Ashok Leyland’s new product may not cheer near-term valuations

Ashok Leyland’s new product may not cheer near-term valuations

Ashok Leyland Ltddisappointed the Street with its August sales figures. Volumes dipped 3.5% compared with a year ago, following a 10% decline in the June quarter.

It has now ventured into the new light commercial vehicle (LCV) segment, in a joint venture (JV) with Nissan Motor Co. Ltd. Is the timing right? What mileage will it give Ashok Leyland and how soon?

Certainly, the company lacked a 0-7.5 tonnes truck in its stable. Equity analysts concur it is the fastest growing segment among CVs in the last few months. Market leader Tata Motors Ltd posted year-on-year (y-o-y) sales growth of 27% in August, even as sales of medium and heavy CVs was subdued at 5.8%.

Movement of farm products and other consumption items into the hinterland and to smaller cities has kept the rentals and sales of smaller trucks robust until now, according to the Indian Foundation of Transport Research and Training, even as the medium and heavy goods segment has been hit by rising interest rates and a slowdown in industrial activity.

Ashok Leyland’s estimates indicate a 15% compounded annual growth rate (CAGR) in the LCV segment between 2011 and 2015.

Indeed, one can argue that the company is a late entrant; it missed the boom during the last two years, when CV sales were on a roll. Besides, the last three years have seen the proliferation of several auto makers in this space. But the management view is that the segment is growing; its initial capacity off the Hosur factory in Tamil Nadu will be around 55,000 units.

Ashok Leyland has the wherewithal to sell the new product through its existing national network, though the initial launch would be in the southern states. A valid concern among analysts has been that the company has not been nimble-footed in sales and product penetration in markets and has been rather slow compared with peers.

Tata Motors’ Ace and Mahindra and Mahindra Ltd’s Maximo are well-entrenched brands in the market, too, though Ashok Leyland’s Dost comes at a slightly higher payload segment, which the management reckons would give it the first mover advantage.

That said, being a JV, the LCV will not influence Ashok Leyland’s earnings or valuations in the near term. Of greater consequence is the rising interest cost due to higher inventory and the resultant working capital. This, together with its higher depreciation, weighed down net profit for the June quarter—it dipped 30% from a year ago.

The company’s shares trade at 25 apiece, which discounts the stand-alone earnings for fiscal 2012 about 12 times. While the new LCV would certainly improve its brand presence, the impact on near-term valuations would be limited until volumes gain momentum over the longer term.

Graphic by Ahmed Raza Khan/Mint

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