDTA estimates.