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Well placed to ride the economic recovery

Headquartered in Chennai, Ashok Leyland Ltd. (ALL) is the flagship company of Hinduja Group engaged in the manufacturing of commercial vehicles (CV). It is the second-largest CV manufacturer in India and the fourth largest manufacturer of buses globally. ALL has nine manufacturing plants with seven in India and two at international locations. It has an international presence in over 50 countries. ALL is the pioneer in the Commercial Vehicle (CV) space as many of its product concepts have become industry benchmarks and norms.

Investment Rationale

* CV Industry to bounce back stronger: The domestic CV industry has witnessed several challenges over the last two years starting with the overall economic slowdown, liquidity issues amongst NBFCs, revised axle load norms and lastly the COVID-19 pandemic and BS-VI related cost increase. Given the highly cyclical nature of the M&HCV industry, we expect a strong rebound in FY22 and FY23 led by favourable base, overall economic recovery, easing liquidity conditions for CV financing and more importantly a strong infrastructure push in the budget would aid volume growth. On the LCV segment, the demand was not impacted as badly as the M&HCV segment, and we expect healthy growth momentum to continue on the back of increased preference towards the hub & spoke model driven by the surge in e-commerce.

* ALL to continue to gain market share: Over the last decade, ALL has been steadily gaining market share in the domestic M&HCV segment and made its presence felt in the LCV segment from FY12. We expect ALL volumes to recover led by revival in the CV industry as the company’s portfolio is more skewed towards high tonnage vehicles which would benefit more during upcycle in the CV industry. Further, its constant focus on technology upgrades and new product launches would enable it to grow faster than the industry.

Outlook & Valuation:

The domestic CV industry is poised for healthy growth led by increased government spending on infrastructure, mining and pick-up in economic activity. We believe ALL stands to benefit from the upcycle in the CV industry given its strong position in the M&HCV and LCV segments. To reduce the earnings volatility, the company has sharpened its focus on increasing its revenue share from LCVs, spares, exports and defence. On the margins front, a better product mix, higher operating leverage and better pricing (as Tata Motors also focusing on improving margins) would provide a cushion to margins against the rise in commodity prices. We believe that ALL’s strong brand presence in the CV segment and its focus on diversifying to less cyclical businesses make it one of our preferred picks in the sector. We recommend a Buy on the stock with a target price of Rs 147.

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