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Ashok Leyland sales in June allay GST-linked concerns

LiveMint logoLiveMint 05-07-2017 Vatsala Kamat

Ashok Leyland Ltd sprang a pleasant surprise on investors with its monthly sales numbers for June. Not only did overall sales grow by 11% from a year ago, it zoomed past its May numbers by about 36%. Evidently, the company managed issues of emission norms and the transition to the new goods and services tax (GST) well, even when its peers reported a drop in sales during the same period.

Not just this. There have been other tailwinds that justify the recent euphoria in the stock that has risen 8% since 8 November, when demonetisation disrupted economic activity. Even market leader and competitor Tata Motors Ltd’s stock fell by 22% over the period.

Investor confidence in the Ashok Leyland stock came after the truck manufacturer arrested the precipitous drop in market share from 30% to about 23% in the decade before 2012. With efforts to plug some gaps in its product portfolio, the company’s share of the truck market has climbed to 33%—higher than the peak reached in fiscal year 2002. In contrast, Tata Motors’ share has receded from about 60% to 50% in the recent past. Analysts say that Ashok Leyland was better prepared to cope with the new BS-IV emission norms than some others in the auto segment.

Better still is that Ashok Leyland’s profitability is on firm ground. Healthy sales traction, a product portfolio with focus on niche markets like defence, exports and spares along with focus on profits too has nudged its operating margins into the double-digit league—the best among the top three companies in the commercial vehicle segment. Of course, Tata Motors’ consolidated profitability is shored up by the overseas subsidiary Jaguar Land Rover Plc that clocks in consolidated profits, when the domestic truck maker posts net losses.

Other factors too have stacked up in Ashok Leyland’s favour. In the last three years, the company has been nimble-footed in trimming debt on its books. For this, it raised funds by selling non-core assets and through qualified institutional placement. This along with healthy cash flows from operations is mirrored in the improvement in interest cover ratio.

However, one cannot deny that Ashok Leyland, like other truck manufacturers, is vulnerable to macroeconomic developments. The challenges in the mining industry and in infrastructure weigh on the company’s sales, just as demonetization did, albeit temporarily. And there are risks to demand too. Fleet utilization is at reasonable levels due to fluctuations in freight. There are also more competitors in the fray now than when it used to be a cosy duopoly. Competitors are aggressive and offering discounts too. So, it will be an uphill task to gain market share from current levels.

That said, the June quarter may see some pressure on profitability due to spillovers from BS-III inventory clean-up and working capital issues in the transition to the new GST regime. These, however, would be short-term disruptions that would fade away as operations get aligned in a few quarters.

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