Ashok Leyland Share Potential in the Indian Auto Industry: A Detailed Exploration

In recent years, the Indian auto industry has faced significant challenges, and this article aims to provide an in-depth analysis of the prospects for Ashok Leyland's shares. This examination will cover the company's standing, current challenges, and future outlook, highlighting why the shares may or may not be a compelling investment option.

Overview of Ashok Leyland

Ashok Leyland, a subsidiary of the Hinduja Group, is a leading player in the commercial vehicle (CV) market in India. It has the distinction of being the second-largest manufacturer of commercial vehicles in India, the third-largest manufacturer of buses worldwide, and the tenth-largest manufacturer of trucks. Ashok Leyland's product lineup is divided into two main segments: Medium and Heavy Commercial Vehicles (MH CV) and Light Commercial Vehicles (LCV).

Current Challenges and Economic Slowdown

Ashok Leyland's performance has been significantly impacted by India's economic downturn, partly due to domestic factors such as the NBFC crisis and a drop in discretionary consumption. The country's GDP growth slowed down to 6.8% for FY19, with a quarterly GDP growth rate touching a six-year low of 4.5% in September FY19. Approximately 94% of Ashok Leyland's units are sold in the domestic market, making it highly susceptible to economic slumps.

Key Factors Contributing to the Slowdown

Demonetization and GST Implementation: The demonetization in 2016 and the implementation of 28% GST on autos in 2017 dealt a severe blow to the sector. New Axle Load Norms: The government's introduction of new axle load norms in July 2018 increased the load-carrying capacity of existing trucks, reducing the demand for new trucks. Liquidity Crisis: The ILFS/NBFC crisis in September 2018 led to a shortage of finance for fleet operators and their customers, resulting in decreased demand. BS VI Emission Norms: Manufacturers had to align with the new BS VI emission norms and clear out non-compliant vehicles before April 2020. Low Freight Demand: Multi-year lows in freight demand have led to reduced capacity utilization or increased unused capacity. Increased Cost of Ownership: Hikes in insurance, road taxes, and toll charges, along with the implementation of the E-way bill and increased compliance costs due to GST, have made the operating environment for fleets unviable.

The Cyclicality Factor

The cyclicality of MH CV business, which accounts for approximately 70% of Ashok Leyland’s topline, is closely tied to the Industrial Production Index (IIP), which is a key indicator of industrial activity. This correlation is evident in the chart below, which shows that the domestic MH CV industry demand fell by a whopping 40% YoY in February 2020.

Future Outlook

The future prospects for Ashok Leyland shares are uncertain due to the cyclical nature of the industry and ongoing challenges. The company's stock price has plummeted by 40% since October 2018, reflecting the market’s pessimism about the future prospects of the company.

The government's push for electric vehicles (EVs) and the ongoing digitalization of the economy may offer some respite. However, these factors alone may not be sufficient to reverse the current downturn.

Conclusion

Investors should exercise caution before buying Ashok Leyland shares. The current economic slowdown and the automotive sector's cyclicality are significant factors that may continue to weigh on the company's performance. While there is potential for recovery, the road ahead is likely to be bumpy. Prospective investors should conduct a thorough analysis and consider other factors such as economic policies, market trends, and company-specific strategies before making a decision.