Chip Shortage impacting Light Commercial Vehicle sales – Ashok Leyland
Update on the Indian Equity Market:
On Wednesday, markets continued to decline for a third straight session on the back of unsupportive global cues. The Nifty index ended lower by 0.6% at 17,226 levels. REALTY (-1.9%) PSU BANK (-1.4%) and MEDIA (-1.4%) were the top losers while AUTO (+0.5%) was the only gaining sector today. BAJAJFINANCE (-2.9%), BAJAJFINSV (-2.5%), and ADANIPORTS (-2.4%) were the top losers while SUNPHARMA (+2.8%) KOTAKBANK (+1.5%), and MARUTI (+0.9%) were the top gainers.
Chip Shortage impacting Light Commercial Vehicle sales – Ashok Leyland
Edited excerpts of an interview with Mr. Sanjay Saraswat, head of Medium and Heavy Commercial vehicle (M&HCV) at Ashok Leyland with CNBC-TV18 on 14th December 2021:
- Ashok Leyland saw a pick-up in sales in the month of November-21, the overall numbers were above street expectations.
- The M&HCV sales improved 10% YoY, but Light Commercial Vehicles sales continued to remain under pressure.
- The Internal Combustion Engine (ICE) Trucks are performing well and growing faster than other segments.
- Although MCVs performance is not satisfactory, it is expected to perform well from 4QFY22E.
- According to the truck financers, the demand for Tipper Segment is improving on the back of increasing infrastructure and mining activities. Mr. Saraswat commented that the Tipper segment is growing equal to the industry growth. The company has improved its market share in the last 2 months and is continuing to improve further on an MoM basis. The company has a wide range of Tippers available as it has recently launched Avatar Brand under Tipper Segment which is doing phenomenally well.
- From FY22E, Company has decided to keep the wholesale and retail volumes equal. In the month of Nov-21, the retail and wholesale sales volumes were almost the same.
- According to the Federation of Automobiles Dealers, although the demand is back in Commercial Vehicles it is still away from pre-pandemic levels. Mr. Saraswat commented that FY18/FY19 was the best period in terms of sales and currently the numbers are far away from that period. But every month and quarter things are improving and moving in that direction.
- The company is experiencing chip shortage issues for some of the models which are impacting the sales. The company is not able to fulfill the demand for vehicles especially LCVs due to the shortage.
- Year till date FY22E, industry sales have doubled on a YoY basis. The base of FY21 was low due to pandemic and BSIV to BSVI transition, especially 1HFY21. For 2HFY22E the growth rate is expected to decline as the base improved gradually. For FY22E, Mr. Saraswat expects the volume growth to be in the range of 30-35% YoY.
Asset Multiplier Comments
- We expect sales to pick up gradually in 2HFY22E on the back of seasonality, improvement in core economic indicators, increase in replacement demand, and easing restrictions.
- We believe, Ashok Leyland is well-positioned to benefit from a strong recovery in the CV cycle on account of new product launches and a well-diversified product portfolio. It will also benefit from the cyclical recovery, especially in buses and higher tonnage trucks where it has a higher market share.
Consensus Estimate (Source: market screener and investing.com websites)
- The closing price of Ashok Leyland Ltd was ₹ 126/- as of 15-December-21. It traded at 26x/17x the consensus EPS estimate of ₹ 5.0/7.6 for FY23E/FY24E respectively.
- The consensus target price of ₹ 158/- implies a PE multiple of 21x on FY24E EPS of ₹ 7.6/-.
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