Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
CVs: Cash is the king! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Oct 13, 2005

    CVs: Cash is the king!

    The commercial vehicle (CV) industry is inherently cyclical in nature. In this article, we shall try to understand whether working capital is an indicator of the cyclical nature of the CV industry and also its impact on financials. For the purpose of this article, we have considered the financial details of Ashok Leyland, as it is not only a pure commercial vehicle manufacturer but also the second largest player in the CV industry. Hence, its performance can be considered as a proxy to that of the industry.

    A brief about the industry performance:
    After growing at a steady rate of 5% CAGR during FY71-FY90 (witnessing ups and downs during the intermittent period), the CV industry grew at a CAGR of 22% during FY94-FY97. From FY97 to FY02, the ride had been very bumpy. However, in the last three years (FY02-FY05), the industry has been recovered sharply with the M&HCVs (medium and heavy commercial vehicles) and LCVs (light commercial vehicles) registering CAGR of 31% and 41% respectively. Thus it is evident, that CV industry is cyclical in nature.

    How important is the working capital?
    Indicator of the cyclical nature? Working capital trends, to an extent, can give insights into the future industry performance. We are not saying that it is the ultimate indicator of the trend, as there are numerous other factors that influence demand and supply. However, an insight into the working capital trend over the last three years highlights the current position of the cycle.

    As can be seen from the above graph (left), the growth in the demand for the company's CVs during FY95-FY97 (22% CAGR) was accompanied by increasing cash cycle (i.e. debtor days + inventory days - creditor days). This was mainly because the company had adopted an aggressive sales strategy, which was based on expectation of strong growth potential in the next few years, led by expansion plans of corporate sector (the first phase of significant expansion post liberalization). As the expected potential demand failed to materialize, the dealers were saddled with excessive inventory. This affected the performance of the original equipment manufacturers (OEM) like Ashok Leyland and Tata Motors in the subsequent years, as the dealers took some time to clear the huge pile of inventories. Thus, while new CVs were being introduced into the system, the same was not reflected in the performance of the OEMs in the subsequent years with the industry shifting into a consolidation phase (till FY02).

    As the cash cycle continued to shorten, the performance of the OEMs started improving. During last three years, though Ashok Leyland has registered a growth similar to that during FY95-FY97, the cash cycle is significant lower (infact reducing since FY01) as compared to the previous growth phase.

    Financial impact: A high working capital results in blockage of funds of the company, which otherwise could be used to fund future growth. This results in increased borrowings by the company. It should be noted that during this period (FY96-FY05) Ashok Leyland has also been incurring capital expenditure averaging around Rs 1.2 to 1.3 bn, which it was able to finance from internal sources.

    To conclude…
    As seen from the above charts, the phenomenal growth witnessed in the last few years is not characterized by the factors that led to the growth during the FY94-FY97 period, atleast on the working capital front. This together with the structural changes taking place in the economy makes us to believe that the demand for the CVs will be at a steady pace. Further, the fall in demand, if any, will not be as drastic as it had been in the past. Having said that, we believe that the robust growth witnessed during last few years is not sustainable. We expect the commercial vehicle industry to grow at around 6% to 8% in the next three years. From a retail investor's perspective, a simple working capital analysis is likely to reflect the future growth prospects of the sector and how efficiently is the company utilizing its very valuable cash reserves.

    More Views on News

    Tata Motors Ltd: Another Disappointing Quarter, Management fails to Perform! (Quarterly Results Update - Detailed)

    Aug 14, 2017

    Tata Motors Ltd disappoints again for both India and JLR business. Management commentary indicates a slow year ahead.

    Maruti Suzuki Ltd: Bumpy First Quarter. GST dents Margins! (Quarterly Results Update - Detailed)

    Aug 2, 2017

    GST realted cost impacts Margins, Management expects good year ahead.

    Hero Motocorp Ltd: Riding on the Scooters Growth, Maintains Margins! (Quarterly Results Update - Detailed)

    Aug 1, 2017

    Good Recovery in the Scooters market, expects pick up in exports too.

    Bajaj Auto Limited: Recovery in Exports but Domestic Disappoints! (Quarterly Results Update - Detailed)

    Aug 1, 2017

    New Export Markets picking up, Management expects good recovery in domestic Three wheeler market.

    Bajaj Auto Limited: Finishes the Year with Headwinds. Poised for a Recovery Ahead? (Quarterly Results Update - Detailed)

    Jul 6, 2017

    Ends the year on a Flat note. Expects good recovery in the exports market.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 24, 2017 02:13 PM