Home >Markets >Mark To Market >Ashok Leyland’s small trucks bet, mid-cap positioning boost stock

Shares of Ashok Leyland Ltd have risen 14% in the past two trading sessions, largely driven by expectations of a surge in mutual fund flows to mid-cap stocks. Mutual funds already own an 8.6% stake in the company, and expectations are that Ashok Leyland will be a beneficiary of new regulations that call for an increase in fund allocations to mid- and small-cap stocks for some mutual funds.

Based on current market capitalization, the company ranks among the top 25 stocks in the mid-cap category.

Meanwhile, its medium and heavy commercial vehicle (MHCV) sales continue to languish. MHCV sales dropped 52% last month, though the pace of decline moderated from earlier months.

Gaining Share
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Gaining Share

MHCV is a large business for Ashok Leyland and accounted for about three-fourths of its sales until FY19. With capacity utilization at fleet operators low and the economy reeling under covid-19, the chances of an immediate sales recovery are bleak.

But what’s aiding the company in these difficult times is its success in the light commercial vehicle (LCV) segment. The share of small trucks in Ashok Leyland’s domestic sales has risen steadily, touching 39% last fiscal, up from 28% in FY15. Last fiscal, the company gained market share in the sub 7.5-tonne gross vehicle weight category despite lower industry volumes.

Demand for these vehicles remain healthy, thanks to the rise of e-commerce and the need for last-mile connectivity. This is reflective in faster recovery of LCV sales vis-à-vis MHCVs in recent months.

The newly-launched Bada Dost with higher load capacity will help Ashok Leyland capture the growing demand for LCVs, say analysts. According to Edelweiss Securities Ltd, the company initially plans to sell the vehicle where it already has a presence.

“The Phoenix platform (Bada Dost built on it) will bolster its ambition to widen addressable LCV market and boost market share; offer a bouquet of products (7-8 new launches expected) to compete more effectively; de-risk business from sharp MHCV cyclicality," analysts at Edelweiss said in a note.

Even so, with MHCVs still generating the bulk of Ashok Leyland’s sales, its fortunes are still intertwined to the broader economy where the outlook remains dim. As schools, colleges stay shut and public transportation is restricted, demand for buses is also hit.

Consequently, many analysts expect the MHCV business to see a significant fall this year—sales are down 86% during April and August. This is expected to weigh on the company’s financial performance this fiscal.

Even so, the much-awaited vehicle scrappage policy, expected to be announced by the government in another month or so, holds out hope for commercial vehicle manufacturers. The policy aims to terminate old polluting vehicles. This is expected to create fresh demand for commercial vehicles.

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