FREE

MOSL: ASHOK LEYLAND (Buy) (Annual Report FY17)-Expanding horizons beyond domestic M&HCV-LCVs, exports, spares and defense in focus

ASHOK LEYLAND (Annual Report FY17): Expanding horizons beyond domestic M&HCV; LCVs, exports, spares and defense in focus

(AL IN, Mkt Cap USD4.8b, CMP INR106, TP INR122, 15% Upside, Buy)

Ashok Leyland’s (AL) FY17 annual report highlights the company’s increasing focus on the LCV, exports, spare parts and defense segments with an aim to reduce dependence on domestic M&HCVs. Network expansion in non-traditional regions, such as north, central and east, is helping AL gain share in the domestic market.

• Right products drive volumes, market share: In FY17, the CV industry was impacted by regulatory measures like demonetization, shift from BS-3 to BS-4 emission standards, and looming GST implementation. However, during the same year, AL's domestic M&HCV volumes grew 4.6% (v/s flat CV industry growth). AL launched various products (Captain Tractors, eco version of Captain Tippers, Guru and Sunshine Bus) in FY17, due to which its market share in M&HCV increased to 33.9% from 32.7% in FY16. Its market share in the bus segment, however, declined to 37.5% (-700bp YoY) due to the strategic move to exit unprofitable segments and work with progressive STUs.
  
• Growth guidance positive for FY18: According to AL, the government's thrust on infrastructure/rural sector, resumption of mining activities in select states, higher demand for consumption-driven sectors and e-commerce logistics providers, potential implementation of scrappage policy, bus body code, and phasing out of old diesel vehicles in line with fleet modernization program should drive its future growth. However, growth in 1HFY18 is expected to be subdued due to pre-buying on account of BS-4 emission norms. AL guided for CV segment growth of 10%, led by M&HCV and LCV growth of 7-10%.
  
• Focus on new growth areas to mitigate M&HCV cyclicality: AL is focused on making its business acyclical by reducing India truck business revenues to 50% in five years (from ~68% now) by growing the share of LCVs, exports, spare parts and defense. This will not only reduce dependence on domestic trucks, but also drive strong revenue growth, in our view. Although we find merit in this strategy, the results are expected to play out only over the medium term.​