Ashok Leyland hits 20-month low on growth concerns

Shares of Ashok Leyland continued under pressure, hitting a 20-month low of Rs 86.55 apiece, down 4.5 per cent on the BSE, on concerns of a slowdown in vehicle sales.

The market price of the country's second largest commercial vehicle (CV) manufacturer was trading at its lowest level since May 25, 2017.

Thus far in the month of January 2019, Ashok Leyland, the flagship firm of Hinduja group, has fallen 16 per cent after recording weak December sales numbers. In comparison, the S&P BSE Sensex was up 1 per cent during the same period. The stock corrected 48 per cent from its 52-week high level of Rs 168 touched on May 8, 2018, on the BSE in intra-day trade.

Ashok Leyland for the second time in the calendar year reported a dismal set of numbers by reporting a de-growth of 20 per cent in its monthly sales of 15,493 units on a yearly basis. The M&HCV segment reported 29 per cent year-on-year declined in sales at 11,295 units in December. Despite the dismal set of numbers, light commercial vehicles (LCV) segment manage to report 27 per cent growth on a yearly basis.

Demand fell during the month on the back of liquidity crunch at non-banking financial institutions (NBFCs) along with an increase in official maximum load carrying capacity of heavy vehicles that crimped orders from fleet owners across the country.

The foreign brokerage firm CLSA reiterates ‘SELL’ rating on Ashok Leyland with a target price of Rs 75 per share.

“India’s truck industry is currently in the fifth year of an up-cycle where historical upturns in the last four decades have lasted four years on average. We see high likelihood of a downturn ahead especially with new axle norms raising freight capacity of existing fleet. Falling share of higher-tonnage trucks is a further drag. We expect competition to intensify in a downturn given Ashok’s improved ability to fight against Tata and the latter’s high focus on regaining its lost market share,” the brokerage firm said in a note.

“With most of the demand for CVs segment already being met in H1 FY19, the additional demand here could be limited going forward. Also, the recent policy revision by the government (increasing the load carrying capacity for heavy vehicles) could weigh on CVs demand and the high growth witnessed in H1 FY19 is expected to slightly moderate going forward,” rating agency CARE Ratings said in sector update.

Meanwhile, analysts expect Ashok Leyland to post a weak set of numbers for the quarter ended December (Q3FY19), due to fall in volume and higher operational cost.

“Ashok Leyland reported a 6 per cent year-on-year (YoY) dip in volumes this quarter owing to base impact along with the liquidity crunch in the segment. Anticipating realisations also to decline by 3 per cent YoY, we expect revenues to de-grow by 9 per cent YoY and margins to contract by 110bps YoY (lower 160bps QoQ) on account of commodity cost pressures,” Prabhudas Lilladher said in results preview.

Motilal Oswal Securities removed Ashok Leyland from the portfolio, given the constrained availability of finance, continued shift toward lower-tonnage vehicles (due to an increase in axle load) and a high base. This will lead to subdued volumes over the next few quarters.

“Also, FY21 demand remains uncertain due to the impact of pre-buy in FY20. The resignation of Mr. Dasari, managing director (MD), brings in uncertainty about continuity of the business plan, which would influence near-term stock performance till a new MD is appointed,” the brokerage firm said in results preview.