How Ashok Leyland Is Better Placed In The Commercial Vehicle Upcycle
Ashok Leyland Ltd’s efforts to regain domestic market share in the medium and heavy commercial vehicle (M&HCV) segment have borne fruit. The automaker captured 30.6% of the market in the March quarter (Q4FY22), a multi-quarter high, riding on the introduction of compressed natural gas (CNG) vehicles and an expansion in the distribution network. This compares well with the market share of 28.9% in Q4FY21.
Ashok Leyland’s M&HCV volumes in Q4 rose about 50% more than industry growth, the management said in a post earnings call.
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The company, which had a market share of 30% in April, plans to launch four more CNG vehicles during the year across different tonnage categories. In general, CNG constitutes 40% of the intermediate commercial vehicle (CV) segment at present.
It remains to be seen if the company can sustain this position in the highly-competitive market. If it does, this could rub off positively on the stock.
Analysts reckon margin expansion to be a key driver. In Q4, Ebitda (earnings before interest, taxes, depreciation and amortization) margin at 8.9% rose by 1.24 percentage points year-on-year (y-o-y), beating analysts’ estimates by a mile. Better operating leverage amid a high inflationary environment led this expansion.
However, elevated commodity costs are a point of worry. Even so, the softening in steel prices bode well for margins. The company hopes to achieve double-digit Ebitda margin. It has taken price hikes in Q4 and in April, too. The management said on a price hike of 2%, they are retaining 1.6-1.7% net after discounts, which is good, but the discount is slightly high.
The CV segment is set to benefit from a strong cyclical upturn after the last downcycle. Industry volumes fell y-o-y in FY20 and FY21, post which FY22 has seen a recovery. “Industry volumes grew 49% y-o-y in FY22 and we believe trucks are at the early stage of a long upcycle, which have lasted four years on average in the past. We factor truck volumes rising 34%/15% y-o-y in FY23/FY24. Our FY24 volume is similar to the FY19 peak,” said analysts at Jefferies India in a report on 20 May.
Increased infrastructure activity by the government, robust growth in e-commerce, and impending replacement demand augurs well for the segment. The management sees headroom for growth as the average age of trucks at 9.9 years is nearly at an all-time high. Further, reopening of colleges and offices means more opportunities for the bus segment.
Elevated fuel prices were expected to have a bearing on the demand but the segment has emerged largely unscathed. “Demand tailwinds evident from an increase in freight utilization have outweighed fuel concerns. With the cut in excise duty on fuel prices, the deal has become sweeter for fleet operators,” said Varun Baxi, analyst at Nirmal Bang Equities.
The company also sees increased traction in export markets such as Africa and the Middle East. Total exports in FY22 grew by 38% y-o-y. While demand is strong, the semiconductor shortage continues to weigh on the light CV segment.
Investors will watch if the company’s market share trajectory continues. Ashok Leyland’s shares closed up 6% on Friday on NSE following the Q4 results. “Valuations at 19.8 times FY24E price to earnings and 10.9x EV/Ebitda are reflecting in the early recovery cycle. Any fundraise in Switch Mobility can serve as a re-rating catalyst,” said analysts at Motilal Oswal Financial Services in a report on 21 May. EV is enterprise value. Switch Mobility is the company’s electric vehicle business.
