Given the significant investments towards construction activities and improvements in road infrastructure, it was anticipated that the commercial vehicles (CV) industry is in for good times. And as expected, Ashok Leyland, the leading player in the industry has done little to disappoint. The company has posted an all time high sales of nearly 49 thousand vehicles, a significant 34% jump from what it managed to sell in FY03. Also, in view of its strong growth in the last two years, the company has embarked upon an ambitious expansion programme. In this article, let us have a look at the recent performance of the company as well as the industry outlook and the company's plan for the future.
After having a good run in FY03, the company continued with its robust performance in FY04. An increase in off take, coupled with significant reduction in interest outgo helped the company to post an impressive 28% growth in topline and a 97% growth in its bottomline for the first nine months on a YoY basis. Had it not been for the sharp spurt in input costs, the bottomline growth of the company would have been even better. However, the company continued to lag its closest rival Tata Motors in terms of unit sales. Since much of the demand came from Northern markets, Tata Motors' higher penetration in these markets enabled it to sell more units than Ashok Leyland, which has a relatively thin presence in these markets. Growth in the exports market however, remained one of the comforting factors for the company.
As far as the future prospects are concerned, the CV segment in India is going through a structural shift. With the improvement in road infrastructure, the position of railways as the main carriers of goods such as coal, cereals and cement has come under significant threat. On account of the improved quality of roads, the cost of operations of higher tonnage vehicles has become extremely competitive. This coupled with the flexibility that road transport provides is likely to result into greater amount of goods being transported through roadways, thus resulting into higher demand for CVs. The company expects the trucks volumes to grow by a minimum of 15% and the bus volumes to grow by a minimum of 10% during FY05. As a leading player in the CV industry, Ashok Leyland is likely to grow at a higher rate than the industry.
In order to capitalize on favorable industry prospects, the company is gearing up to unleash a gamut of modern vehicles. The company's current market share amount to around 35% and with the help of these new launches, it hopes to take the same upto 50% in the next 3 to 5 years. In order to prepare itself for increasing competition, especially from foreign players, the company plans to increase its R&D expenses and take it to around 4% of revenues from the current 1%. The company has outlined a program to expand its current capacity by around 55% and has earmarked Rs 5 bn for the same, to be raised mostly through FCCBs over the next two years.
The stock is currently trading at Rs 282, implying a P/E of 25x, its annualised 9mFY04 earnings. While the industry is expected to grow at a robust rate in the medium to long term, company's regional focus and increased competition from technologically superior foreign players, will mean that the company will have to fight hard to improve its market share. Given this backdrop, the valuations appear stretched from a medium term perspective. For the long term however, much will depend on the company's ability to stay ahead in terms of technology and its efforts towards expanding geographical reach.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407