Ashok Leyland: Sales, Budget are positives

Firm continues to gain market share in commercial vehicles; other growth positives as well

Ashok Leyland yet again outperformed its commercial vehicle (CV) peers in February. Its medium and heavy CV (M&HCV) volumes for the month grew 31 per cent year-on-year as against the segment's 28 per cent. The performance was driven by a strong growth in south India, expansion in north and east, and export orders, says Motilal Oswal Securities. Given that the performance is likely to continue and that there are other positives in the Budget, analysts remain positive on the stock.

Overall volume growth was led by replacement demand, with some purchases from the road and mining sectors. Including light CVs (LCVs — Dost and Stile brands, part of the Nissan joint venture) which grew three per cent, the overall volumes were up 24.5 per cent year-on-year for the company in February. Led by a 38 per cent growth in M&HCVs for FY16, the company is expected to end the financial year with overall volume growth of 34 per cent. Year-to-date, it has gained about 350 basis point market share from its rivals such as Tata Motors.

The over 50 per cent increase in allocation to road construction in the Budget is a positive, says Axis Capital, for CV demand, especially the tipper segment, where Ashok Leyland is dominant. A tipper is a truck with a rear platform that can be raised at its front end, enabling a load to be discharged.

Tippers and construction trucks have not grown in the CV space so far — the two could recover. The Budget has increased the defence spending for M&HCV by 75 per cent and Ashok Leyland will be a beneficiary.

The change to the Motor Vehicles Act is another positive as this will allow the private sector to participate in the passenger vehicle segment of road transport. The scrapping of the permit systems should boost bus sales, benefitting players such as Ashok Leyland. A 20 per cent spending increase in schemes such as Atal Mission for Rejuvenation and Urban Transformation (Amrut), formerly JNNURM (Jawaharlal Nehru National Urban Renewal Mission), will be another positive.

The stock has gained 10 per cent in the past few trading sessions. While the replacement segment continues to be strong, the bigger positive will be new sales for the company, whose stock is trading at a reasonable 14 times its FY17 earnings estimates of Rs 6.7.