Shares of Ashok Leyland Ltd look stable despite the commercial vehicle (CV) manufacturer posting weak Q2FY20 results, which were also below expectation.
Perhaps, the management commentary about a sharp reduction in inventory and analysts’ confidence that the worst is behind lifted investor sentiment. Besides, after plunging sharply from its 52-week high of Rs122 to ₹78 currently, Ashok Leyland’s stock factors in the near-term pain.
Ashok Leyland’s management said while it gained market share in the medium and heavy commercial vehicle (M&HCV) segment in Q1FY20, the focus in Q2FY20 was to bring down inventory levels. This was important considering the 48% jump in interest cost during the quarter on account of higher working capital.
Fortunately, the company reined in costs on all operating fronts, including raw material, staff and other expenses.
Indeed, the 44% fall in vehicle sales was already factored in by investors, but realisations too fell 4% yoy on the back of lower mix of M&HCV sales and discounts to cut inventory.
Hence, Ebitda (earnings before interest, tax, depreciation and amortisation) margin came under pressure falling nearly 510 basis points yoy to 5.8%, which was lower than Bloomberg’s consensus estimate of 6.5%. One basis point is one hundredth of a percentage point. “We expect Ashok Leyland to face margin pressure on account of ongoing slowdown and intensifying competitive environment in domestic CV space in the quarters ahead,” says Mitul Shah, vice-president, research, Reliance Securities Ltd.
That said, most analysts concur that at present the M&HCV industry is half-way through the cycle. Still, the uncertainty on truck owners’ purchasing pattern ahead of the BS-VI norms and the economic slowdown that fuels the pain will keep shares range bound in the near term.
Nomura Research points out that inventory levels are at comfortable levels now. “Although the near term outlook remains tough due to the BS-VI transition, we maintain our stance that the M&HCV recovery will play out from second half of FY21,” the report said, adding Ashok Leyland is a pure proxy to play the M&HCV cyclical recovery.