Moneycontrol
Nov 09, 2017 06:21 PM IST | Source: Moneycontrol.com

Ashok Leyland riding on strong commercial vehicles, to double down on defence & EVs

We continue to like the business and recognize numerous tailwinds for the company like the GST opportunity, strong exports, strategy on defense, and last but not the least, the focus on electric vehicles (EVs).

Nitin Agrawal @agrawant
 
 
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Ashok Leyland (AL), the second largest commercial vehicle manufacturer, reported a strong topline number for the second quarter ended September 2017 driven by robust volume growth. However, margins were impacted by high raw material prices. We continue to like the business and recognize numerous tailwinds for the company like the GST opportunity, strong exports, strategy on defense, and last but not the least, the focus on electric vehicles (EVs). Any weakness in the stock should be an opportunity for long-term investors.

Quarter at a glance

Ashok Leyland_2Q18Topline – Strong volume growth

With the GST impact tapering off, the company posted a significant growth of 30.8 percent (YoY) in net revenue from operations. The growth was driven primarily due to a strong volume growth (22.6 percent) and 6.7 percent increase in realization.

Margin headwinds – pricing power might shield the impact

AL’s EBITDA margin declined by 150basis points (YoY) in 2QFY18. The management mentioned multiple reasons for the contraction in the EBITDA magin: it had got a very large and high margin order in the year-ago quarter, it could not pass on the raw material price increase (up 340bps (YoY) as a of net revenues) to the customers because of the heavy discounts offered by the competitors; export of its BS-III inventory was done at a lower margin and lastly, the tax benefit of its Pantnagar facility has gotten over. The reduction in other expenses partly offset the rise in raw material prices.

Looking beyond the earnings

Hinduja Foundries to be EBITDA accretive

Commenting on Hinduja Foundries in the last conference call, the management had indicated that it would be EBITDA positive, going forward. It has become EBITDA positive in the second quarter itself and its margin came at around 8 percent.

Market share – confident of continuing gains

The company had achieved the highest ever market share of 34.7 percent in 1QFY18 which has now come down to 33.6 percent (40bps YoY). The fall was primarily due to the deep discounts offered by the competition. The management indicated that the company will not offer discounts just to gain market share if discounts don’t make financial sense.

The management is confident that the price sanity would come back in the market, going forward, and the company is well placed to take advantage on the back of its innovative BS-IV compliant iEGR technology.

Volumes recovery

With many of the headwinds largely behind, volume pick-up has started, riding on the positive impact of GST rollout and the government’s increased focus on infrastructure spending. The management also indicated that the strict ban on overloading would increase the demand for its products. While recognizing the competitive intensity, the management is confident about its products and its position in the market.

Focus on electric vehicles

The company is very focused in the EV space. It expects EVs to form a large part of business in the coming years and expects higher volumes in all of their categories. Ashok Leyland is making significant investments in technology and putting a lot of efforts to make EV a reality. The company is also focusing on all technologies as of now as no one is currently sure which technology would produce the optimum result in future. AL is giving maximum weight to the total cost of ownership of electric vehicles as that is the critical component for wider adoption of EV.

Strong position in defense

With the governments’s increasing focus on defense, the management is very confident and excited about the long-term opportunity in the defense sector.

In sum, we are positive on the medium to long term outlook on Ashok Leyland. The company has bolstered its position in the market and looks set to gain from GST, infrastructure spending and the market’s return to normalcy post BS-IV implementation.

Valuation

At the current price, the stock trades at a reasonable valuation of 19.4x FY18 projected earnings and 16.5x FY19 projected earnings, which make it an ideal candidate for accumulation.

Ashok Leyland_2Q18_1

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