Given the decisive shift in the industry’s product mix and AL, margin can surprise on the upside once the heightened competitive intensity and commodity cost headwinds subside. Maintain ‘BUY’.
We recently attended Ashok Leyland’s (AL) global conference, which reinforced our positive stance on the company as: (1) management guided for growth in FY19/20 & expects the shift towards higher tonnage vehicles to sustain; (2) focused strategy on exports/spare parts yielding results—up >30% in FY18; (3) product launches across categories. We were impressed by the company’s effort to create a new 41T (lift-axle) category via intelligent engineering of existing 37T (lift-axle) offering; and (4) management envisages strong profitability in the LCV business. We believe, given the decisive shift in the industry’s product mix and AL, margin can surprise on the upside once the heightened competitive intensity and commodity cost headwinds subside. Maintain ‘BUY’.
Management reiterated focus on profitable market share and key performance matrix of market share, margin and working capital. In FY18, while AL’s overall market share was flattish at 32.2%, it has gained across regions. However, much stronger demand in non-South market flattened overall market share. AL’s market share in non-South regions is in the 25-30% range. Infrastructure, GST-led hub-and-spoke model, driver shortages, among others, continue to spearhead demand. AL has lined up a series of new/variant launches to capitalise on the anticipated demand uptick.
Management reiterated its long-term vision of 50% revenue from non-cyclical business and one-third volumes from exports. It is making dedicated efforts to achieve the same. For instance, in exports, AL has identified five markets to focus on and in spares, the focus is on enhancing wallet share.
We maintain that our robust demand outlook will be driven by ban on overloading, replacement demand, GST and driver shortage; our recent channel checks in South India validate our thesis. We maintain ‘BUY/SO’ with SOTP-based TP of Rs 175.