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.

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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%.

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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."

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(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.)