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Ashok Leyland Ltd’s shares are in reverse gear lately. In the past month, the stock has declined by around 14%, widely underperforming a 4% drop in the broader Nifty 100 index. “When the broader markets are in a weak territory, high beta stocks, such as Ashok Leyland’s, tend to fall faster. Increased concerns on inflation and higher interest rates tend to have an adverse impact on the commercial vehicle sector in which the company operates," said Kumar Rakesh, senior automobile and tech analyst at BNP Paribas India.

There are a few other reasons causing discomfort as well. One is the company’s declining market share in the medium and heavy commercial vehicles (MHCV) segment. There was further erosion in Ashok Leyland’s MHCV market share in the September quarter, partly owing to weak performance of the southern markets.

Losing grip
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Losing grip

Further, on 26 November, Ashok Leyland announced that its managing director and chief executive officer Vipin Sondhi has resigned. Some analysts view this as a point of concern even as others believe this may not be a big worry. Sondhi would continue to be in office till December. As analysts from Kotak Institutional Equities said in a report on 7 December, “Despite Mr Sondhi’s exit, we believe the company is well-prepared to execute its strategies across business segments."

To be sure, Ashok Leyland is expected to be a key beneficiary of the anticipated upcycle in the commercial vehicle segment from a medium-term perspective. Rakesh said, “Ashok Leyland was impacted more than the CV industry in the latest downcycle as the new axle loading norms hurt those categories more, where the company had a higher market share. We see this as a positive for Ashok Leyland in the impending upcycle as we expect those segments to grow at a faster pace. Also, we expect the company to benefit from volume market share gains in the LCV space on the back of new product launches."

BNP Paribas expects Ashok Leyland’s Ebitda margins to recover from the trough levels in FY21 (3.7%) and move into double digits over the next two years (FY23E: 10.4%)." Ebitda is earnings before interest, taxes, depreciation, and amortization; a key profitability measure for companies.

Ashok Leyland will be launching CNG (compressed natural gas) products starting in the March quarter, which can be expected to improve its overall market share. A recovery in southern markets after Q2 would help, too.

Kotak’s analysts said, “We expect recovery in truck demand over the coming quarters led by a sustained recovery in economic activity (especially tipper segment) on account of better freight demand from sectors such as e-commerce, infrastructure, mining, cement, steel and agriculture, and higher freight income resulting in improvement of fleet operators’ profitability."

Further, according to some analysts, any fundraise in Switch Mobility—Ashok Leyland’s electric vehicle arm—may act as a trigger for the stock. On the flip side, potential disruption in economic recovery due to the Omicron variant of the coronavirus poses a risk to the CV cycle recovery. Lack of financing availability to small fleet operators is another risk.

Notwithstanding the recent drop in the stock, Ashok Leyland’s investors are sitting on pretty good gains in 2021. So far this calendar year, the stock has appreciated nearly 32%, beating the Nifty 100 index, which gained 25% during the same period. As such, investors seem to be capturing some portion of the optimism into the share price. It goes without saying that market share trajectory in the MHCV segment remains a key monitorable ahead.

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