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Ashok Leyland: Conference call excerpts - Views on News from Equitymaster
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Ashok Leyland: Conference call excerpts
Jul 8, 2005

In order to have better perspective on industry and to finalize our research report, we held a conference call with the company, the extracts of which are given below:

  1. Industry growth over next 3 to 5 years: The commercial vehicle industry has been on a growth track since last three years. As the industry is inherently cyclical in nature, there are questions raised whether there the cycle has peaked out. The management, agreeing this nature of the industry, believed that the industry has the potential to grow at the rate of 10% to 15% in FY05. Growth over the next five years could be in the range of 7% to 8%, depending upon economic performance. But in our estimates for FY05, we have assumed lower growth of 7% with 6% CAGR over the next three years.

  2. Key drivers of the industry growth: As per the management, the increasing thrust on road infrastructure will drive the demand for commercial vehicles. Apart from flexibility of operation and reduction in transit time, the cost per tonne for roadways is lower by 10% to 15% as compared to that of railways and is likely to improve in future as more regions of the country are connected with better roads. Like in the international markets, the share of roadways in goods transportation is likely to increase. This can be more pronounced, given the fact that the Indian railways lack direction and management.

  3. Downturn in the industry: Post the first two months of dismal performance (volumes were down on YoY basis), doubts have been raised about the sustainability of CV demand. As per the management, there are no such visible signs, especially when consolidation is taking place among freight operators. However, the management clarified that there may be intermittent periods of weak demand but the fall will not be as drastic as it was in the past. The company believed that the longer-term trend is likely to be secular.

  4. Replacement demand: As per the management, not much of replacement demand can be expected from the truck operators in FY06, as significant replacements have already taken place by large truck operators. However, the passenger bus market has the huge potential of demand. Improved road infrastructure has provided a big fillip to passenger transportation sector, which is largely private sector dominated. The company believes that the demand from the bus segment can be higher, as more private operators are given permission to operate (inter city movements)

    However, the demand from STUs depends on the availability of fund at their disposal. It should be noted that most of these STU are facing financial problems.

  5. Margin pressure: Due to competition, the management feels that operating margins will remain under pressure. However, any softening in steel prices (as it accounts for around 40% of operating costs) will provide some cushion. The management does expect the steel prices to soften. The company has entered in to long-term contracts only to the extent of 35% (Tata Motors 60%) of its requirements.

    While the medium-term trend of the steel prices are headed south, we feel that the first six months of this fiscal year will be difficult for auto majors. To that extent, the company may continue to face pressure on margins in FY06.

  6. Strategy going forward: In order to protect itself from the cyclical nature of the industry, the company is concentrating non-cyclical segments like exports, defense and spare parts. The management has set a target of 25% contribution from these segments. Apart from these areas, the company is also concentrating on northern, central and eastern regions of the country. It should be noted that traditionally, the company is regarded as southern centric player.

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