Leyland delivers goods in Q4, but demand remains challenge for CVs in near term

  • Liquidity crunch and increase in tonnage post-new axle load norms have hit sales since the second half of FY19
  • Ashok Leyland stock is still about 44% lower than its 2018 high, but clearly things are looking better compared to the past few months


In mid-February, shares of Ashok Leyland Ltd had fallen almost 54% from their highs in 2018 to 78. They have since risen and now trade at around 94 apiece on the National Stock Exchange. Of course, the stock is still about 44% lower than its 2018 high, but clearly things are looking better compared to the past few months.

Note that the company’s revenues and operating profit had fallen by 12% and 23%, respectively, in the December quarter, owing to weak sales. In the March quarter results, which were announced on Friday, revenues grew about 1%, while operating profit fell 4.6%.

The results actually were a mixed bag with revenues being slightly better than expected, while margins fell short. Ashok Leyland’s volumes had risen 1% year-on-year, and were driven by sales of light commercial vehicles (CVs), which rose by more than 8%. As such, average price realizations were expected to drop on account of the change in the product mix. What’s more, the auto slowdown has resulted in increased discounts. Put together, analysts at Kotak Institutional Equities were factoring in a 3% decline in average price realizations, leading to a decline in revenues as well. But the company has managed to maintain realizations, which is a positive surprise.

Oddly though, despite this advantage and the backing of softening commodity prices, profit margins were slightly below expectations. The consensus estimate on the Street for operating profit margin stood at 11.5%, while Ashok Leyland reported margins of 11.1%.

“It makes sense to compare Ashok Leyland’s margin performance to that of Tata Motors’ India performance," says an analyst at an institutional brokerage firm, who declined to be named. “By that measure, the former’s performance looks good because it reported a sequential improvement in margins from 10.3% in the December quarter, while Tata Motors reported a 200 basis points drop in margins on a stand-alone basis."

But as Tata Motors Ltd had highlighted in its call with analysts post-results, demand remains a challenge in the near term. Liquidity constraints faced by non-banking financial companies and increase in tonnage post-new axle load norms have hit sales since the second half of FY19, and these constraints still apply.

Of course, post-elections, investors are hoping for a quick resolution to the liquidity crisis, as well as a boost for infrastructure. These, coupled with the new BS-VI norms, should aid demand for new CVs. Such a thesis has driven Ashok Leyland shares in recent trading sessions. But the fact that the shares are still considerably lower than a year ago means that investors are still being cautious

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