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Geared For The Long Road Ahead

Geared For The Long Road Ahead




Ashok Leyland is a manufacturer of commercial vehicles such as medium and heavy commercial vehicles M&HCV, light commercial vehicles (LCV), passenger vehicles and automobile components and services related to automotive aggregates, vehicle financing and engineering design services. It offers a range of trucks, which include long-haul trucks, mining and construction trucks, and distribution trucks. The company designs, develops and manufactures defence vehicles for armed forces as well. Apart from these, the company offers power solutions for electric power generation, earth-moving and construction equipments, agricultural harvester combines, and marine and other non-automotive applications. The automotive giant recently accomplished its mission to be amongst the top 10 M&HCV trucks and top five M&HCV buses manufacturing companies globally in terms of volumes. It has more than 10 successful new product launches in the year.

Industry Overview

Global growth has been on a decline due to factors such as the negative effects of the tariff increases in US and China, trade tensions which have taken toll on business confidence, tightening of financial conditions, etc. For the automotive sector the year FY 2018-19 was very tedious. The government’s support for infrastructure development and road construction hoped to boost the demand for automobiles but on the other hand macro economic factors indicated a huge mismatch in production and demand, especially for passenger vehicles. Even as the sector was able to maintain a steady output in the domestic markets, fall in exports caused higher than usual inventory levels. 

The commercial vehicle (CV) market in India registered a growth by 18 per cent in total industry volumes (TIV) during FY18-19 with an increase of 19 per cent in light commercial vehicles and 15 per cent in medium and heavy commercial vehicles. To add to the pressure of increase in oil prices on the industry, the BS-VI regulation will become effective from April 1, 2020 with implementation of other protocols such as the introduction of the anti-locking braking system (ABS) as well as the implementation of the 2nd phase of safety protocols. The Society of Indian Automobile Manufacturers (SIAM) has projected an expected growth of 3-5 per cent in FY20E for the automotive sector. The obstacle that the industry faces is accurate volume planning for production in order for supply to meet with the demand. 

Financial and Operating Performance

Owing to reduced sales, mounting pricing pressure and intensifying competition, Ashok Leyland’s performance for the quarter ended June 30, 2019 was rather subdued. On consolidated basis, for the first quarter of FY20, the net sales of the company came in at Rs.6,514.73 crore which is a fall by 7.51 per cent compared to net sales of Rs.7,043.96 crore for the corresponding quarter of the previous fiscal year. The company reported a decrease of 18.36 per cent in PBDT to Rs.623.39 crore in Q1FY20 from Rs.763.59 crore in Q1FY19. The net profit gained by the automaker declined by 40.3 per cent to Rs.273.87 crore for the first quarter of the current fiscal year from Rs.458.72 crore gained in the same quarter of FY19.

For FY19, the company’s net sales were equivalent to Rs.32,753.24 crore, which is an increase of 10.94 per cent compared to the net sales of Rs.29,522.13 crore in FY18 owing to increase in the domestic M&HCV volumes which grew by 13 per cent primarily driven by increase in sales volumes of tipper, haulage, multi-axle rigid vehicles, intermediate commercial trucks and buses. Primarily because of diversion and sale of BS-III vehicles, export volumes reduced by around 27 per cent in FY19 compared to FY18. For FY19, Ashok Leyland incurred approximately Rs.944 crore as capital expenditure towards BS-VI, LCV, maintenance, modular business program, electric vehicles, etc.

In FY19, increase in input cost related to commodities such as steel, forgings, castings, rubber, etc. put pressure on the profit margins. The PBDT for the year increased by 10.35 per cent and was reported to be Rs.3,535.94 crore as against Rs.3,204.25 crore in FY18. Despite control on material costs and operating expenses combined with proper management of working capital, net profit after tax for FY19 was marginally lower by 20.81 per cent at Rs.2,183.32 crore compared to Rs.1,807.25 crore for FY18. 

In FY19, in the domestic markets, Ashok Leyland sold 1,31,936 M and HCVs out which 1,15,613 units were of M&HCV trucks. In spite of uncertainty due to revision of axle load norms and the liquidity issues that were faced by NBFCs, M&HCV units’ sales grew by 13.2 per cent. In FY19, the company reported a significant growth of 25.5 per cent in LCV domestic sales units over the previous year. As part of the power solutions business, it sold 21,859 engines in FY18-19 which is an increase of 16.6 per cent over the last year. All combined together, total sales in domestic market came up to 1,85,065 units and 12,301 units in foreign markets. For the financial year ended March 31, 2019, the company declared a final dividend of Rs.3.10 per equity share of Rs.1. 


The near challenge for the company includes the decline in consumer demand and clearing up of inventories. FY20 is a tough period for all automotive players for them to get ready for the BS-VI launch by April 1, 2020. Unlike global automakers, Indian automakers are expected to take a leap from BS-IV to BS-VI in just three years. This is a steep obstacle for both OEMs and the ancillary sector. Ashok Leyland has been in tune with adapting to the BS-VI change by being the first lndian OEM to meet with the BS-VI emission norms across its full range of heavy duty trucks (GVW of 16.2T and above). The company is also set to roll out a Modular Vehicle Programme focused on enhancing flexibility to meet customer needs in a cost-efficient way. 

With new product launches set for the next fiscal year, it has also been focusing on electric vehicles’ production strategies. As the digital age is intended to set in soon, the company has been showing its forte in technology and intelligent use of technology, thus staying a step ahead of its peers. As the market conditions turn favourable, the company intends to expand its presence in foreign markets with a wide variety of product offerings through the M&HCV trucks segment. 

The management of the company indicated that focus will be put on continuance of investments in infrastructure and revival of defence mobility spending. There is an expected pre-buy in FY20 because of the introduction of BS-VI norms from next year which can lead to increase in demand provided the government is able to address the liquidity situation in the economy as well as the reduced urban and rural demand through some long-term direction. The company stressed on the importance of long-term direction or a policy guideline to the automotive sector to address vehicle scrappage policy pronouncements. 

Recently, the government cut the FY20 GDP growth target from 6.9 per cent to 6.1 per cent. But if the rains are normal next year, the economy and businesses will revive. Moreover, Ashok Leyland has many growth opportunities to conduct a sustainable business. The company which was recently recognised to come under the the large corporates (LC) category is given a credit rating of CARE AA+ with a stable outlook by credit rating agency Care Ratings Limited. As the company has been able to maintain a growing market share and for future it anticipates margin improvement, we recommend a HOLD to our investorreaders.

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