After a series of upgrades on the back of robust September quarter results, Ashok Leyland's scrip has shot up 12 per cent to Rs 27 over the last three trading sessions. Despite a weak environment, the company managed to grow revenues, realisations and margins. While revenues were up 10 per cent, higher realisations (up 1.3 per cent) aided Ebitda margin growth. In addition to operational improvement, most analysts are betting on the turning of the commercial vehiclse (CVs) cycle, likely to benefit the country's second largest CV manufacturer.
Morgan Stanley's Binay Singh and Shreya Gaunekar, in a recent report on the CV sector, say it will bottom out in the next six months and a recovery can be expected in FY14, on the back of pre-election public capex pick-up and more favourable interest rates.
Given that the company derives 70 per cent of its revenues from medium and heavy commercial vehicles (M&HCVs) it is a direct play on the cycle recovery, they add. The stock, which has gained 18 per cent since the start of the year and 31 per cent since September, is trading at 12 times FY14 earnings estimates. Most brokerages have targets between Rs 30 and Rs 33, indicating upsides of 11-22 per cent from current levels.
Increasing volume guidance
The company has been able to outperform the M&HCV sector year-to-date. As compared to the sector fall of about 16 per cent, Ashok Leyland's sales declined seven per cent due to distribution expansion, customer focus and brand building activities resulting in better execution, says a BofA-ML report. The company management expects a pick-up in volumes in the second half of FY13, especially in the March quarter. It has given a guidance of flat to marginal growth for M&HCVs in FY13, compared to industry volume fall of 10 per cent.
Analysts, however, say that given the weak economic environment, the company is likely to see its volumes decline by 2.5-5 per cent this year. So far, the company has increased its market share in the M&HCV segment by 167 basis points year-on-year to 25.4 per cent. Going ahead, it is looking at ending the year with a market share of 26 per cent.
However, given the intense competition, one will need to see how much gains Ashok Leyland can make on this front.
While the September quarter was better than analyst expectations, the surprise was on margin improvement. Even as the quarter saw strong volumes of the lower margin light commercial vehicle Dost, Ebitda margins improved by 210 basis points sequentially to 10.1 per cent (against estimates of eight per cent).
The gains accrued on the back of a better mix, namely higher tonnage trucks, buses and spares, as well as higher production from its tax-free Pantnagar unit. Lower staff, power and advertising expenses also aided margins.
The margins would have been higher but for the competitive pressures in the market which forced Ashok Leyland to increase its discounts by Rs 20,000 to Rs 80,000 a vehicle.
Its listed competitors Tata Motor and Eicher CV businesses had Ebitda margins of 5.9 per cent (including passenger vehicles) and 5.8 per cent, respectively.
The Leyland management is looking to maintain margins at 10 per cent levels for the second half of the current fiscal. DSP Merrill Lynch analyst S Arun expects margins to sustain on a similar mix (as in the September quarter) and steady recovery in volumes and raises margin estimates for FY13 to 10.1 per cent.