Sumit BilgaiyanFounder of Equity99
We recommend Ashok Leyland with a buy rating and a target price of Rs 195 in long term as we believe the company has multiple levers in its favour which will drive growth over FY19-FY20.
The growth momentum witnessed by domestic commercial vehicle (CV) industry in recent months is poised to continue in FY19/FY20, buoyed by policy changes at the macro level and shifting demand preference at the buyer level.
Three significant demand drivers are likely to propel strong volume growth for the industry i.e. overloading ban on trucks in key states like Rajasthan, Uttar Pradesh and Madhya Pradesh, pre-purchases on account of migration to BS-VI emission norms and CV scrappage policy implementation.
In Q3FY17, sales jumped 57.5 percent to Rs 71132 million due to 41.2 percent/44.6 percent growth in M&HCV and SCV volume. EBITDA has grown by 101.9 percent YoY to Rs 7882 million and PAT whopped 178 percent YoY at Rs 4497 million.
Double-digit EBITDA margin, while comparable to those of its peers, is likely to witness an expansion on the back of improved product mix and operating leverage benefits. Apart from this, the company has also been winning orders from defence and exports.
Ashok Leyland was the only company in the industry which had increased prices of its vehicles by about 7-10 percent in April last year owing to BS-III to BS-IV transition. They have taken another hike in January to offset higher input prices.
The company recently also increased its warranty period from 18 months to 48 months to reinforce customer confidence the effect of which is visible in improvement in market share. March 2018 sales are up 20 percent driven by double digit growth in MHCV and market share gains in LCV.
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