Beating the Slowdown: Ashok Leyland set to report higher numbers, market share

Fiscal 2016 was a subdued year for corporate India. Most companies are expected to report muted annual results due to lack of demand, slowing capital expenditure and low capacity utilisation, compounded further by a global slowdown. But there are a few companies that are expected to buck the trend and likely to announce record volumes for the year and, of course, for the quarter ending March 31. In a 5-part series, Business Standard take a look at these top volume drivers to find out their strategies that beat the slowdown. Part I looks at how commercial vehicle maker Ashok Leyland has beaten the odds. 

Fiscal 2016 has been one of the best years for the Hinduja-owned commercial vehicle maker Ashok Leyland across all parameters. It has done well financially, became a national player and improved its market share even as its competition lost market share.  No wonder, then, that investors have rewarded the company with its stock touching a new high.
The numbers tell the story of the company’s remarkable fortunes. Overall sales of 1,27,321 units translated into growth of 38.39% over FY2105 sales of 92,004 units.  During the nine-month period ended December 2015, while the CV industry grew by 30%, Ashok Leyland's sales grew 54%.
Sales of its medium and heavy commercial vehicles (M&HCV) were up by 32% year-on-year for March, and by 41% for the full fiscal. In comparison, market leader Tata Motors reported growth of 26.5% for March 2016 and 24% for the full year.
The bump in sales has helped the company gain market share across tonnage segments in trucks. According to numbers from industry body Society of Indian Automobile Manufacturers (SIAM), Ashok Leyland’s market share in the CV segment rose to 18.57% in FY 16 from 15% in the previous financial year. In the same period, Tata Motors’ market share dropped to 44.37% from 47.23%, while Mahindra & Mahindra's market share dropped marginally to 24.32% from 25.03%.

Quarter Tata Motor M&HCV Sales (No: of Units) Ashok Leyland M&HCV Sales (No: of Units) Q1 2014-15 (Apr-Jun) 30,575 14908 Q2 2014-15 (Jul-Sept) 33,684 18207 Q3 2014-15 (Oct-Dec) 35,943 18279 Q4 2014-15 (Jan-Mar) 42,535 26266 Q1 2015-16 (Apr-Jun) 37,100 21485 Q2 2015-16 (Jul-Sep) 44,556 29852 Q3 2015-16 (Oct-Dec) 40,763 23176 Q4 2015-16 (Jan-Mar) 54,074 35249 (Source: Company websites)

In the M&HCV space, Ashok Leyland’s market share rose to 30.65% from 27.20%, while Tata Motors’ market share dropped to 54.95% from 57.17%.
Ashok Leyland has clearly taken a big bite out of Tata Motors’, as well as other CV makers’ share. The CV major was benefited in the higher-tonnage segment, including 25 tonne, 31 tonne, 35 tonne and 37 tonne on the back of demand from infrastructure spend, partial lifting of the ban on mining, and fleet operators’ focus on renewals.
As far as financials are concerned, the company's break-even period was reduced by 25% from around 75,000-80,000 units, which has helped the company become more competitive. Debt equity ratio has fallen to 0.65 from 2.44, while working capital has been reduced by Rs 1,200 crore to Rs 244 crore in seven months, showing higher efficiencies. The company also sold non-core assets worth Rs 1,200 crore. EBITDA margins for the April-December 2015 period was 11% against 6.3%  a year ago.

Management’s take

Gopal Mahadevan, chief financial officer, Ashok Leyland said when the industry witnessed a 50% drop 2-3 years ago,  Ashok Leyland decided to restructure its business for growth.
First, the company looked at reducing break-even point by focusing on manufacturing cost, selling expenses, as well as other areas. Second, it sought to augment cash by reducing working capital, improving earnings, and boosting capital by selling non-core assets without affecting company's capability and capacity.
Alongside, it also put a growth strategy in place. Despite tough times, Ashok Leyland pursued with its product launches including BOSS, launching a range of tippers between 16 and 49 tonnes, Neptune engines, JanBUs, MiTR and Partner in the LCV range, among other products.
Long seen as a Chennai-based firm, the company decided to become a pan-India player and increased its sales and service points to 1,300 from 300. At the same time, it put customer service front and centre. For instance, it claims it was the first one to assure clients that their complaints would be addressed in a mere four hours and that the vehicle would be back on the road in 48 hours. Such measures helped the company grow its market share across regions.
Another reason, according to analysts at Credit Suisse, is the higher production at the company’s Uttaranchal plant. About 40% of production comes from this plant which enjoys tax sops. It is these exemptions that have allowed the company to offer higher discounts than peers. The company could benefit going ahead, as the tax sops cease in FY2020.
Mahadevan agrees that external factors, including demand revival and softening of input costs, have also helped the company. This, however, he pointed out, was not unique to Ashok Leyland, and that these factors were the same for the rest of the industry.
Way forward
“We want to ensure that we continue on the path of growth and sustained profitability," Mahadevan said. While the industry is expected to grow at around 15-20% in FY2016-17, Ashok Leyland, he claimed, will perform better than the industry.
The factors that will drive growth include a good monsoon, commencement of infrastructure projects, GDP growth, and importantly, regulation related to BS-IV fuel efficiency norms that will push demand for both new and replacement markets.
“With international quality & future-ready product portfolio (developed India's first Euro 6 HCV and Non-plugin Hybrid Bus) and adequate capacities, the company is now reaping benefits of its investments,” the company said in a statement.
Given the gains in market share, expectations of strong volume growth and improvement in financials, analysts have raised their earnings projections for Ashok Leyland by 10% for FY2017.
The company’s stock was trading at a 25% premium to its historical valuations, and analysts at Deutsche Bank believe the current valuations are justified given the significantly higher market share. They believe the stock’s rerating reflects a better visibility on the recovery and strong free cash-flows which will reduce its leverage.  (Tomorrow: Shree Cement)