Tailwinds fuel the Ashok Leyland stock, but it’s a painful ride ahead2 min read . Updated: 09 Apr 2020, 12:50 AM IST
- Being a pure play on commercial vehicles, stock has fallen from ₹160 at the peak of CV cycle in ’18 to a low of ₹44
Ashok Leyland Ltd’s shares have surged 29% from the low of ₹33.70 hit on 25 March. What is driving the stock in spite of the 21-day lockdown?
To start with, it must be noted that the stock had reached extremely low valuations, and the recent rise may be akin to a dead cat bounce. A report by Motilal Oswal Financial Services Ltd points out that Ashok Leyland trades at a 20% discount to its decadal average (price-to-earnings ratio).
But this is not the only reason. Its decision to reverse the proposed buyout of the promoter stake in group firm Leyland Finance Ltd helped investor sentiment.
Note that in mid-March, investors had hammered the stock when Ashok Leyland said that it would be buying 19% in the commercial vehicle (CV) financing firm, from existing investors (Everstone Group: 7%; promoters: 12%) for ₹1,200 crore.
A report by Edelweiss Securities Ltd stated that the timing, quantum and valuation of the deal would pressure the company’s cash flows in a weak demand environment and also weigh on its valuations. “We believe the Street would have preferred Ashok Leyland buying a 7% stake from Everstone. This would have been in compliance of their commitment as well as reduced the strain on cash call," it added.
Besides, the valuation of Hinduja Leyland Finance was based on pre-pandemic levels.
Therefore, the Ashok Leyland management’s decision to hold back the purchase of promoter stake has clearly helped.
Another reason for optimism on the Street is the hope for an economic stimulus that would include the auto sector. However, this argument looks far-fetched. Industry experts concur that CVs are the worst-hit from the covid-19 impact and are likely to take the longest among auto segments to recover.
Some analysts are more sceptical. Even assuming a sharp recovery in CV sales in the second half of the year, Ashok Leyland is likely to burn cash, says an analyst at a domestic brokerage firm, requesting anonymity.
CV sales were under pressure even before the lockdown. Unlike passenger vehicles, which saw some green shoots of recovery in January and February, CV sales continued to post double-digit decline due to slowing economic activity.
Being a pure play on CVs, Ashok Leyland’s stock has been hit hard. It has fallen from a high of ₹160 at the peak of the CV cycle in 2018 to a low of ₹44. Indeed, valuations could be attractive, but the ride ahead would be a long and arduous one.