 "Ashok Leyland: Market gain leads to rerating")
Ashok Leyland hit a fresh all-time high on Friday, followed by further gains on Monday. There are multiple triggers for this, chief among which was yet another month of sales outperformance and last week’s news about the company’s plans to list its subsidiary and a receipt of a defence order.
Sales of its medium and heavy commercial vehicles (M&HCV) were up 32 per cent year-on-year for March, while for FY16 stood it stood at 41 per cent. In comparison, market leader Tata Motors reported growth of 26.5 per cent for March 2016 and 24 per cent for FY16. This has helped Ashok Leyland gain market share across tonnage segments in trucks. Strengthening of distribution network, which was more prominent in south India, has helped.
Analysts at Motilal Oswal Securities attribute the March performance to strong growth in south India, the benefit of expansion in the north and east and recent export orders. Ashok Leyland’s market share has increased by 700 basis points over the past couple of years to around 33 per cent currently, with market share in every region (more so north and east) crossing 20 per cent. The largest gains have come in the intermediate CVs (7.5-12 tonne capacity) where it was a bit player earlier. A shift towards higher tonnage vehicles and product introductions too aided volumes and market share.Sales of its medium and heavy commercial vehicles (M&HCV) were up 32 per cent year-on-year for March, while for FY16 stood it stood at 41 per cent. In comparison, market leader Tata Motors reported growth of 26.5 per cent for March 2016 and 24 per cent for FY16. This has helped Ashok Leyland gain market share across tonnage segments in trucks. Strengthening of distribution network, which was more prominent in south India, has helped.
Another reason, according to analysts at Credit Suisse, is the higher production at the company’s Uttaranchal plant. About 40 per cent of production comes from this plant which enjoys tax sops. It is these exemptions that have allowed the company to offer higher discounts than peers. The company could benefit going ahead, as the tax sops cease only in FY20.
Among other triggers include the Rs 800-crore defence order for supply of field artillery tractors, ambulances and other vehicles, and plans to list its finance arm, Hinduja Leyland Finance, where it has invested Rs 800 crore in the past five years.
Given the market share gains, expectations of strong volume growth and improvement in financials, analysts have raised their earnings projections by 10 per cent for FY17. While the new target prices are above Rs 120 and the stock is trading at a 25 per cent premium to its historical valuations, analysts at Deutsche Bank believe these valuations are justified given the significantly higher market share. The analysts believe the stock’s rerating reflects a better visibility on the recovery and strong free cash-flows which will reduce its leverage.