Even as the heavy commercial vehicle sales continue to soften, Ashok Leyland’s bet on the light commercial vehicles (LCV) has begun to pay-off. Since its launch in October 2011, the company sold 12,116 units of the LCV, Dost. And the sales are increasing by the month. The company sold 1,110 units of Dost in January. In April the sales run increased to 2,218 units and further to 2,305 units in May.

The 1.25 ton pick-up vehicle, has received good response from the market. According to Bloomberg, it has a three month waiting period. The company, which is producing the vehicle through a venture with Nissan, is estimated to have an order backlog of 6,000-7,000 units. It is planning to launch the CNG version of the vehicle and is aiming to sell 32,000-36,000 units in current fiscal.

Navin Matta of Daiwa Capital Markets said in a note “AL’s (Ashok Leyland) LCV venture with Nissan is progressing well, with a current volume ramp-up of 2,300 vehicles/month. Per AL, the current market share in the segment in states where vehicle has been launched has already reached 18%. The company has a current order backlog of 6,000-7,000 vehicles. In FY13, AL expects to sell 36,000 LCV units.”

Except for the success of the Dost, the overall sales of the company would have been falling at a faster pace. Weighed down by high finance costs and weakening economic activity, commercial vehicle sales contracted 2% from 6,468 units in April to 6,343 units last month. But add the Dost numbers, overall sales will fall by just 0.4% in May.

The share of the LCVs in overall product mix is also on the rise. According to Avendus Securities the share of the LCVs could increase from 14% in March quarter to 24% next fiscal. Sri Raghunandhan N L of Avendus Securities said in a note “The LCV share in the product mix expanded 2.2% q‐o‐q to 14% in the Mar12 quarter. This share is likely to increase to 24% by FY14f due to robust demand for the ‘Dost’ LCV.”

Encouraged by the success of the Dost, the company, in partnership with Nissan, is lining up new variants in the segment. According to a NDTV report, the venture is preparing to launch a multi-purpose vehicle-Evalia and a low cost vehicle-Stile. While several factors will determine the success of the new vehicles, the focus on the LCVs is helping the company contain the sharp drop in volumes for now.

Ashok Leyland, though, will derive limited gains from the changing sales mix. Compared to the medium and heavy commercial vehicles, LCVs carry lower margins. So, even as the share of LCVs in overall sales is rising, the company is unlikely to gain exponentially. Joseph George of IIFL said in a note “The management expects Ebitda margin to improve from 9.8% in FY12 to 10–10.5% in FY13. It expects some margin dilution owing to increase in the share of low-margin Dost volumes in overall sales. Adjusting for the negative impact of Dost, the management expects Ebitda margins to be at 11–11.5%.”

Overall, even as the mainstay medium and heavy commercial vehicles continues to contribute most of the earnings, the diversification into LCVs business is yielding its intended benefits-to bring in more volumes. The stock gained 9.4% since the beginning of this year. BSE Auto index in the same period rose 14.4%. A sustained pick-up in margins and volumes is necessary for the stock to outperform the benchmark index.