Ashok Leyland Ltd’s strong performance in the March quarter failed to impress investors. Revenue jumped 46% from a year ago as sales volume rose by nearly one-third.

Operating margin, too, improved by 4 percentage points to 10% as raw material prices softened. Operating profit more than doubled. Yet, the stock lost 5% in the last two trading sessions.

There appears to be two key disappointments. One, the reported revenues are lower than what the Street had expected. Second, realizations are flat sequentially, which indicates that pricing power hasn’t come back. The price per vehicle sold increased 12% from a year ago, but it was little changed from the December quarter.

This has happened despite a favourable product mix in the latest quarter. As light commercial vehicles sales slowed, the share of higher-priced medium and heavy commercial vehicles increased in overall sales. Billing from the defence sector which was skewed towards the December quarter impacted sequential realization numbers, the management told analysts in a conference call.

That explanation provided little comfort as the correction in the stock deepened on Wednesday. It is still up 36% this calendar year though. For the stock to hold on to these gains, the company has to show it can squeeze out better profitability even from current volumes.

The management is confident that the commercial vehicle industry sales would grow 10-15% in the current fiscal year. It is seeing signs of improvement in demand from infrastructure sectors. Freight rates are firming up and fleet operators are coming back to buy trucks.

Besides, Ashok Leyland is also eyeing opportunities in exports and defence contracts. It expects these businesses to grow strongly in the coming quarters. Many of the company’s customers have bid for defence contracts. Better economies of scale are also one way to improve margins.

However, discounts are still high. Right now, commercial vehicle sales are mostly being driven by replacement demand. Overall capacities at the truck or fleet operators level are not expanding in a substantial way, say analysts.

It is only when these transporters begin expanding in a big way companies such as Ashok Leyland can regain pricing power. Such an expansion will not only improve realizations but also improve utilization levels. After all, the current medium and heavy commercial vehicle industry volumes are still two-thirds of where they were three years earlier.

The writer doesn’t own shares in the above-mentioned companies.