How Ashok Leyland Turned Around From Pandemic Lows

Shares of Ashok Leyland Ltd. hit an all-time high on Tuesday, sustaining momentum from Monday, after its net profit rose in the fourth quarter of fiscal 2024, while margin also expanded.

The company is upbeat on the sales of commercial vehicles in fiscal 2025. Not so much because of forward commentary, but more so because of strong margin and sales performance. The fourth quarter growth has reflected the company's efforts to improve margin over the years.

Here is a look at the truck-maker's journey.

Following the pandemic, many industries were affected due to loss of demand and high commodity costs. Automobile-makers were no different. The first three quarters of fiscal 2021 were lackluster due to drivers and fleet owners preferring purchase of used trucks, or using trucks they already owned longer, as they were battling demand and cost concerns.

While revenue did bounce back, margin remained in the low-single digits during the fourth quarter of fiscal 2021, as compared with a 15% range seen at the end of March 2019, which was the fag-end of the truck upcycle.

After that, demand was also affected due to pre-buy of vehicles as India moved into new axel norms for trucks, as well as from other factors such as pandemic era lows and commodity costs, among others. In fiscal 2021, the company’s sales were at roughly 1 lakh units, while at the end of fiscal 2022, sales saw a 27% increase to 1.28 lakh units.

While recovery was underway, evidence of revival of sales and revenue was only visible in financial year 2023. Margin finally entered the double-digit range in the last quarter of the fiscal.

Company sales rose a whopping 50% during the year. This was led by overall recovery in medium and heavy commercial vehicles, led by trucks in the segment, which saw 60% sales growth. MHCV bus sales were also up 135%.

In fiscal 2024, the market hasn't grown. But there was pre-buying in the fourth quarter of the previous year, as BS-VI emission norms required OBD-2 threshold for vehicles produced on or after April 1, 2023, the company said.

What’s significant is the margin coming in at 11% in the fourth quarter of fiscal 2023—the first time it crossed double-digit margin after the pandemic in roughly eight quarters.

Generally, the first quarter of a fiscal is weak for truck-makers, since a lot of buying happens in the previous quarter. Most regulations have also come in from April in the past, leading to pre-buying in the fourth quarter showing strong volume for most truck-makers. However, fiscal 2024 saw margin and revenue growing 10% and 13%, respectively, in the first quarter.

The double-digit margin continued throughout the financial year. The management was positively surprised seeing the Q1 margin, it told NDTV Profit after the fourth quarter results. Its efforts on cost management over the past 12-18 months had been instrumental to margin-accretion, it said.

Margin have steadily risen this year to come at 14% in the fourth quarter on the back of strong volume and better operating leverage. For the full year, margin came in at 12%, up 400 bps as compared with the previous year. Material cost, as a percentage of revenue, was lower by 4.4% over FY23 as well, aiding margin.

The company has reassigned current Chief Financial Officer Gopal Mahadevan as director of strategic finance and mergers and acquisitions. He will be looking at the group’s subsidiaries, which have become sizable, as well as M&A opportunities, among other tasks, Mahadevan told NDTV Profit.

Fiscal 2024 saw a strong show for the company across businesses. Its market share in the light commercial vehicle segment rose 5.8% for the year. The company displaced the number two player and also gained market share from the market leader, the management said.

Defence revenue also doubled to roughly Rs 1,000 crore for fiscal 2024. They supply armored trucks among other products, and it has become a sizable business for the company.

Its finance arm, Hinduja Leyland Finance Ltd., has crossed Rs 50,000 crore in assets under management. Of this, commercial vehicle financing represents 30% of overall assets. The subsidiary is not just limited to CV financing, as its housing finance segment has crossed Rs 10,000 crore in AUM. It also provides two-wheeler financing and personal loans, among others.  

Most brokerages have affirmed a positive view on the company’s recent performance.

Emkay Global rated the company to a 'buy' from 'sell'. It also raised the target price to Rs 250 per share, a 78% rise from the previous price target.

Contrary to Tata Motors Ltd.'s flattish-to-negative guidance for the industry, Ashok Leyland has guided for a positive year, the brokerage said. "The truck industry generally operates in five-year cycles and we are currently in year three, showing further market growth," it said.

Nomura also has a ‘buy’ on the company, with a target price of Rs 247 per share. Margin for commercial vehicles will continue moving higher through the upcycle, as both players are focusing on margin improvement.

Prabhudas Lilladher expects average selling price increasing by 2.8% quarter-on-quarter—indicating lower discounts and better pricing across product portfolio—is a positive. They have a target price of Rs 239 per share.