Home / Markets / Mark To Market /  Hope fuels rally in Ashok Leyland shares despite few signs of revival

It’s the week of the underdogs in India’s stock markets. Many stocks that were languishing 40-60% below their pre-covid highs are suddenly in the limelight. Shares of Ashok Leyland Ltd are a case in point. The company’s Q1FY21 results, as expected, were disastrous. Still, the markets’ response was to drive the company’s shares up nearly 15%.

Revenue at the company slumped 88.5% in April-June as covid-19 and lockdowns hit commercial vehicle sales. Tracking the steep fall in sales volumes, analysts were expecting the company to report a weak financial performance for the June quarter. While the fall in revenue was in line with expectations, the operating loss of 333 crore exceeded several analysts’ estimates.

“Financial performance will remain weak in the near term. Most fleet operators have opted for loan moratoriums, and are operating at suboptimal levels; this will crimp demand for fresh vehicles," said an analyst at a domestic brokerage.

Slow recovery
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Slow recovery

There is some reprieve on the debt front, with the company telling analysts that it won’t rise from current levels. But the outlook on the recovery remains weak, say analysts, even though the company has said the worst is behind it. Against that backdrop, the rally in the stock is a mystery.

Coming back to Q1 results, the transition to the BS-VI emission norms and the resultant price hikes helped improve average selling price and realizations. But the steep fall in volumes adversely hit operating leverage.

“The company reported an Ebitda loss of 333 crore (versus Jefferies estimate of 220 crore loss). Gross margin expanded 580 basis points year-on-year, but Ebitda margin was still negative at -51% due to the adverse impact of operating leverage on low volumes," Jefferies India Pvt. Ltd said in a note. Ebitda is earnings before interest, taxes, depreciation and amortization.

The monthly sales update for July indicates an incremental improvement in sales. Compared to 81% in June, the fall in sales volumes moderated to 56% last month. The recovery is being driven by light commercial vehicles.

But sales of better-priced medium and heavy commercial vehicles continue to remain sluggish. Sales in this category dropped 75% in July.

Auto analysts foresee a weak recovery in the medium and heavy commercial vehicles segment, a large business segment for Ashok Leyland.

“For the medium heavy commercial vehicle segment (MHCVs), the industry may have declined ~67%, in line with our estimates. Challenges over finance availability, driver availability and weak economic activity will continue to impact near-term demand, in our view. We see further downside risks to our segment estimates of -25% for FY21F and +30% for FY22F," Nomura research said in a July automobile sales review note.

The weak recovery and unusually low sales can continue to exert financial pressure on Ashok Leyland. That is the big risk to the earnings in the near term.

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