As dream run for CVs slows down, Ashok Leyland may see lower volumes

Brokers are revising down volume growth estimates for FY12, even though the truck maker expects to grow by 18%

More than a year ago, analysts had predicted that commercial vehicles (CV) sales would recover, based on an upturn in industrial production. Now, there seems to be a consensus on the street that the dream run is probably over for commercial vehicle manufacturers. It is possible that the conditions that led to their recovery no longer exist and that the sector is likely to face headwinds.

At an analysts' meet yesterday, Ashok Leyland maintained a volume guidance of 95,000 units in FY11 (domestic 85,000 units, exports 10,000 units) which it expects to increase by 18% in FY12. However, many analysts have started revising volume estimates downwards. They expect a growth rate of anywhere between 4% and 15%, compared to the company's guidance of 18%. The main obstacles to growth next year would be higher interest rates, slower growth in industrial production and deteriorating profitability for truck operators.

Click here to view table

Ashok Leyland has already started facing enormous margins pressure. Despite 47% higher volumes and a 12% overall increase in prices this financial year, its EBITDA margins have been flat. The company has 9,500 units of inventory.

One silver lining is its production ramp-up at the Pantnagar plant, in Uttarakhand. It will produce 9,000 units from Pantnagar in the March quarter against a total 6,000 units produced there between April and December. It will probably save Rs35,000 per vehicle in excise duty because of the relocation and this should aid margins. Ashok Leyland has given a guidance of a Rs50,000 per unit saving in excise duty in FY12 as localisation of components increases. It also believes that its working capital requirements will come down by Rs400 crore in Q4FY11 with outstanding payments arriving from state transport companies.

Ashok Leyland's Q3 results were disappointing overall, because of higher interest costs due to a large increase in working capital due to STU dues and finished goods inventory, higher staff costs due to bonus payment for a prior period and higher other expenditure because of fixed costs from the Pantnagar plant.

Independent brokerage CLSA says that its discussions with CV financiers indicate that the growth momentum in truck sales is softening. "Rising interest rates, multiple product price hikes and rising risk-to-freight growth from slowing capex and mining output increase makes us believe that FY12 will be a weak year for trucks, post the strong 34% CAGR over FY09-11. We now build in 0% growth in truck sales for Ashok Leyland in FY12 (Ashok Leyland expects +18% growth). Ashok Leyland is however seeing much better growth in buses and exports and we now build in higher volumes here resulting in total FY12 volumes rising 4% y-o-y."

Ashok Leyland's Q3 volumes were up 14% y-o-y led by stronger exports, but truck volumes grew just 2%. Bus volumes also grew a modest 2%. Its market share for trucks declined from 25% in Q2 to just 16% in Q3, but the market share in buses improved from 42% to 50%.

Click here to view table

Click here to view graph

However, the brokerage does not think that there will be a drastic commercial vehicle slowdown and, therefore, it feels that the sharp correction in Ashok Leyland's share price will reverse. It finds valuations attractive. "We believe that the market is fearing a 10-20% de-growth in CVs in FY12, which we believe is unlikely, since the classic pre-downcycle 'red flags' - rising delinquencies with financiers, falling freight rates-are absent now. We expect a more benign moderation in CV growth and view the 24% stock price correction since November 10 as excessive, especially given improving growth in buses and exports and benefits from the Pantnagar plant around the corner."

Click here to view graph

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)


RBI’s rate hike will help contain inflation: Pranab

New Delhi: Finance minister Pranab Mukherjee today said the Reserve Bank of India's (RBI) decision to hike short-term borrowing and lending rates will help contain inflation and was in line with the government's policy, reports PTI.

Welcoming the RBI decision to increase the repo and reverse repo rates (short-term borrowing and lending rates) by 25 basis points each, Mr Mukherjee said it was aimed at giving "a strong signal to tackle inflationary pressures".

"RBI has taken a decision very correctly to increase the repo rate and reverse repo rate," he added.

The RBI also revised inflation target to 7% by March-end, from 5.5% projected previously.

The central bank retained the economic growth forecast at 8.5% for the current fiscal with potential for an upward bias.

The RBI measures also include extending additional liquidity support facility till 8 April 2011.

"Therefore the RBI policy announcement is in conformity with the thinking and policy of the government," the finance minister said.

Mr Mukherjee said the government has formulated a five pronged strategy comprising joining the global crusade against 'black money'; creating an appropriate legislative framework; setting up institutions for dealing with illicit funds; developing systems for implementation; and imparting skills to the manpower for effective action.

The finance minister said there were no reliable estimates of black money both inside and outside the country.

The interim recommendations of BJP Task Force 2009 have estimated the amount of black money to be between $500 billion to $1,400 billion, he said.

A recent study by Global Financial Integrity has estimated the present value of illicit money outflow to be $462 billion, he said.

"All these estimates are based on various unverifiable assumptions and approximations. Government has been seized of the matter and has constituted a multidisciplinary committee to get studies conducted to estimate the quantum of illicit fund generated by Indian citizens," Mr Mukherjee said.

On whether the government would come out with an amnesty scheme to bring back unaccounted money abroad, he said a group has been constituted to look into such possibility.

He said India has also initiated process of negotiation with 65 countries to broaden the scope of article concerning Exchange of Information to specifically allow for exchange of banking information and information regarding taxpayers not covered by the Double Taxation Avoidance Agreement (DTAA).

"Thirteen new DTAAs have also been finalised where the Exchange of Information Article is in line with the international standards," the minister said.

He said the government was strengthening the administrative machinery by setting up eight more income tax overseas units.

Two such units are operational in Singapore and Mauritius, Mr Mukherjee said.

Government is also setting up an Exchange of Information (EoI) cell, which will help in effective exchange of information to curb tax evasion, he said.

"We have detected undisclosed income of about Rs15,000 crore in last 18 months, due to focused search operations by the Income Tax department," he said adding that during the same period, Directorate of International Taxation has collected taxes of Rs34,601 crore.

"The Directorate of Transfer Pricing has detected mispricing of Rs33,784 crore, which has prevented shifting of an equivalent amount of money outside India," he said.

Information regarding details of payments received by Indian citizens in several countries has started also coming from treaty partners. This information is in different stages of processing and investigation, Mr Mukherjee said.

The finance minister said necessary provisions have been made in the proposed Direct Tax Code (DTC) to create legislative framework to check illicit outflows of funds.

India's membership in Financial Action Task Force in June last year was in recognition of the strength of the country's anti-money laundering and anti-tax evasion measures.

India has also joined the Task Force on Financial Integrity and Economic Development in order to bring greater transparency and accountability in the financial system.

In June 2009, the Prevention of Money Laundering Act (PMLA) has been amended whereby the predicate offences listed in the Schedule to the Act were substantially increased in terms of the Acts covered and sections covered under such Acts, Mr Mukherjee said.

He said this amendment has tremendously widened the scope of money laundering investigations by the directorate.

Mr Mukherjee said the early results of the government's initiatives were encouraging.

"These proactive steps led to additional collection of taxes of Rs34,601 crore and detection of additional income of Rs48,784 crore on which taxes are being collected. I am confident that the results will be quite satisfactory in the days to come," Mr Mukherjee said.


RBI hikes key rates by 0.25%, retains GDP forecast at 8.5%

New Delhi: Home, auto and loans to corporate may become costlier as the Reserve Bank of India (RBI) today hiked short-term lending and borrowing rates by 0.25% each, though bankers felt there may not be an immediate increase in interest rates, reports PTI.

These initiatives (hike in rates) are aimed at checking price rise while retaining the growth momentum, RBI said while raising the year-end inflation projection to 7% and retaining the economic growth forecast for the fiscal at 8.5%.

The short-term lending (repo) rate has been increased to 6.5% while the borrowing (reverse repo) rate has gone up to 5.5%. The RBI also extended the additional liquidity support facility to banks till 8 April 2011.
It has retained the cash reserve ratio (CRR)-a portion of deposits that banks are required to maintain in cash with the RBI-at 6% to ensure that the system had enough liquidity to meet loan requirements.

"The policy rate hikes will not result in immediate increase in lending and borrowing rates of banks as this has already been factored in by the market given high inflationary pressures," Oriental Bank of Commerce executive director SC Sinha told PTI.

He, however, added that banks may have to increase the rates in case the credit off-take goes up.

The RBI will constantly monitor the credit growth and, if necessary, will take necessary steps, according to third quarter monetary policy review announced today.

The central bank projected an economic growth of 8.5% with an upside bias. It also warned that inflation is a matter of concern and revised its projection for FY 2011 to 7% from 5.5% earlier.

The RBI in 2010 raised the key policy rates six times to contain inflation which shot up to 8.43% in December on high prices of food items, from 7.48% in November.

While the food inflation for the week ended 8th January stood at 15.52%, it had soared to 18.32% in the end of December on high prices of vegetables, including onion.

The policy measures, the RBI said, will "rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases."

It, however, asserted that the monetary action was aimed at taming rising inflationary expectations, while at the same time being moderate enough not to disrupt growth.

It also aims to contain the spill-over from rising food and fuel prices to generalised inflation and continue to provide comfort to banks' liquidity management operations, RBI said.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)