‘ALL to undergo margin pressure in near term; will see demand pick-up in H2FY21’

Though the company expects to benefit through pre-buying ahead of BS-VI transition in fourth quarter to some extent even as the CV industry is half way to ongoing cyclical downturn and is involved in heavy discounts to push inventory, the analysts pointed out. 

By:November 13, 2019 7:51 AM

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Hinduja group’s flagship firm Ashok Leyland Limited (ALL) will only see the actual pick up in demand in second half of FY21 (next fiscal) and it will have to undergo margin pressure in the near-term given the weak demand environment and BS-VI transition costs, said analysts tracking the company. Though the company expects to benefit through pre-buying ahead of BS-VI transition in fourth quarter to some extent even as the CV industry is half way to ongoing cyclical downturn and is involved in heavy discounts to push inventory, the analysts pointed out. An analyst with Anand Rathi Institutional Research, in its post-results analysis said ‘in our view the steep correction in supply tonnage, no further regulatory hindrances and expected growth in road freight would lead to replacement demand for Ashok Leyland in H2 FY21. We expect cyclical recovery from FY22 and expect the company’s earnings in FY23 to be closer to FY19’.

‘While we expect the next three quarters to be very weak due to inventory clearance and the BS-VI introduction, we foresee the long-due replacement demand to kick in from H2 FY21, assuming freight growth’, the analyst added. According to Edelweiss Research analyst, ‘in the near term, margin pressure is expected to persist given the weak demand environment and BS-VI transition costs. Management’s cost focus and benign commodity costs would alleviate the impact though. The management’s unwavering focus on profitable growth rather than on chasing market share is encouraging. But the improvement in liquidity and the overall economic activity are key to business revival’, the analyst pointed out.

Anand Rathi said ‘that the replacement is more to do with higher repair and maintenance cost, especially, post-implementation of axle-load norms. From FY22, we expect a cyclical recovery and, thus, strong volume growth. Scrappage works only when rewarded or penalised. Given the current situation of fleets’ operator economics, we believe that the policy would be effective only if fleet owners are rewarded to replace trucks or penalised for using age-old trucks. Mere voluntary scrappage may not work, in our view’.

According to Anand Rathi the Q2FY20 results takeaways were ‘discounts at Rs. 5.25 lakh, trucks average realisation is at Rs. 15.88 lakh and dealer plus factory inventory at 13,200 units. We are assigning a higher multiple as we expect cyclical recovery from FY22 and the risk was lower-than-expected volume growth’.

Reliance Securities analyst said, ‘looking ahead, we expect Ashok Leyland to face margin pressure on account of ongoing slowdown and intensifying competitive environment in domestic CV space. However, company would benefit from pre-buying ahead of BS-VI in Q4FY20 to some extent, we believe that we are half way to ongoing cyclical downturn of M&HCV. We would start witnessing recovery post Q2FY20 though at lower pace. M&HCV sales would pick up strongly in FY22’.

Ashok Leyland reported a 93% drop in its profit for the quarter ended September 30, 2019 to Rs. 39 crore (from Rs. 528 crore) and 48% drop in revenue to Rs. 3,929 crore (compared to 7,621 crore). Its market share in the M&HCV segment during the quarter declined by 4.7% to 30.4% (35.1% earlier) due to 59% drop in this value segment to 14,637 units (35,628 units previously), said company sources.

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