Ashok Leyland revs up as June volumes surpass expectations
Summary
The CV industry is in fine fettle. Underlying demand is healthy backed by infrastructure spending, strong replacement demand and implementation of scrappage policyShares of Ashok Leyland Ltd surged nearly 4% to hit a fresh 52-week high of ₹173.90 apiece on Monday on the National Stock Exchange (NSE) as the commercial vehicle (CV) maker’s wholesale volumes surpassed expectations.
Volumes grew almost 5% year-on-year to 15,221 units, higher than the 14,400 units estimated by analysts at Nomura Financial Advisory and Securities (India). Volume growth defied estimates that were shaped by the pre-buying effect observed in April and May. This was spurred by the anticipation of price increases ahead of the transition to Bharat Stage-VI phase 2 norms, which had led to a significant boost in CV volumes in March, and subsequently a 46% month-on-month downturn in April.
However, the company managed to shift gears in May, witnessing a month-on-month pick-up in volumes that further accelerated in June by nearly 16%. Consequently, Ashok Leyland’s Q1FY24 volume rose 4% year-on-year to 41,329 units, notwithstanding a sequential drop of approximately 31%.
Even so, Ashok Leyland fares better than its peer, Tata Motors Ltd. The latter’s CV volume is down by nearly 15% year-on-year in Q1.
The CV industry is in fine fettle. Underlying demand is healthy backed by infrastructure spending, strong replacement demand and implementation of scrappage policy. “We have observed strong growth in the bus division, driven by demand from educational intuitions and a low base," said analysts at Motilal Oswal Financial Services in a report dated 27 June.
On the profitability front, Ashok Leyland aims to clock double-digit Ebitda (earnings before interest, tax, depreciation and amortization) margin in the near term. In FY23, this measure was 8% while in Q4FY23 it was nearly 11%.
In Q1, the share of high-margin medium & heavy CVs stood at 63.3%, down 452 basis points sequentially. One basis point is one-hundredth of a percentage point. Given this and a drop in volumes, all eyes would be on Ashok Leyland’s margin performance in Q1.
Shares of Ashok Leyland have risen 16% in the past one year. Further meaningful upsides would be driven by sustained growth in volume, improvement in margin trajectory and market share gains.