Uncertain outlook, higher debt to keep Ashok Leyland stock under pressure

The Ashok Leyland stock has been trading weak, shedding a per cent on muted results, rise in debt and weak near-term outlook. Pegged back by a sluggish economy, transition to BS-VI emission standards and loss of sales in March, volumes in the March quarter fell a steep 57 per cent y-o-y. In addition to the sharp fall in volumes, the company lost 200 basis points market share in FY20 in the medium and heavy commercial vehicles to 31.8 per cent. 

 

While revenues were lower led by volume fall, realisations on a sequential basis were higher. The company indicated there was a 9 per cent volume shift from intermediate commercial vehicles to heavy duty vehicles which helped improve realisations. Discounts from suppliers, no BSVI inventory and better raw material cost management also helped on the gross margin front. 

 

However, margins at the operating level were down 630 basis points year on year to 4.8 per cent due to higher staff costs and negative operating leverage. While major capital expenditures (capex) are behind it, given weak volumes and maintenance capex, pressure on cash flows is expected to continue in the coming quarters. 

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Barring some demand from tippers in the infrastructure segment, volumes have been weak. The company expects some pick up as the business cycle improves and is banking on BS-VI compliant launches in the M&HCV segment to improve sales. The new launches are based on a modular platform which is expected to reduce the number of components. It also expects some pick up in bus volumes due to social distancing norms. 

 

While the street will track signs of a pick-up in volumes, the other trend to watch out for is debt. Gross debt of the company which stood at just over Rs 3,000 crore at the end of FY20 has increased to Rs 5,400 crore after it raised additional debt via non-convertible debentures. Its debt to equity ratio is at 0.5 times while cash on the books stands at Rs 1,000 crore. Any increase in the loans to group companies (currently at Rs 500 crore) will also be a key concern for the street.

 

Given the weak demand environment, higher debt and market share losses in the core heavy duty trucks, the risks of investment in the country’s second largest truck maker are high.