If one were to analyse the second quarter performance of India Inc, the performance of some sectors like automobile stands out. Commercial vehicle (CV) manufacturers like Ashok Leyland have benefited immensely due to the recovery in the industrial sector and rise in freight rates. But will the company be able to sustain profitability?
On the positives front, the CV segment in India is going through a structural shift. With the government’s thrust on road development projects, road sector has gained significant advantage over Railways that has been a mainstay for transportation of coal, food grain and cement till now. Upon the completion of the Golden Quadrilateral (aimed at connecting the four metros) and East-West-North-South corridor, cost of operation of such higher tonnage vehicles becomes comparable with that of Railways (unsubsidized for select categories like food grains). The sharp spurt in demand for multi-axle vehicles (MAVs) in the last two years is a clear indication that there is a skew towards demand for higher tonnage vehicles (notably above 16 tonne carrying capacity). This should have a positive impact on topline growth of ASOK.
ASOK is a leader in the bus segment. Our interaction with the management reveals that the State Transport Undertakings (STUs) are currently operating at almost 120%-130% capacity utilisation. So there is enough growth potential. Also, backed by stringent emission norms (particularly in metros), replacement of old vehicles will become mandatory. ASOK's launch of CNG (compressed natural gas) buses will pay off in the coming years.
However, one of the key causes of concern is the company’s regional presence. ASOK lost 3% market share in FY02 primarily on account of weaker presence in Northern markets. Our interaction with the management also suggests that Telco has already initiated a price war in the southern region. Though the company has opted out of such a pricing game in order to safeguard margins, it is difficult to sustain such measures in the long run due to increased competitive pressure. As a result, improvement in operating margins is limited when compared with Telco.
The relatively regional presence also means that the company has to offer higher credit to customers for gaining market share, both in the bus and CV segment.
For more detailed analysis with projections, view our complete research report on Ashok Leyland
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407