Tactical Pick of the Week: Ashok Leyland

Amid weak demand and market volatility, the Ashok Leyland (AL) stock price has corrected significantly. It is down 52 percent from its 52-week high, factoring in most of the negatives. We expect demand to pick up due to bring forward of buying ahead of Bharat Stage VI implementation, scrappage policy, government’s continuous focus on infrastructure and mining activities. We advise investors to buy the business, which is available at very attractive valuations.

In terms of Q3 FY19 performance, net revenue witnessed a year-on-year (YoY) decline of 12 percent, led by volume and realisation decline of 6 percent and 6.3 percent, respectively. This was on account of subdued consumer sentiment on multiple macroeconomic challenges. On the profitability front, AL continues to maintain its double-digit margin, though the same witnessed a 140 basis points contraction year-on-year.

What exudes our confidence on the stock?

Long-term industry opportunities to continue

In the last couple of months, the domestic market faced challenges on the back of weakening macroeconomic environment leading to muted sentiment for the automobile sector, including the commercial vehicle (CV) segment. Subdued market sentiment is on account of liquidity problems, financing issues, rising interest rates and slowdown in economic activity. This was, further, aggravated by the lag impact of new axle load norms.

With the government’s continued focus on rural economy and infrastructure, the CV segment may see strong demand going forward as well. The management expects 10-15 percent industry growth and is confident about its positioning and products. In fact, the company posted a strong monthly volume numbers (12 percent YoY) in January.

Key growth drivers in the near term

BS-VI emission norms are to be implemented from April 2020 and the management expects 30 percent demand growth due to bringing forward of demand. This is due to the fact that the new BS-VI compliant vehicles would be 10-15 percent more expensive than current vehicles. The scrappage policy is to be implemented from April 2020 and would potentially lead to a replacement of 200,000-300,000 trucks that are over 20 years old. This would generate additional demand for the company.

Strong market presence

On the back of superior technology and products, the company continues to have a strong market presence. The company currently has 32.5 percent market share in the CV segment.

Reasonable valuation

Amid market volatility and weak demand outlook, the stock has corrected quite significantly, thereby making valuations attractive and offering investors a great buying opportunity. The stock is currently trading at 13.8 times and 11.5 times FY19 and FY20 projected earnings, respectively, which is very reasonable for the company like AL.

Though investors are little wary of the departure of its Managing Director and CEO, Vinod Dasari, the management has assured that there will not be any business impact during this transition period.

[“source=moneycontrol”]