Why this midcap auto stock may enter the fast lane | Economic Times

ET Intelligence Group: The demand in the light, and medium and heavy commercial vehicles (LCVs and MHCVs) is gradually picking up with the increase in economic activities. Ashok Leyland, the country’s only pure-play CV maker, is expected to be a major beneficiary of this given its product mix, rising focus on the fast growing LCV segment and receding debt burden. The CV segment has been reporting a gradual turnaround following rising freight volume and improving profitability of the fleet operators. In January 2021, the MHCV volume rose by 2% year-on-year after declining in each of the nine quarters upto December 2020. For Ashok Leyland, the overall volume grew by 7% in the three months to December for the first time in six quarters led by 53% jump in the heavy trucks volume. The segment, which has superior realisation, formed 30% of the total truck volume of the company.The company expects the trend to sustain in the coming quarters due to growth in infrastructure projects. The rising share of the heavy truck, particularly haulage, in the total MHCV bodes well for the Ashok Leyland since it had garnered a higher market share during the previous industry upcycles. The haulage truck share in the company’s total MHCV volume was 6.8% in the December 2020 quarter compared with 21-44% share between FY18 and FY20.The MHCV volume at the industry level has declined by 67% from the peak of FY19. After falling by 47% in FY20, it is likely to drop by another 20% in the current fiscal. Analysts expect the volume to grow by 55-65% in FY22 given the improving trend in the GST bill invoicing and a fall in the fleet capacity of the industry for the first time in 15 years. In addition, the weekly run-rate of registration of trucks has improved to around 4000 levels in January 2021 compared with just 300 units in July 2020.To capture the benefit of the fast growing segment of LCVs due to rising e-commerce activities, the company has introduced a new platform, Phoenix. The new offering has expanded its addressable market to 65% compared with 34% earlier. Its market share in the 2-3.5 tonne segment rose to 20% in the December 2020 quarter, a gain of 200 basis points from the year ago. The company plans to launch 7-8 new models based on the new platform.Apart from eying a superior volume growth, the company is also keen to improve the balance sheet strength by reducing the debt burden. The net debt dropped by 33% in the past two quarters to Rs 2,900 crore. Given the likelihood of lower capital expenditure in the medium term, the company may start generating free cash flow from the next fiscal year.At the prevailing level of around Rs 130, the stock trades at 5.1 times one-year forward book value. The stock has gained three times since April 2020, which may moderate the pace of a further upside.