Ashok Leyland share price hits 52-week high. Should You Invest in the Stock of Ashok Leyland at Current Levels?

3 Feb 2021by Pradeep U

Ashok Leyland share price hits 52-week high. Should You Invest in the Stock of Ashok Leyland at Current Levels?

Ashok Leyland share price touched its 52-week high of Rs 137.15 today, riding on the euphoria generated by the new vehicle scrappage policy announced by the finance minister in the Union Budget speech for 2021 and robust sales numbers generated in January 2021.

The company's total vehicle sales witnessed an 11% growth at 13,126 units in January 2021 compared with 11,580 units sold in January 2020. The company's total domestic vehicles sales also grew by 14% with 12,359 units in January 2021 against 10,850 units in the corresponding period last year.

From a 52-week low of Rs. 33.70 in March 2020, Ashok Leyland share price has recovered sharply generating almost 4 times returns in a span of less than 11 months.

So, is there more upside left in Ashok Leyland share price? Or is it time to book some profits?

To know the answers to the above questions, let's take a detailed look at the Ashok Leyland share from a fundamental perspective.

A brief history of the company

A flagship company of the Hinduja Group, Ashok Leyland is the second-largest manufacturer of commercial vehicles in India and the third-largest manufacturer of buses in the world. The company ranks as the tenth-largest manufacturers of trucks.

Headquartered in Chennai, Ashok Leyland operates manufacturing plants at 9 locations spread across India, UAE and United Kingdom. The company also has a joint venture with the Alteams Group to manufacture aluminium components used in the automotive and telecommunications sectors.

The company derives 70% of volumes from the MHCV segment, while light commercial vehicles (LCVs) constitute the balance of 30%. 87% of its revenues are generated from domestic markets, while exports contribute the balance 13%.

The company also enjoys a strong presence in the Gulf countries such as Qatar, Saudi Arabia, United Arab Emirates, Bahrain, Oman and Kuwait with over 65% market share in buses. Ashok Leyland also enjoys a significant market share for its vehicles in Bangladesh, Sri Lanka, Nepal, Bhutan and Ukraine.

In January 2021, the company posted an 11% jump in its total sales at 13,126 units against 11,850 units in January 2020.

The light commercial vehicle sales were up 40% at 5,752 units versus 4,096 units, and total M&HCV sales were down 5% at 7,374 units versus 7,754 units.

Key drivers for growth for the stock of Ashok Leyland

New vehicle scrappage policy announced in the Union Budget 2021

In her Union Budget 2021 speech, Finance Minister Nirmala Sitharaman proposed a voluntary scrappage policy to replace personal vehicles which are more than 20 years old and commercial vehicles older than 15 years. This move is expected to provide a much-needed impetus for the auto sector as it will boost vehicle sales, especially commercial vehicles in the long run. Click here to read more about it.

Economic recovery

With the Covid-19 associated lockdowns coming to an end and opening up of the economy, business activities are gaining momentum. Key indicators such as Index of Industrial Production (IIP) are improving on a month-on-month basis indicating a pickup in industrial activities. With economy rapidly improving, MHCV volumes are picking up on month on month basis.

Green Tax on older vehicles

Ministry of Road Transport and Highways (MORTH) has given its approval to the proposed levy of Green Tax at 10-25% for commercial vehicles over eight years and personal vehicles of over 15 years.

According to a statement issued by the Ministry of Road Transport and Highways, public transport vehicles, such as city buses, would be charged lower green tax while a higher green tax (50 per cent of road tax) would be charged for vehicles registered in highly polluted cities.

Due to the additional costs involved, commercial vehicle owners are likely to switch to newer, less polluting vehicles as the vehicle gets older. This is likely to translate into higher vehicle sales, thus benefitting manufacturers of commercial vehicles such as Ashok Leyland in the long run.

Diversified product portfolio

Ashok Leyland offers a diverse variety of products ranging from gross vehicle weight ranging from 1 ton to 55 tons in trucks, buses with a seating capacity from 9 to 80 and diesel engines for industrial, genset and marine applications. The company is also a significant supplier of logistics vehicles to India's armed forces. Its logistics vehicles portfolio includes fuel bowser, water bowser, light recovery vehicle, field artillery tractors, firefighting trucks and high mobility vehicles in 6x6 and 8x8 configuration.

Ashok Leyland also manufactures electric buses and operates a fleet of electric buses as a pilot program in two cities in India and London through its subsidiary based in the UK.

The company, which is working on launching electric buses with swappable batteries and fast charging systems in India, has been investing in research and development (R&D) for electric vehicles (EVs) from several years. In FY20 the company’s total expenditure in R&D was almost 4% of its annual turnover and stood at Rs. 673 crores compared to Rs. 658 crores spent in FY19.

The CV manufacturer is also currently working on a flash charge version of its electric buses in a tie-up with ABB Power Products, enabling the battery to be charged in seconds while passengers alight and board the bus. This revolutionary technology would do away with the requirement to take the bus out of service for recharging after every few hours or using a replacement bus, thus increasing passenger carrying capacity while minimising the fleet's size.

Innovative modular platform strategy to reduce the parts per vehicle

In Jan 2020, Ashok Leyland launched a modular platform for customising commercial vehicles where the company's customers can customise the vehicles as per their load, terrain, application and operational requirements. This is a first of its kind initiative in the domestic, commercial vehicle industry. 

This all-new modular platform strategy aims to reduce the parts per vehicle and improve the Total Cost of Ownership (TCO) including best in class operation and maintenance cost.

Government's 'Make in India' push for defence

Government of India's increasing focus on local sourcing for defence equipments under the 'Make in India' iniative is a big boost to Ashok Leyland, as it is a major supplier of defence logistics vehicles. In the first quarter of FY21, the company's defence business contributed to around 10% of its total revenue. A rising share of its defence orders in the coming years, would help Ashok Leyland to reduce the volatility in revenue due to cyclical nature of trucking business.

Bottom line: Should You Invest in the Stock of Ashok Leyland at Current Levels?

With economic recovery back on track the demand for light, medium and heavy commercial vehicles have slowly started returning. With a wide variety of product offerings across 1 ton to 55 tons in trucks and a strong presence in 25 ton+ categories, Ashok Leyland is well placed to benefit from a cyclical upturn. However, there are some potential risks too which could impact road freight such as the commissioning of the Dedicated Freight Corridor (DFC) project for setting up railway freight lines on Western and Eastern parts of the country, covering a total length of 3,360 kilometres from Ludhiana in Punjab to Dankuni in West Bengal and JNPT in Mumbai to Dadri in Uttar Pradesh.

With an average expected speed of 70 km/hour, once fully commissioned the DFC’s end-to-end transportation time would be at par or lower than road freight transport and can be used to transport bulk goods, vehicles and other consumer durables.

Ashok Leyland has managed to go from strength to strength to create a formidable presence despite intense competition from domestic CV makers like Tata Motors, Mahindra & Mahindra, SML Isuzu, Eicher Motors and international CV companies like Volvo and Bharat Benz a subsidiary of German automobile giant Daimler AG. In the last few years, CV manufacturers like MAN Truck and Bus, a part of the Volkswagen Group and Asia Motor Works (AMW) had to cease operations due to insufficient commercial vehicles' demand.

According to a media statement, Ashok Leyland aims to become a debt-free company in two-years’ time. By launching a variety of new LCVs products in the last few months,
Ashok Leyland is slowly de-risking its business which was earlier highly skewed in favour of heavy and commerical vehicles. Through its subsidiary Optare, the company is also looking at growing its presence in Europe.

With low debt and a lean cost structure, Ashok Leyland looks like a definite winner who can outperform all its peers over the next 4-5 years.

Invest wisely after detailed research.

 

 

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