Markets
Ashok Leyland takes the rough with smooth
Summary
Ashok Leyland continues to be plagued by the chip shortage, which impacts production of light CVsThe Nifty Auto index rose 3.27% on Monday, emerging as the top sectoral performer. There is a general optimism surrounding auto companies due to improving macro-economic outlook. Shares of Ashok Leyland Ltd too basked in this glory, hitting a new 52-week high during the day. This is despite the fact that its commercial vehicle (CV) volumes in July dropped sequentially by 6.2% to 13,625 units, slightly weaker than expectations. True, one factor weighing on volumes is the seasonality.
Ashok Leyland also continues to be plagued by the semiconductor chip shortage, which mainly impacts production of light CVs. Due to this, the company could not produce an estimated 500-1,000 vehicles per month over the last few months, Ashok Leyland said in its June quarter (Q1FY23) earnings call. This situation could improve ahead. Moreover, the demand outlook is robust. The company said that fleet utilization levels are rising and there is an increase in freight movement on the back of a pick-up in economic activity.
“If the cyclical upturn in the CV industry plays out as expected, then the higher tonnage segment should see an increased growth comparatively as the segment had seen a far sharper decline in the downcycle. In view of this, Ashok Leyland would benefit as it has a significant market share in the higher tonnage segment," said Kumar Rakesh, an automobile and technology analyst at BNP Paribas Securities. Even so, there is a risk from the tightening of interest rates. Coming to Q1 results, Ashok Leyland underperformed expectations on the margin front. While price hikes boosted realizations, it did not mitigate headwinds from higher commodity costs. The upshot: Ebitda margin came in at 4.4%, a sequential drop of 4.44 percentage points.
The automaker is distant from the early double-digit Ebitda margins it clocked prior to FY20. But in the coming quarters, softening commodity costs and volume growth would aid Ashok Leyland to reach such levels.
Meanwhile, its electric vehicle business, Switch Mobility, continues to see increased momentum. The Indian operations have an order book of 600 buses, which is comforting. Investors would do well to monitor the fundraise in this business. Taking into account the 3.5% gain on Monday, Ashok Leyland’s shares are up 31.5% so far in FY23. Sustaining market share is key ahead. In Q1, the company’s market share in the domestic medium and heavy CV segment fell by 60 basis points sequentially to 30%. Competition is intense in the sector as evident from the continued high discounts given by companies and hence this necessitates closer tracking.
