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Ashok Leyland Ltd.

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Moving on Fast Track

By IE&M Research

Commercial vehicle maker Ashok Leyland has just announced that it will increase prices of its entire product portfolio by a minimum of 2 percent to partially offset the impact of rising input costs. This increase in price is also owing to the implementation of the AIS 140 regulation. The proposed price increase will be effective April 1, 2018. Now automakers are required to install a tracking device and emergency buttons in new and existing public service vehicles from April 1, 2018 under the AIS 140 regulation. Ashok Leyland has also decided to introduce a new product every six months to widen offerings and fully harness the demand potential. Apart from the domestic market, the company is targeting to capture new export markets, which were earlier restricted due to agreement with MNC partner as well to tap the growth opportunity. Moreover, mainly due to implementation of vehicle scrappage policy, which opens huge opportunity for replacement demand, Ashok Leyland has a very bright future going forward.

The Company

Ashok Leyland Ltd (ALL) is the flagship Ashok Leyland Ltd. 1
company of the Hinduja Group with its headquarter in Chennai. The company’s manufacturing facilities are spread across India with two facilities in Prague (Czech Republic) and Ras Al Khaimah (UAE). It has operations in India, Sri Lanka, Bangladesh, Mauritius, the Middle East and Africa. It is one of the largest commercial vehicle manufacturers in India and engaged in the manufacturing of commercial vehicles and related components. The company offers a range of products from 18 to 82 seater double-decker buses, from 7.5 to 49 tonne in haulage vehicles, from numerous special application vehicles to diesel engines for industrial, marine and genset applications.

Very Big Product Range

Through its subsidiaries, it is engaged in manufacturing and trading in Medium and Heavy Commercial Vehicle (MHCV), Light Commercial Vehicles (LCV), Passenger Vehicles (PV), automotive aggregates, vehicle financing and engineering design services. It offers a range of trucks, which includes long haul trucks, mining and construction trucks, and distribution trucks. It designs, develops and manufactures defence vehicles for armed forces. It offers Light Vehicles, which include DOST, PARTNER, STiLE and MiTR. It offers power solutions for electric power generation, agricultural harvester combines, earth moving and construction equipment and marine and other non-automotive applications.

Pluses:

Vehicle scrappage policy

The government has introduced a vehicle scrappage policy for commercial vehicles older than 15 years of age. The ministry is considering to incentivise fleet operators for scrapping old vehicles in the form of reduced tax rates on new vehicles. However, the quantum of concessions to be offered for scrapping the old vehicles is still in the process of finalisation. As per the draft report, about 11 lakh MHCVs would qualify for scrappage, which provides huge opportunity for the industry (current industry size of 4 lakh units). Ashok Leyland is set to capture the additional growth opportunity going ahead. At the current market price the stock is available at a PE of 19.6x its FY2020E EPS of 7.1.

Ashok Leyland Ltd. 2

 

 

 

 

 

Strong growth momentum

The LCV industry reported robust 19% growth in 9MFY2018. Going ahead, growth momentum is expected to remain strong. Due to consolidation of warehouses (hub and spoke model) post GST rollout, LCV demand is picking up strongly. Moreover, improved rural demand, coupled with a boom in e-commerce will drive LCV demand. Ashok Leyland has bagged an order from The Institute of Road Transport, Tamil Nadu for the supply of 2000 passenger chassis and 100 fully built small buses to various STUs in the state of Tamil Nadu. The order size is about `321 crore. The order is to be supplied during the first half of 2018-19.

And the Risks

Delay in implementation of vehicle scrappage policy could restrict the additional sales growth for the company. Moreover, slowdown in industrial activities could also restrict sales volume for the company.

(Disclaimer: The views expressed herein are based on publicly available information and other sources believed to be reliable. The information contained in this document does not have regard to specific investment objectives. Neither IE&M nor any person connected with the organisation, accepts any liability arising from the use of this document.)

About the author: IE&M Team

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