Expected slowing in medium and heavy CV volumes during 2011-12 likely to impact Leyland more than Tata Motors
Increases in prices of trucks and buses, rising interest rates and a likely rise in the price of diesel are likely to result in muted medium and heavy commercial vehicle (M&HCV) volume growth for 2011-12 of Tata Motors and Ashok Leyland, the leading companies in the segment.
Given the weak economic growth numbers, leading brokerages such as UBS Securities and Nomura believe industry volumes would rise by only up to five per cent, at the most, year-on-year (y-o-y), for 2011-12. The segment grew 36 per cent in 2010-11. The weak volume forecast is likely to impact Ashok Leyland more than Tata Motors, which has a diversified presence, feel analysts.
The Ashok Leyland scrip, steady over the past month due to strong March quarter numbers and robust 2011-12 expectations, fell two per cent after the company reported a 11 per cent y-o-y fall in May volumes. Its larger peer, Tata Motors, is down 12 per cent since the announcement of its March quarter results. The Street is worried about the performance of its domestic business, which reported a fall in profits as well as lower margins at the Indian and British units. Analysts have revised earnings downwards largely due to the scaling down of standalone net profit figures and volume fall. Among the two, Tata Motors at seven times 2011-12 estimated earnings looks more attractive than Ashok Leyland’s 14 times.
Growth
UBS analysts Sonal Gupta and Deepa Mirchandani, in a recent report, said the near-term growth outlook for M&HCVs remains challenging, given sluggish Index of Industrial Production growth and a high base. Truck owners, grappling with 12 per cent year-on-year growth in M&HCV prices brought on by high commodity costs and changes in emission norms, are also likely to see their fuel bill go up if diesel prices are raised this month (as expected by the Street). Higher interest rates are not helping.
While light CVs are doing well due to the need for last-mile connectivity, M&HCVs are seeing a pressure on volumes due to increased financing cost, believe Pioneer Intermediaries’ analysts. The challenges on various counts (rising fuel prices, interest rates, and high vehicle costs) could increase the incentive for overloading, feel Gupta and Mirchandani.
The lax implementation of overloading norms will further impact new truck sales.
| DOMESTIC CONCERNS | ||||||
| in Rs crore | Tata Motors | Ashok Leyland | ||||
| Q4, FY11 | FY11 | FY12E | Q4, FY11 | FY11 | FY12E | |
| Net Sales | 35,610 | 123,133 | 138,225 | 3,828 | 10,918 | 11,830 |
| % change | 23.0 | 33.0 | 12.0 | 30.0 | 50.0 | 8.4 |
| Ebitda | 4,471 | 17,780 | 18,635 | 509 | 909 | 785 |
| % change | 30.0 | 106.4 | 11.0 | 35.0 | 62.0 | -13.0 |
| PAT | 2,637 | 9,273 | 9,345 | 298 | 615 | 476 |
| % change | 18.0 | 260.7 | 3.0 | 34.0 | 45.0 | -22.6 |
| P/E (x) |
--- | 7.3 | 7.0 |
--- | 10.9 | 14.1 |
| Consolidated financials; % change is year-on-year; E: Estimates; Source: Company Enam, UBS | ||||||
Tata Motors reported a nine per cent increase in aggregate M&HCV volumes for April and May.
Nomura analyst Kapil Singh says while the Street would take improved truck volumes for the company positively, industry growth was likely to remain in the band of zero to five per cent for 2011-12.
With its passenger car sales falling seven per cent in the current financial year year to date (FYTD), the fortunes of the company’s standalone numbers will depend on the performance of CVs. M&HCV volumes are likely to lag but light CVs, which registered a 26 per cent jump FYTD, are expected to maintain volume growth.
Outlook
Though the outlook for its standalone financials’ mainstay is not too bright, most analysts have a buy rating on Tata Motors, given the strong volume growth expectation for Jaguar Land Rover (JLR), which accounts for half its consolidated sales and 65 per cent of Ebitda (earnings before interest, taxes, depreciation and amortisation). The company (JLR) has raised its volume estimate for 2011-12 from 270,000 to 300,000 units, based on a spike of volumes from Land Rover Evoque to be launched in the September quarter and traction in growth from the North American, Russian and Chinese markets.
Ashok Leyland’s M&HCV numbers for April and May fell 13 per cent y-o-y. While the company increased its market share in 2010-11 by 240 basis points to 25.7 per cent, analysts believe it may be losing share over the past two months to Tata Motors and Eicher.
Competitive pressure for both Ashok Leyland and Tata Motors is likely to increase with the launch of trucks from the Mahindra Navistar joint venture in the September quarter.
Ashok Leyland plans to expand capacity at its Pantnagar plant to 35,000 units in 2011-12.
Though tax breaks to the tune of Rs 40,000 per unit are a plus, the high fixed cost base and slowing growth in volumes could create pressure on earnings for the financial year, believe analysts. The company’s balance sheet could come under pressure in 2011-12, as it intends to invest Rs 1,200 crore, half of which will be raised via debt. This would raise its debt to equity ratio to 0.8.
