Volume uptick in FY22 to drive revenue, margin gains for Ashok Leyland

The company is expected to gain market share led by higher tonnage trucks

Ashok Leyland is expected to be one of the key gainers of a recovery in medium and heavy commercial vehicle (M&HCV) volumes. After two consecutive years of decline, the worst-performing segment in the auto sector is expected to see the fastest rebound. Some of the improvement is reflected in the recent sales numbers of the only pure-play commercial vehicle maker in the listed space. 

Even as its FY21 year-to-date volumes for domestic M&HCVs are down 60 per cent, the company posted a 23 per cent rise in November. After the sector’s single-digit fall in volumes, analysts at Emkay Research expect, 24 per cent YoY growth in the March quarter. 

In addition to M&HCVs, analysts believe additional triggers for the stock include a pick-up in the sales of light commercial vehicles, doubling of export contribution to revenues from the current 10 per cent over the next five years, and de-risking of the portfolio with incremental revenues from spares, defence, and engines.

Higher revenues and operating leverage are also expected to lead to a doubling of operating profit margins over the next two years, from FY21’s mid-single-digit estimates.

The key trigger, however, remains the rise in truck volumes. Analysts at Kotak Institutional Equities expect a volume bounce back from FY22 onwards, led by a revival in road freight demand, strong replacement demand, and low base. In addition to the increase in the interstate movement of goods and passengers on the back of a robust uptick in the consumer, auto, pharmaceutical and other segments, the revival in infra spending is a major positive for the truck segment.

Emkay Research’s Raghunan­dhan N L and Mumuksh Mandlesha say: “The focus on infrastructure creation and government policies on production-linked incentive can revive the investment cycle and spur the growth of capital formation in FY22. Historically, capital formation has a near-perfect correlation with MHCV volumes.” Higher infrastructure spends should lead to a rise in tipper sales, which account for 20 per cent of M&HCV volumes. Any scrappage policy announced by the government should add to the replacement demand and improve overall volumes.

Market share gains are also expected to follow volume gains for the country’s second-largest truck maker as the share of higher tonnage vehicles will see a better demand growth. The company’s M&HCV market share — which was impacted due to containment measures — has improved from 16.5 per cent in the June quarter to 28.5 per cent in the September quarter. A strong presence in trucks above 25-tonne capacity and the new AVTR modular platform — which has 5 per cent higher fuel efficiency — are expected to drive the gains. From 32 per cent share in FY20, the company is expected to gain 200 basis points by FY23.

While the commissioning of the dedicated freight corridor (DFC) remains the single biggest risk to truckmakers, brokerages believe DFC’s estimates on a potential shift of freight is optimistic and that the Railways has been losing share to roadways despite being a cheaper mode of transport.

Though the stock has gained over 42 per cent over the last three months, analysts believe there are further upsides. In a recent note, analysts at Nomura Research highlighted that the current valuation of 11x FY23 enterprise value-to-operating profit is attractive given the expectation of a sharp increase in operating profit and margins hitting double digits.