Ashok Leyland: Sustained volumes key monitorable

December quarter performance will be next trigger; needs to sustain volume performance

The Ashok Leyland scrip has been touching new highs, gaining nearly 19 per cent since the start of the year on good December sales and expectation of a healthy quarterly performance. Commercial vehicles sales are showing positive momentum after two years (FY13 and FY14) of weak demand, though improved sales growth is on the back of a smaller base. The company has outperformed the sector for the nine months ended December, thereby gaining market share which stands at 27 per cent, up 200 basis points from the previous year.

While its volumes for FY15 (to date) were higher by 24 per cent, medium and heavy commercial vehicle (M&HCV) sales grew an impressive 85 per cent in the December quarter. This was due to higher pre-buying on expectation of a excise duty rise in the new year, as well as replacement demand. For the sector, it is the heavier vehicles (16 tonnes) which are exhibiting stronger growth, due to the expansion of capacity and replacement demand, albeit on a low base.

  While volumes for the December quarter was up 38 per cent for the company, analysts at IDBI Capital Research expect revenue growth to rise a disproportionate 66 per cent, owing to higher average selling prices. Realisations are up on the back of a superior mix and lower discounts. Margins are expected to be stable at 7.2 per cent on a sequential basis. The company had made a loss at the operating profit level in the December quarter of 2013. Given the improved operational performance and steady margins, the company is expected to report net profit of Rs 33 crore in the December quarter against a loss of Rs 232 crore in the year-ago quarter.

Analysts expect M&HCV volumes to improve on the back of lower operating costs and  a pick-up in industrial activity boosting demand. A fall in fuel prices (diesel), which account for half the operating costs for fleet owners, is expected to improve profitability. The sector is expected to post strong double-digit growth in FY16 (10 per cent growth in FY15) and that should boost Ashok Leyland’s prospects.

However, a large part of the expected revival in volumes, margins and increase in market share is already factored into the price. Given the Bloomberg consensus price of Rs 58 and the current price of Rs 61, there is no upside from these levels. Investors could take exposure to the scrip on dips.