Ideas for Profit | Ashok Leyland: Strong business available at an attractive valuation

Nitin Agrawal Moneycontrol Research

 Highlights: - Decline in volume and realisation led to decline in topline - M&HCV segment continues to remain weak - Operating margin maintained above 10 percent - Near term business outlook sluggish, positive for the long term - Valuation attractive --------------------------------------------------

In a very weak industry environment, Ashok Leyland (AL) posted a decent set of Q3 FY19 earnings. Though the company witnessed a decline in its volume and net revenue, it could maintain its operating profitability above 10 percent. The industry outlook for both domestic and export markets remains weak in the short term. However, the long-term outlook remains positive. Strong position in the market, bringing forward of buying ahead of rollout of Bharat Stage VI norms, scrappage policy and attractive valuations make it a long term buy.

Quarter at a glance

Key highlights In terms of quarterly performance, the company has posted a 12 percent fall in net revenue, led by volume and realisation decline of 6.1 percent and 6.3 percent, respectively.

The fall in volume was led by a 16.5 percent decline in medium and heavy commercial vehicle (M&HCV) segment volumes, but was partially offset by a 27.7 percent increase in light commercial vehicle (LCV) volumes. Weakness in realisation was due to intense competitive intensity leading to rampant discounts and weaker product mix.

AL continues to maintain its profitability above 10 percent due to higher spares and LCV sales. Its operating profit margin contracted 140 basis points (100 bps=1 percentage point). The management expects cost savings of 150 bps due to modularity programme in FY21.

Outlook

Strong market presence On the back of superior technology and products, the company continues to have a strong market presence. This also led to market share gains for the company. AL, however, witnessed a 140 bps year-on-year (YoY) contraction in its market share due to aggressive pricing by its competitor. We believe that it would continue to maintain and/or gain market share going forward.

Industry opportunities to continue The domestic market has been facing challenges on the back of weakening macroeconomic environment leading to muted sentiments for automobile sector, including CV and PV segments. Subdued market sentiments are on account of liquidity problems, financing issues, rising interest rates and slowdown in economic activity. This was, further, aggravated by the lag impact of new axle load norms in the CV segment.