Ashok Leyland: Riding The Wave of CV Market Momentum
One can find substantial investor returns when identifying sector leaders during an upswing in equity markets. Ashok Leyland serves as an excellent example. The company faced challenges during the extended downcycle in commercial vehicles (CVs), which persisted through the pandemic. However, as economic activities returned to normal and truck sales began to recover, Ashok Leyland“s stock gained significant momentum, more than doubling from its pre-pandemic levels. Those investors who recognized the turning cycle are likely enjoying significant gains.
As a pure-play participant in the automobile CV sector, Ashok Leyland focused on developing future-ready products and addressing gaps in its portfolio during the challenging years. These efforts started to yield results about 12 to 18 months ago when the business cycle turned favorable.
The remarkable performance in FY2023 can be attributed in part to these strategies and the pent-up demand that followed the post-COVID normalization of India”s domestic economy. The expansion of its intermediate commercial vehicle (ICV) range allowed the company to capitalise on the growing demand for last-mile product deliveries. Additionally, Ashok Leyland established a presence in niche areas, such as tippers, defense vehicles, and smaller LCVs, which contributed to its market share growth in the CV segment.
Ashok Leyland outpaced the industry”s average growth rate throughout FY2023. Annual sales surged by nearly 50%, and the company effectively managed the higher vehicle prices in the domestic market. Consequently, the FY2023 revenue increased by about 68% compared to FY2022.
What”s particularly impressive is that Ashok Leyland continues to perform well. In September, the company reported a 10% year-on-year sales increase, despite a high base from the previous year. M&HCV (medium and heavy commercial vehicle) sales alone grew by 15%, and the company currently holds a 31% share of the market. The management is optimistic about further increasing its market share to 35% in this segment.
The demand for CVs remains robust, driven by the end of monsoon season, a resurgence in infrastructure projects, and essential goods transportation. The Federation of Association of Dealers anticipates this demand will persist, especially with elections approaching and the central government”s continued focus on infrastructure development.
Furthermore, there”s a growing demand for tourism, translating into increased orders for buses from state and central governments as well as private tourist service providers. Ashok Leyland nearly doubled its bus sales through September, now accounting for a significant portion of total passenger vehicle sales in the domestic market. The company”s investment in its electric vehicle subsidiary, Switch Mobility, positions it well for potential future growth in bus sales.
Analysts have highlighted that, along with an expanding market share in CVs, Ashok Leyland”s management is confident in maintaining its EBITDA (earnings before interest, tax, depreciation, and amortization) margin in the mid-teens, thanks to robust sales and economies of scale. Another research firm, Motilal Oswal Financial Services, pointed out that lower input costs, driven by declining metal prices, will boost profitability. This suggests that there is room for further earnings growth and improved stock valuations.
However, it”s essential to remain vigilant about potential negative factors. Pressure on market share and intense competition could impact pricing and profitability, potentially affecting investor sentiment and signaling a downturn in the business cycle.
