With weakening freight rates and no pick-up in the capex cycle, analysts expect the medium and heavy commercial vehicles (M&HCV) sector to register a volume decline of four to five per cent in FY13 as against nine per cent growth in FY12. Ashok Leyland Ltd (ALL), last week revised its volume growth estimates for FY13 to seven per cent from 13 per cent earlier. Most analysts believe that the target (of ALL), given the difficult macro environment, is difficult to achieve. Nomura analysts Kapil Singh and Nishit Jain say that with industry M&HCV volumes expected to fall five per cent, ALL is likely to post flat growth.
In addition to the high interest rates, a Tata Motors spokesperson says the contraction in manufacturing and mining segments, which are key demand drivers for the commercial vehicles (CV) sector, has led to the fall in demand. A price increase following the five per cent excise duty in a slowing environment did not help. While pricing action was meant to maintain margins, it was nullified with discounts doled out (currently at Rs 60,000 per vehicle). The only bright spot in an otherwise gloomy environment is the robust growth of the light commercial vehicles (LCV) and bus segments.
“The hub and spoke model and appropriate pricing based on load sizes has helped this sub-segment grow much faster than the M&HCV segment,” says V G Ramakrishnan, vice president, automotive & transportation practice, Frost & Sullivan. Among listed players in this space, Ashok Leyland (others are Eicher and Tata Motors) is expected to be the worst affected by slowing growth as it is the least diversified player.
| MARGINS UNDER PRESSURE | |||
| In Rs crore | Ashok Leyland | Eicher Motors | Tata Motors |
| Net sales | 14,671.0 | 8,330.0 | 2,02,800 |
| Y-o-Y change (%) | 16.4 | 25.0 | 22.4 |
| Ebitda | 1,405.0 | 867.0 | 26,865.0 |
| Y-o-Y change (%) | 11.7 | 25.0 | 1.1 |
| Ebitda (%) | 9.6 | 10.4 | 13.2 |
| Y-o-Y change (bps) | -40.0 | – | |
Source: Analyst reports
Ashok Leyland
The company is looking to the relatively more stable southern Indian market and an uptick in small commercial vehicle, Dost, and bus sales to boost its overall volumes. The company’s CFO K Sridharan, in a recent concall said, “While the M&HCV segment saw a fall of 12.5 per cent, the drop in the southern market fall was limited to 4.5 per cent in the June quarter.” The company’s debt has increased to Rs 4,750 crore in June from Rs 3,000 crore in FY12 due to an increase in working capital. Weak earnings and high capex/investments will result in ALL being free-cash-flow negative in FY13, says Joseph George of IIFL Research.
The company plans to prune debt to Rs 3,650 crore by the end of the current fiscal. While valuations are not demanding and the stock is trading at Rs 22, most analysts believe the near-term prospects of the company do not look too good and will weigh on the stock. Ashish Nigam and Kunal Jhaveri of Antique Stock Broking say that in a weak CV cycle, the unaffordable investment phase (with no cash-flow visibility) makes them maintain a cautious view on the company.
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The company, which has a joint venture with Volvo (VECV), is gaining market share in the M&HCV segment. Its share of the M&HCV segment has improved from 2.8 per cent in January 2012 to 4.3 per cent currently, albeit it comes on a small base. A recent IDFC Securities report says that the company offers superior growth visibility in a cyclical industry due to rising heavy commercial vehicle share in a weak market, resilient light and medium duty CV and exports/outsourcing. In the motorcycle business (Royal Enfield), which accounts for about 12 of revenues, the company has a 2-9 month waiting period for various models and monthly bookings of 11,000. This is also a high margin business (12 per cent) as compared to 9 per cent margins in CVs.
Notably, motorcycle business margins are expected to rise to 16-17 per cent in 2-3 years as against 11-12 per cent projections for CV business, led by economies of scale and new product launches. Given its diversified business model, strong balance sheet (no debt), new launches across segments over the next two years, prospects look good. While the scrip is trading at Rs 1,960, analysts have pegged a price target of Rs 2,500-Rs 2,800.
Tata Motors
India’s largest CV player registered a 23 per cent decline in M&HCV sales for the June quarter. For July, its M&HCV sales are down 19 per cent, while LCV volumes are up 19 per cent. Analysts say the downward trend in M&HCV sales volumes is likely to continue over the next couple of months unless there is an increase in freight charges or there is lowering of financing costs. A Tata Motors spokesperson says that a major stimulus would be required in sectors like road construction and infrastructure projects, while resumption of mining in critical markets like Bellary, Goa, Orissa and Jharkhand is essential to see a sustained improvement in demand.
What would soften the blow for Tata Motors is the 18.5 per cent jump in sales of LCVs in the June quarter. Analysts say LCVs, powered by movement of consumer goods within the city, are likely to grow in double-digits in FY13. Further, with a majority of revenues and profits coming from its overseas subsidiary, Jaguar Land Rover, a drop in CV sales might not spoil the party. However, CLSA analysts say the key concern for JLR is not on volumes but margins. The firm has cut the target price (the stock is currently quoting at Rs 227) from Rs 269 to Rs 224.