Ashok Leyland Limited’s efforts to capture the domestic market share in the Medium and Heavy Commercial Vehicles (M&HCV) segment have paid off. The automaker captured 30.6% of the market in the March quarter (Q4FY22), a multi-quarter high, riding on the introduction of compressed natural gas (CNG) vehicles and expansion in the distribution network. This compares well with the market share of 28.9% in Q4FY21.
Ashok Leyland’s M&HCV volumes in the fourth quarter grew nearly 50% higher than industry growth, management said in a post earnings call.
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The company, which had a market share of 30% in April, plans to launch four more CNG vehicles in different tonnage categories during the year. In general, CNG currently accounts for 40% of the intermediate commercial vehicle (CV) segment.
It remains to be seen whether the company can maintain this position in a highly competitive market. If this happens, it could have a positive impact on the stock.
Analysts believe margin expansion is a key factor. In Q4, EBITDA (earnings before interest, taxes, depreciation and amortization) margin rose 1.24 percentage points (year-over-year) year-on-year at 8.9%, beating analysts’ estimates by a mile. This expansion was led by improved operating profits amid a high inflationary environment.
However, the increased cost of commodities is a matter of concern. Still, softening steel prices augurs well for margins. The company expects to achieve double digit EBITDA margin. It has hiked prices in Q4 and April as well. Management said that at 2% growth, they maintain 1.6-1.7% net post-discount, which is good, but discounts are a bit high.
The CV segment is set to benefit from a strong cyclical upswing after the last downcycle. Industry volumes declined in FY20 and FY21, followed by a recovery in FY22. “Industry volume grew by 49% in FY12 and we believe trucks are in the early stages of a long upcycle, which lasted an average of four years ago. We see truck volumes up 34%/15% year-on-year in FY23/FY24. Our FY24 volumes are similar to FY19 peak,” analysts at Jefferies India said in a report on May 20.
Increase in infrastructure activity by the government, strong growth in e-commerce and imminent demand for replacement augurs well for the sector. Management sees headroom for growth as the average lifespan of trucks at 9.9 years is an almost all-time high. Also, reopening of colleges and offices means more opportunities for the bus segment.
Higher fuel prices were expected to impact demand, but the segment has emerged largely non-stop. “The reduction in demand, evident from the increase in freight traffic, has allayed fuel concerns. With excise duty cut on fuel prices, the deal has turned mellow for fleet operators,” said Varun Baxi, analyst at Nirmal Bang Equities.
The company has also seen growth in export markets such as Africa and the Middle East. Total exports grew by 38% in FY22. While demand is strong, semiconductor shortage is taking a toll on the lightweight CV segment.
Investors will see if the company’s market share continues. Ashok Leyland shares closed up 6% on the NSE on Friday after the fourth quarter results. “Valuations at 19.8x FY24E price and 10.9x EV/Ebitda for earnings are reflecting in the early recovery cycle. Any fundraise in Switch Mobility can act as a re-rating catalyst,” analysts at Motilal Oswal Financial Services said in a report on May 21. EV is enterprise value. Switch Mobility is the company’s electric vehicle business.