Ashok Leyland: Q3 strong, set to gain from GST & govt infra spending

Ashok Leyland (AL), the second largest commercial vehicle manufacturer, reported a strong set of numbers for the third quarter ended December 2017 driven by robust volume growth and increase in realization.

We continue to like the business and recognise numerous tailwinds for the company like the GST opportunity, strong exports, strategy on defence, and last but not the least, the focus on Electric Vehicles (EVs).

Topline – Strong volume growth

With the GST impact waning and low base due to demonetisation last year, the company posted a significant growth of 57.5 percent (YoY) from operations. The growth was driven primarily due to a strong volume growth (42 percent) and 11 percent increase in realization. Net realization was better on the back of product mix. The company achieved highest ever quarterly net revenue and volume in 3QFY18.

Margin recovered – cost optimization helped

Despite rise in the raw material prices, the company posted EBITDA (earnings before interest depreciation & tax) margin expansion of 170basis points (y-o-y) in 3QFY18. This was primarily driven by the cost optimization measures taken by the company which led to the saving of 180bps in staff cost and 120bps in other expenses which got partially offset by 200bps rise in raw material cost as a percentage of net sales.

Looking beyond the earnings, the company management sounds very positive, riding on multiple tailwinds.

Hinduja Foundries to be EBITDA accretive

Commenting on Hinduja Foundries in previous conference calls, the management had indicated that it would be EBITDA positive, going forward. It has become EBITDA positive in the second quarter itself and did well in 3QFY18 as well.

Market share –continue to maintain momentum

The company had achieved highest ever market share of 34.7 percent in 1QFY18. The current market share is 33.8 percent (up 140bps y-o-y). This was on the back of new launches and wide acceptance of its iEGR technology.

Volumes recovery

With many of the headwinds largely behind, volume pick up has started, riding on the positive impact of GST rollout and the government’s increased focus on infrastructure spending and the success of the company’s iEGR technology.

The management also indicated that the strict ban on overloading would increase the demand for its vehicles. While recognizing the competitive intensity, the management is confident about its products and its position in the market.

Focus on Electric Vehicle (EV)

The company has a very focused strategy in the EV space. It expects EV to form a large part of business in the coming years and expects higher volume in all of their categories.

AL is making significant investments in the technology and putting a lot of efforts to make EV a reality. The company is also focusing on all technologies as of now as it is currently not sure which technology would produce optimum result in the future. AL is giving maximum weight to the total cost of ownership of electric vehicle as that is the critical component for wider adoption of EV.

Strong position in Defense

With the governments’s increasing focus on defense, the management is very confident and excited about long term opportunity in the defense sector. The management doesn’t see any slowdown in defense in short to medium term and indicates that there is lot of potential for a company like Ashok Leyland.


At the current price, the stock trades at a reasonable valuation of 21.6x FY18 projected earnings and 18.4x FY19 projected earnings, which make it an ideal candidate for accumulation.

To sum up, we are positive on the medium to long term outlook on Ashok Leyland. The company has bolstered its position in the market and looks set to gain from GST and infrastructure spending.


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