Ashok Leyland shares surge over 24% this week, on strong demand revival outlook; should you buy?

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August 14, 2020 10:41 AM

Shares of Ashok Leyland surged 4.5% as the stock market began trading on friday, to trade at Rs 64 per share. The auto manufacturer that specialises in commercial vehicles has seen its shares jump over 24% so far this week.

 

Revenue from operations for the medium and heavy vehicle manufacturer stood at Rs 650 crore in the April-June quarter, down 88% from Rs 5,683 crore that the company posted in the same period last year.

Shares of Ashok Leyland surged 4.5% as the stock market began trading on friday, to trade at Rs 64 per share. The auto manufacturer that specialises in commercial vehicles has seen its shares jump over 24% so far this week, despite posting a net loss of Rs 389 crore in the first quarter of this fiscal year. Ashok Leyland is expected to recover smartly by the last quarter of this fiscal year or by the first quarter of the next one. Another factor aiding Ashok Leyland’s rally is the favourable news flow around the private sector players in the defence equipment manufacturing segment.

Revenue from operations for the medium and heavy vehicle manufacturer stood at Rs 650 crore in the April-June quarter, down 88% from Rs 5,683 crore that the company posted in the same period last year. The flagship of the Hinduja Group said that in the first half of the April-June quarter there were nearly no operations taking place pulling the revenues down. However, the numbers were above street estimates. “Topline came in ahead of estimates tracking beat on ASPs, which looks optically higher due to increase in proportion of other segment revenues in overall sales,” said brokerage and research firm ICICI Direct in a note. 

Company management has said that they expect demand to normalise by the last quarter of this fiscal year. Production is also being ramped up with current capacity at close to 35%. Brokerage firm Prabhudas Lilladher that the auto-maker could see revival with the economic recovery. New launches in the LCV segment could help Ashok Leyland gain market share and increased focus on spares & exports business, analysts say.

Emkay Global, on the other hand, likes that Ashok Leyland is considering reduction in net debt to aid better cash flows. Currently the net debt of Ashok Leyland stands at Rs 4,200 crore. In the first quarter, Ashok Leyland registered a 90% drop in volumes to just 3,814 units. “ In exports, new launches, increased penetration and a gradual recovery in overseas markets are expected to aid volumes,” Emkay Global said. Profit per unit for the company has declined since 2016 and that trend continued this quarter due to lower scale. 

ICICI Direct has a HOLD call on the stock with a target price of Rs 65 per share. The brokerage is closely watching the demand revival of the company. Meanwhile Prabhudas Lilladher has upgraded the stock to BUY from Accumulate with a target price of Rs 76, as it hopes for a strong recovery. Analysts at Emkay Global too are bullish on Ashok Leyland, their estimates pin hopes of recovery in the last quarter of this fiscal year. With target price of Rs 89 the stock has a 45% upside from yesterday’s closing levels, according to Emkay Global.

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