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Volume growth to be key for Ashok Leyland

, ET Bureau|
Feb 19, 2019, 08.01 AM IST
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BCCL
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Kotak Institutional Equities expects 16 per cent growth in FY20, while CLSA projects only a 2 per cent increase.

Highlights

  • Ashok Leyland’s volumes increased 9 per cent to 19,741 units in January.
  • This means it must sell more than 43,000 units in February and March.
  • Historical data shows sales volumes in March are typically 3,000-3,500 units higher than in January and February.
ET Intelligence Group: The stock of Ashok Leyland, India’s secondlargest commercial vehicle maker, has lost 25 per cent of its market value in the past three months. This may trigger two questions for investors: One, is the stock a compelling buy now that it is 40 per cent cheaper than its five-year average price-to-earnings multipleRs Two, is the stock a value trapRs

A straightforward answer to these questions may undermine the impact of certain possibilities that could influence the trajectory of the stock in the near term.

The key variable is the volume growth it can deliver in the fourth quarter of FY19. Ashok Leyland has maintained its growth guidance of 15 per cent for the current financial year even after a 6 per cent drop in the third quarter.

In the first nine months, the company’s volumes increased 18 per cent, boosted by robust growth in the first half. To achieve the targeted 15 per cent growth for FY19, volumes need to grow more than 5 per cent in the quarter ending March.

Ashok Leyland’s volumes increased 9 per cent to 19,741 units in January. This means it must sell more than 43,000 units in February and March.

Historical data shows sales volumes in March are typically 3,000-3,500 units higher than in January and February. The street’s expectations are 11-12 per cent volume growth for FY19. If the company is able to beat these expectations, it could generate some buying interest.

Besides this, volume growth in the next financial year is critical as there is lack of clarity about when pre-buying of vehicles will start before new emission norms kick in from April 2020. This is the prime reason for the wide divergence in volume growth estimates for the company.
ashok-bloom-graph


Kotak Institutional Equities expects 16 per cent growth in FY20, while CLSA projects only a 2 per cent increase.

While predicting volume growth will be a challenge for Ashok Leyland, it is optimistic about positive sales growth in FY20. This stems largely from expectations of pre-buying, which historically has boosted volumes by 30-50 per cent.


There is consensus that if truck sales grow more than 10 per cent in FY20, then there is a high possibility of volumes declining in FY21as the demand cycle retreats after peaking. Demand in the industry is rising for the fifth year now, which is the duration of a typical cycle. Pre-buying in FY20 may extend the current demand cycle by one year, an expectation that’s reflected in analysts’ EPS estimates. According to Bloomberg’s pool of analysts, the company’s EPS is estimated to narrow to Rs 6.26 in FY21 from Rs 7.28 in FY20. The Ashok Leyland stock has traded in a P/E range of 10-18 in the past five years. If the market considers FY21 volume growth based on the mid-cycle multiple, it can ascribe price-earnings multiple of 12-15 times, which means the fair value could be in a range of Rs 75-93. If the street perceives demand declining, it will accord a lower multiple to the stock and the fair value will fall further. The street will peg its one-year forward target price based on FY21 earnings, giving the absolute EPS of FY21prominence.

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