Ashok Leyland’s Q4 FY15 results were strong as volumes during the quarter (excluding Dost) grew by 40% y-o-y and 38% q-o-q on the steady recovery in the MHCV cycle and the economy. Also the recent launches of various new products have led to this growth. The company’s market share increased to about 27.2% in MHCV segment which was a drastic improvement from 22.7% in the full year. In line with the strong volume growth, Ebitda margins saw a huge swing of from 6% in Q4 FY14 to 10.1% in Q4 FY15 on the back of improved product mix and operating leverage obtained from volume growth.
Going forward, hopes of a healthy and steady revival in economy is expected to bring in volume recovery in CV segment. Lifting of the mining ban can be an upside trigger for the stock. New launches and JNNURM orders can help Leyland achieve good volume growth in coming years. However, there is a slight concern related to the pace of the recovery, but we believe that volumes are hedged well with defense business, spare parts and engine business too contributing well to the overall profitability. Lower discounts, price hike impact of Q4, lower RM prices, cost cutting initiatives, higher defense order inflows and increasing contribution from the tax haven Pantnagar plant will add to the profitability henceforth. We maintain our ‘buy’ rating and raise target price to R78.