Ashok Leyland in top gear with volume growth, export focus

The volumes at Ashok Leyland, India’s only pure-play commercial vehicle company, grew twice that of the industry in the nine months through December. This has helped the Chennai-based company to gain 340 basis point of market share in a highly-competitive environment. The company has expanded its reach across India to reduce dependence on the southern market.

It has maintained volume growth guidance of 20 per cent for FY16 since it expects replacement demand to continue. Fall in fuel prices has substantially improved interest serviceability of the fleet operators leading to higher demand.

The competitive intensity in the medium and heavy commercial vehicles ( MHCV) segment can be gauged from the fact that average discount level has reached 7-8 per cent of the vehicle price.

There are three reasons for Ashok Leyland to expand its market share.

First, the MHCV segment has witnessed higher growth for the tractor trailers, which carry load of more than 35.2 tonnes. This segment has been a forte of the company. In the last one and half years, the share of heavy trucks, which carry more than 16 tonne, has increased by 10 per cent to 65 per cent of the total truck sales volume.
An increasing proportion of high tonne trucks makes the product mix richer, thus boosting average realisation per unit. This is a prime reason for margin expansion. The company has been able to raise the prices of some products which lifted the company’s average realisation by 3.2 per cent to Rs 13.35 lakh per unit during nine month period ending December against the same period last year.

Second, the company is a dominant player in South India, which has seen relatively high economic activity compared with the rest of India. Hence, the company’s volumes picked up faster. In addition, the company has been continuously expanding in the rest of India. It is focusing on gaining market in the intermediate commercial vehicle (ICV) segment by launching two new products — Guru and Sunshine — in ICV segment in the next financial year.

The third factor is that the company is planning to expand contribution from exports, defence, and buses to reduce the cyclicality of the truck business. Currently, exports contribute 10 per cent of the total sales. The company expects to earn over one-fourth of its revenues from exports in the next 3-5 years by expanding presence in Africa, South East and Latin American market.

The stock is valued at 16.6 times its projected earnings for FY17, which is at a premium to its average valuation in the past five years. However, it is justified due to improving return on equity, steady market share gain and ability to be a key beneficiary of local defence procurement.