Stock Review: Ashok Leyland

As industrial and agriculture sectors post robust growth, trucks have been in demand. At the same time, a clear shift is visible towards higher tonnage vehicles. However, Ashok Leyland has seen a quieter move compared to its peers. Analysts expect this to improve, given the robust demand for commercial vehicles (CVs) moving in tandem with strong agricultural and industrial growth. A 10-year analysis puts the multiplier effect for CVs at about 1.4x Index of Industrial Production, according to a Sharekhan research.

In a recent analysts' meet, the management stood by its earlier guidance of total sales of 90,000 vehicles in FY11, adding that it was rather a conservative estimate, given adistinct possibility of additional sales of 6,000 units.

The company's market share increased to 27 per cent in the June quarter compared to 17 per cent a year ago, boosted by resurgence in multi-axle vehicle sales and high demand in South and West India. It plans to launch the U-Truck Platform by October, with 10 models slated to be introduced within the first month of the launch and around 25 models in the next 18 months.

Going ahead, the company expects to maintain earnings before interest, tax, depreciation and amortisation margins in excess of 10 per cent on the back of the price hike in June. The new emission norms effective October may hurt sales during the quarter. Incremental costs per vehicle are expected to be around `40,000 a vehicle, which the management plans to pass on to consumers. The company is looking at a capex of around 2,000 crore in the next two years, which includes spends on joint ventures.

The stock ended 1.5 per cent lower on Wednesday at 76 and trades at a P/E valuation of 17x FY11 earnings per share estimates.

The booming industrial production cycle is expected to push performance of the auto sector's low-flier