Ashok Leyland – An Iconic Brand Going Through Temporary Pain

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The share price of the Commercial Vehicle(CV) maker Ashok Leyland has fallen by more than 50% over the past year.

Source: Google Search

So, what is causing such a steep fall in the share price? Let’s analyze.

A Sharp Fall in the Auto Sales Volume – Start of a Downcycle

Commercial Vehicle Industry is highly cyclical in nature and depends on the overall economic activity in the country.

Since the beginning of March 2019, the CV market has seen a sharp slowdown. With August sales being the worst, the company reported a 50% fall in sales volume.

Over the past few months, the economy has seen a sharp slowdown with the Q1-FY20 growth slipping to a mere 5%.

Axles Load Norms

The new axle load norms approved by the government in the middle of last year have proved to be one of the main reasons behind the poor performance of commercial vehicles during the past few months.

The norms allow truck owners to increase the load on the vehicle up to the new limit as prescribed by the government. The higher limit has in a way legalized overloading and given fleet owners the opportunity to sweat their existing assets more instead of purchasing new trucks.

According to reports, the new axle load norms have created a 20% excess capacity which is now in the process of getting absorbed.

Reduction in Travel Time due to GST Implementation

A typical truck spent 20% of its runtime at interstate check-posts (pre-GST). After the inter-state check-posts were removed, the travel time of long-haul trucks and other cargo vehicles has been cut by at least one-fifth.

Uncertainty Regarding BS-VI Transition

All auto companies will stop the production of BS-IV vehicles from 1st April 2020. Under the new norms, the BS-VI vehicles will get expensive by 10-15%.

There was an expectation that due to an imminent hike in price, there would be a lot of pre-buying. However, there is no sign of pre-buying as of now and it seems highly unlikely that there will by any.

Resignation of the Top Management

Vinod Dasari, the Managing Director, was instrumental in the rise of Ashok Leyland. He resigned effectively on 31st March 2019. This void in the top management has created an added layer of uncertainty for the company.

Let us now analyze the past cycles to understand the nature of the industry

In 2008 and 2014, there were similar downturns in the economy which led to a falling in the CV industry.

As can be seen above, both in 2008 and 2014, the volumes fell dramatically only to recover in the subsequent years. Let’s now look at the stock price movement from 2014 (the bottom of the cycle) to 2018 (the peak of the cycle).

At the bottom of the cycle, the Ashok Leyland price was nearly Rs 17; while at the top it was nearly Rs 150.

What is the way forward?

Ashok Leyland is a good company with a strong balance sheet. However, the Commercial Industry(CV) it is operating in, is undergoing a cyclical downturn.

Investors must monitor the company for signs of an upturn in demand which could re-rate the stock from here.

Caution: Entry and Exit are the most important aspects of investing in a cyclical company. Entering into a cyclical industry too early in a downcycle can cause severe erosion of capital. Therefore, investors must carefully monitor company performance.

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Disclaimer: The views expressed in the above report are personal and at no point should be construed as investment advice. Please consult your financial advisor before making any decisions.

Cover Image Source: The Hindu Business Line

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Aditya Shah

Aditya Shah

Aditya Shah is a SEBI-Registered Investment Advisor. He is the founder of Hercules Advisors that invests for the long term in high quality publicly listed Indian companies at reasonable valuations.
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