Ashok Leyland Ltd’s shares rose by 4.5% on Friday. Investors appear pleased with the company’s medium-term aspirations. At the analysts meeting held on Thursday, the commercial vehicle (CV) maker said it aims to focus on profitable growth and also improve its market share.
The company targets a market share of 35% in the domestic medium & heavy CV (M&HCV) segment in the medium term. It helps that the company has gained market share over the past few quarters with the measure at 32% in the March quarter (Q4FY23). The company plans to increase the market share by plugging gaps in its product portfolio and strengthening its presence in north and east India where it has been lagging. In the light CV segment, it aims for a market share of 25% versus 20% in FY23.
View Full Image
This comes at a time when the M&HCV industry growth is set to moderate after having a good run in the past two years. The CV volume trajectory in Q1FY24 so far has been modest due to pre-buying seen in the last quarter ahead of transition to Bharat Stage-VI phase 2 norms. With an anticipated volume pick up from July onwards, Ashok Leyland expects industry demand for M&HCVs to increase by 10% in FY24. In FY23, the growth was 49%, Aniket Mhatre, an analyst at HDFC Securities, said.
“The best of CV upcycle is behind us given that the industry saw strong growth in the last two years. Also, while the industry is 9% lower than its previous peak in volume terms, it has already crossed its FY19 peak in tonnage terms in FY23,” Mhatre said.
Further, elevated inflation and interest rates would make fleet operators incrementally cautious in adding new fleets, he added. In the light CV segment, Ashok Leyland expects 5% industry growth in FY24. But in the coming years, strong replacement demand, government’s infrastructure spending and the implementation of scrappage policy are some tailwinds.
However, what one also needs to factor in for Ashok Leyland is the potential impact of competitive intensity given that peer Tata Motors Ltd has a strong footing in CVs. Analysts from Kotak Institutional Equities believe it will be challenging for the company to gain market share as Tata Motors may resort to an aggressive pricing strategy in order to defend its market share.
To reduce the cyclicality of the business, Ashok Leyland aims to expand its non-CV business. Also, it is looking to spread its wings in the international CV markets.
Meanwhile, another key goal that Ashok Leyland has is to clock double-digit Ebitda margin in the near term and improve it to mid-teens in the medium term. Cost cutting initiatives should aid margin performance.
The company has steadily improved its Ebitda margin over the past two years. In FY23, the margin stood at 8.1%, expanding by around 350 basis points year-on-year. One basis point is 0.01%. This meant that Ebitda almost trebled to ₹2,931 crore in FY23.
In Q4FY23, Ebitda margin climbed to double-digits at 11%. But the progress towards achieving mid-teens margin necessitates closer tracking given that analysts are not yet upbeat on this. Various broking firms estimate Ashok Leyland’s Ebitda margin to be in the range of only 10-11% in FY25.
Over the past year, Ashok Leyland’s shares have appreciated by nearly 27%, suggesting investors are capturing the optimism adequately. Currently, the stock is flirting with its 52-week high of ₹169.45 apiece seen in September. The stock trades at 23 times its FY24 estimated earnings, according to Bloomberg data.
Know your inner investor
Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Download The Mint News App to get Daily Market Updates.
Updated: 19 Jun 2023, 12:25 AM IST