Ashok Leyland in focus on hopes of ‘pre-buying’ surge ahead of BS-IV

ET Intelligence Group: Investor interest in the stock of Ashok Leyland, India’s second-largest commercial vehicle (CV) maker, is increasing on expectations that logistics companies will buy more trucks in the current quarter before stricter emission standards are enforced from the beginning of the next fiscal.

The stock has gained 22% since the beginning of December underpinned by demand for trucks that comply with the old emission standards (BS-III). The government regulations stipulate that all vehicles sold from April 2017 should comply with BS-IV. Price of trucks manufactured to comply with the new emission regulations is between Rs 60,000 and Rs 1,00,000 higher than those models produced as per BS-III standards.

The company management said in the earnings call after the December quarter results that it is expecting ‘pre-buying’ in CVs to gather pace from mid-February. Therefore, analysts have revised upward their volume growth outlook of medium and heavy commercial vehicles ( MHCV) to 8% for FY17.



This implies that volume growth of MHCV has potential to reach 24% for the March quarter.

Increase in truck volumes is expected to contract discounts per vehicle as demand normalises. The company increased prices by 4% in January, a move that will further offset commodity price pressures.

Operating margins in the December quarter declined 140 basis points sequentially to 10.9% due to higher raw material costs and lower realisations. The Street has been pricing in operating profit margins of 12% and 11.5% for FY17 and FY18, respectively.