Speed bump ahead

Ashok Leyland’s turnaround was historic. But now, with macro headwind, policy changes and a drop in market share, can it sustain its run?

Since 2014, Ashok Leyland has scripted one of the best turnaround stories in the history of India Inc. A couple of years before that, it was caught in quick sand. There was a slowdown in the mining industry, which led to a fall in demand for heavy vehicles such as trucks, which in turn led to unsold stock and investor panic. The management took hard decisions — including downsizing and moving out of its non-core businesses — and, buffeted by recovery in infrastructure and agriculture, Leyland saw remarkable improvement over the next three years.

Its market share had risen to 34% in FY18 from 27% in FY15. Ebitda margin rose to 10.4%, from 3.51% in FY15, led by sales growth of 23.61% annually during the period. (see: Top speed). As the transformation continued, investors turned bullish on the stock, which continued to rally. On May 8, the shares of Ashok Leyland were at its record high of Rs.167 with the company commanding a market cap of Rs.485 billion. 

The company’s first quarter results of FY19 were also heartening. Revenue was up 47% (YoY) to Rs.62.5 billion driven by a hike in sales volumes of medium and heavy commercial vehicles (M&HCV) of 10 to above 16 tonne gross vehicle weight (GVW) and light commercial vehicle (LCV) of eight to 10 tonne GVW. The former grew by 54% to 30,647 and the latter, 33% to 11,481. Raw material costs had shot up — by 68% to Rs.47.53 billion — but Ebitda had doubled from Rs.3.03 billion in June 2017 to Rs.6.41 billion in June 2018. 

Then again, Leyland’s performance continued to look good in the September quarter, having delivered a 24.58% (YoY) growth in net sales and 37% rise in PAT, but failed to match investor expectations. 

Analysts were expecting the margins to be above 11%, but competitive pressure and discounting impacted the EBITDA margins which expanded only marginally. Going ahead too, analysts believe that margins will at best remain flat due to rising cost and competitive intensity.  Additionally, the worry is also that its robust sales growth, which stood at 32%,


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