<b>Beating the Slowdown:</b> Ashok Leyland set to report higher numbers, market share

The commercial vehicle maker has boosted its volumes and market shares through a smart mix of higher production, lower costs, culling of non-core assets, and expanding on a national scale

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. 


The previous financial year has been one of the best for  Hinduja-owned commercial vehicle (CV) maker Ashok Leyland. It has done well financially, has become a national player and improved its market share.  

Sales of trucks and buses grew 34 per cent, year on year, in 2015-16.  In the nine months ended December 2015, while the industry’s sales grew 30 per cent, its sales grew 54 per cent.

Sales of medium and heavy commercial vehicles were up 32 per cent, year on year, in March and 41 per cent in 2015-16. In comparison, market leader Tata Motors reported growth of 26.5 per cent for March and 24 per cent for 2015-16.

According to the Society of Indian Automobile Manufacturers, Leyland’s CV market share rose to 18.5 per cent in 2015-16 from 15 per cent a year ago.

During the year, Tata Motors’ market share dropped to 44.3 per cent from 47.2 per cent and Mahindra & Mahindra’s to 24.3 per cent from 25 per cent.

In medium and heavy CV, Leyland’s market share rose to 30.6 per cent from 27.2 per cent and Tata Motors’ share  to 54.9 per cent from  57.1 per cent.  Leyland gained in the higher-tonnage segment on the partial lifting of mining bans and operators renewing their fleets.

The company reduced its debt-equity ratio to 0.65 from 2.44 and working capital by Rs 1,200 crore to Rs 244 crore in seven months. It sold Rs 1,200 crore of non-core assets. Earnings before interest, taxes, depreciation and amortisation margins for the first nine months of 2015-16 were 11 per cent against 6.3 per cent in the same period a year ago.

Gopal Mahadevan, chief financial officer, said when the industry witnessed a 50 per cent drop in sales three years ago, the company decided to restructure its business. It looked at reducing the break-even point by focusing on manufacturing costs and selling expenses.

It augmented cash by reducing working capital, improving earnings and selling non-core assets.

Despite the tough times, Leyland launched a range of tippers, Neptune engines, JanBUs, BOSS, MiTR and Partner. The company also increased its sales and service points from 300 to 1,300. It was the first truck maker to assure clients their complaints would be addressed in four hours and vehicles would be back on the road in 48 hours.

Analysts at Credit Suisse said the company benefited from higher production at the Uttarakhand plant. About 40 per cent of Leyland’s production comes from this plant which enjoys tax sops. These sops cease in 2019-20.

Mahadevan agrees that external factors like reviving demand and soft material costs had helped but notes out the rest of the industry benefited from these as well.

While the industry is expected to grow 15-20 per cent in 2016-17, Leyland is expected to outperform. It will gain from a good monsoon, resumption of stalled infrastructure projects, overall economic growth and the switch to BS-IV fuel.

Given the market share gains, expectations of strong growth and improvement in financials, analysts have raised their earnings projections by 10 per cent for 2016-17.

The stock is trading at a 25 per cent premium to its historical valuation. Analysts at Deutsche Bank believe this is justified, given the higher market share.

They believe the stock’s re-rating reflects better visibility on recovery and strong free cash flows, which will reduce leverage.