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Ashok Leyland: Cruise mode

Oct 7, 2002

Ashok Leyland (ASOK), the second largest player in the commercial vehicle segment (CV), is seeing its stock price languish at current levels. We take a look at the recent monthly volume performance of the company and analyse in brief the future growth prospects. Total volumes, comprising buses, CVs and LCVs, have risen 14% in the first five months of the current fiscal year to 12,538 units. The company has benefited in a large way from the spurt in CV demand. Freight rates have hardened in key trunk routes on the back of a recovery in industrial production. This could also have been led by higher agricultural output last fiscal. Goods transportation at key ports have shown a rise for the first four months of FY03. According to CMIE, traffic at major ports of the country has increased by 11% to 101 MT for the period April-July 2002 as compared with the corresponding period previous year. Freight operators generally tend to place orders for CVs when freight rates are lucrative. Apart from this, road construction projects have resulted in increased orders for higher tonnage CVs on account of operational economies of scale. A combination of all these factors has translated into a 14% rise in domestic HCV sales for ASOK between April-August 2002.

Volume snapshot...
(Nos) Apr-Aug 2000 Apr-Aug 2001 Apr-Aug 2002 % change*
Buses 5,154 3,898 4,277 9.7%
Domestic 4,722 3,653 3,899 6.7%
Exports 432 245 378 54.3%
M/HCVs 5,568 6,984 8,015 14.8%
Domestic 5,204 6,745 7,735 14.7%
Exports 364 239 280 17.2%
LCVs 161 103 246 138.8%
Domestic 134 81 101 24.7%
Exports 27 22 145 559.1%
Total 10,883 11,009 12,538 13.9%
Domestic 10,060 10,405 11,735 12.8%
Exports 823 604 803 32.9%
* Change 2002 over 2001

After a sharp drop in FY02, there seems to be a recovery in demand for passenger vehicles in light of resumption of orders from State Transport Undertakings (STUs). However, one has to keep in mind that this 10% rise is also on account of year-on-year effect. The company's efforts to increase exports have yielded positive results in FY03 as is evident from the table above. More recently, ASOK won two significant orders for export of buses to Sri Lanka and Bangladesh. The Sri Lankan contract for 250 fully built buses and the Bangladesh order for the supply of 300 mini-buses in CKD form is estimated at over Rs 340 m. We expect the contribution from exports to increase significantly in the long run (exports accounted for 6% of turnover in FY02).

A recovery in CV demand, concerted cost saving initiatives and lower interest expenses will also result in higher profitability for the company in FY03. In 1QFY03, ASOK posted a net profit of Rs 97 m as against a loss of Rs 94 m in 1QFY02. Though profitability would increase in the next two years, the question is, will it sustain in the long run? As per ACMA, the Northern, Eastern and Western markets together accounted for 81% of truck demand in 1998 (34% from Northern markets alone). ASOK derives a significant proportion of sales from the Southern and Central regions. While it is increasing its presence in the Northern region, it is still lower compared with Telco. Besides, it will not take Telco much longer to establish a full-fledged network in the Southern region. Moreover, with Volvo entering the market with higher-tonnage trailer CVs, domestic players will be anyway under pressure.

The stock currently trades at Rs 90 implying a P/E multiple of 10x FY03E earnings.

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