Smaller trucks to keep sales humming for Ashok Leyland till MHCV recovery

Shares of Ashok Leyland Ltd saw decent recovery even as sales of medium and heavy commercial vehicles (MHCV) continued to languish. MHCV sales dropped 52% last month, but the pace of fall was moderated from previous months. Still, the stock is down about 12% from its pre-covid highs in January.

MHCV is a large business for Ashok Leyland and has generated about three-fifths of Leyland’s sales in recent years. With capacity utilization at fleet operators low and economy reeling under covid-19 the chances of immediate sales recovery is bleak.

But the company’s success in light commercial vehicles (LCV) is aiding it. The share of smaller trucks in the company’s domestic sales has steadily risen over the years reaching 39% last fiscal, up from 28% in FY15. During the last fiscal, the company gained market share in the sub 7.5 ton gross vehicle weight segment despite a fall in industry volumes.

Demand for these vehicles remains healthy thanks to the rise of e-commerce and requirement for last mile connectivity. This is reflective in faster recovery of LCV sales vis-à-vis MHCVs in recent months.

The newly launched Bada Dost with higher load capacity will help Leyland capture the growing demand for LCVs. The demand for smaller trucks is projected to double from current levels.

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Concurrently the vehicle is being made suitable for overseas markets. According to Edelweiss Securities Ltd, Leyland initially plans to sell the vehicle where it already has presence. “The Phoenix platform (Bada Dost built on it) will bolster its ambition to widen addressable LCV market & boost market share; offer a bouquet of products (7-8 new launches expected) to compete more effectively; de-risk business from sharp M&HCV cyclicality,” analysts at Edelweiss said in a note.

Even so, with large commercial vehicles (MHCVs) still generating majority of the Leyland’s sales, the company’s fortunes are still intertwined to the broader economy, where outlook remains dim. As schools, colleges remain shut and public transportation is restricted, demand for buses is also hit.

Consequently many analysts expect the MHCV business to see a see significant fall this year-sales down 86% in April to August. This is expected to weigh on Leyland’s financial performance in current fiscal.

Even so, the much-awaited vehicle scrappage policy, expected to be announced by the government in another month or so, holds out hope for commercial vehicle manufacturers. The policy aims to terminate old polluting vehicles. This is expected to create fresh demand for commercial vehicles.

“There are ~0.6 million M/HCVs between 15-20 years old and an almost similar number in the 20-25 years bracket. A gradual phase-out of these vehicles would be supportive for commercial vehicle sales, particularly as industry volumes are expected to decline ~50% to ~200,000 units in FY21E. Even if we assume a 25% phase-out of these older trucks, it will contribute meaningfully to replacement sales,” analysts at HDFC Securities Institutional Research said in a note.

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