The Hindu Business Line : Ashok Leyland: Buy

Ashok Leyland (ALL) shareholders can continue to hold the stock and consider fresh acquisitions at declines from the current levels linked to the broad market. The company appears set to round off what has been a good year for it with a flourish in March sales. The near-term outlook appears optimistic, given the strong order-book, especially for multi-axle vehicles and the strong trends in the economy.

Clipping ahead of industry

The most notable feature of ALL's performance this year is that it is growing at a substantially faster pace than the heavy commercial vehicles industry. ALL's domestic sales were up 17 per cent in the first 11 months of this fiscal against the industry growth of a piffling 2.6 per cent in the same period.

Growth this fiscal has been fastest in three segments of the commercial vehicles industry and ALL is strong in two of them with a zero presence in the third. The 25-tonne multi-axle vehicle and the 35-tonne tractor-trailer segments have been the fastest growing in the cargo category and ALL has exploited the demand here to the hilt. However, ALL does not have a vehicle in the third hot segment of sub-1 tonne vehicles where the newly-launched Tata Ace is making merry.

In fact, ALL is reported to have a three-month order-book for multi-axle vehicles; a segment that is fast becoming the volume-grosser for the industry. In addition, Defence supplies is a steadily growing business for the company.

Flexibility

ALL's asset is its ability to switch around its range of engines and vehicles based on buyer interest. Its engines are ahead of the emission norms, especially the high power `J' series which can deliver output of 260 HP.

In recent times, the company has also built-in manufacturing flexibility with the ability to make all its vehicles at any of its plants. This is a definite advantage as capacity can be optimised based on the market demand pattern.

Always conservatively leveraged at around 0.7 debt:equity, ALL's financials are set to grow stronger following the conversion of its convertible bonds issued in April 2004. Bondholders who have been offered a conversion price of Rs 31 per share are likely to opt for the conversion, given the higher ruling market price of Rs 40 per share. Assuming all bondholders opt for the conversion, ALL's reserves are likely to increase by Rs 400 crore.

The rising interest costs — they were up 70 per cent in the first nine months — are a spot of bother but the conversion of the bonds would offer some relief.

ALL had a tepid third quarter ended December 31, 2005 with flat earnings but that was largely because of the extended monsoon season in the South, affecting vehicle offtake.

Challenges ahead

The near-term prospects indeed appear encouraging for ALL but there could be challenges ahead in the medium term. As the market scales up the tonnage chart, competition is bound to get stiffer.

Though ALL's focus on the medium-to-heavy vehicles segment is a plus, it can also be a liability as any dent in its market-share cannot be made up in other segments.

The Supreme Court order on overloading, which is just beginning to be implemented, has had a salutary effect on vehicle offtake and, when implemented in right earnest, can give a positive push to the sale of commercial vehicles.

However, there are also threats looming in the form of the new-found aggression of the Railways which is talking of dedicated freight corridors and dynamic freight pricing policies. The upward trend in interest rates is another cause for concern as financing costs could become dearer.

However, the robust trends in the economy and the impressive growth in industry and agriculture outweigh the above concerns. Though there could be a correction or two in the medium-term growth, the long-term trend appears positive now.

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