I wrote a DETAILED article talking about the business of Ashok Leyland – here
Pros
- Infrastructure boom – GoI is spending BIG on infrastructural development and that will benefit AL + other CV players. A substantial amount has been earmarked for Capex in the Union Budget (around 10L CRORE) + the Government wants to convert 8 LAKH diesel buses into e-buses over the next 6 years.
- An astute management – AL is part of Hinduja Group which is a high pedigree conglomerate. On the earnings call, the management was very clear about it’s intent – it will NOT sacrifice profits / margins to gain market share but focus on the quality of the product instead. Over the last 10 years, AL has transformed itself from being a south centric player to a pan-India player with strong market share in most regions that it operates in.
- High barriers to entry – CV market is not easy to enter. It requires a lot of capital, and it takes a long time to achieve break-even, so you need deep pockets. No major entrants are expected in the short term.
- Future Growth drivers for AL:
M&HCV Business – the management believes that the industry is moving towards higher tonnage tractor trailers which has a higher selling price + higher margins. Globally, the penetration of high tonnage tractor trailers is quite heavy and in India it is only 20%. With goods roads that should increase and bode well for AL going forward and should help it expand margins.
LCV Business – LCV business has higher margins compared to M&HCV. Is less cyclical. And the current product portfolio addresses only 40-45% of the market, which means there is more room to grow and more variants that AL can launch in the future.
Investing in new technologies – AL is investing in EVs (through it’s step down subsidiary Switch Mobility), and in hydrogen fuel cells, hydrogen ICEs. In EVs, via Switch Mobility – it recently unveiled it’s e-LCVs which already has a pre-booking of 13,000 units. In e-buses, it has an order book of 1300+ e-buses. AL is also getting ready to launch electric trucks very soon.
Cons
- Cyclical industry – the growth in CVs is a factor of the growth in the economy, Any slowdown in the economy would adversely effect this industry and it is quite cyclical.
- High competition – even though the barriers of entry are quite high, existing players are quite BIG and very competitive. Tata Motors is the largest CV player in India.
- Commodity prices – the business is heavily dependent on commodity prices, especially steel. Although AL has been able to pass on increase in commodity prices to end customers, in a highly competitive scenario this might not always be possible
- High Debt – There is a significant debt on the books of AL, primarily because of the financing subsidiary (HLFL). However, investors should keep tabs on this # to ensure it doesn’t balloon out of control.
- No FY25 guidance – in the Q3 earnings call, no forecast was given by the management on estimated deliveries / revenue #s for FY25.
- Promoter Pledging – the promoters are pledged some of the shareholding, which is a red flag in case the stock price start to drop drastically
Conclusion
I think AL is being valued as a traditional CV company and the future potential in the e-bus / e-LCV / e-Truck segment is not being baked in. That said, it has to prove itself that it can capture a significant portion of the EV market to be able to command a premium valuation.
Disclosure: Not invested, tracking closely – waiting for a 10-15% correction to make a BUY decision.
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