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    Defence booster talk lifts Ashok Leyland: But can it really work?

    Synopsis

    Analysts see prospects in the stock. The stock had 9 ‘buy’, 8 ‘outperform’ and 15 ‘hold’ calls on the publicly available Reuters Eikon database on Friday. It also had 5 ‘underperform’ and 2 ‘sell’ ratings.

    stock-market-5---istockiStock
    The ALL stock traded at Rs 62 on Friday, 30 per cent below its 52-week high hit in January, down 25 per cent on a year-to-date basis.
    Mumbai: Ashok Leyland Managing Director Vipin Sondhi is sounding very bullish on the opportunity in India’s defence equipment business and his company’s bet on a modular truck platform, though the outlook for revival of the commercial vehicles segment remains weak.

    The company’s stock rallied more than 13 per cent in Thursday’s trade even after the country's second-largest commercial vehicles maker reported a 77 per cent year-on-year drop in consolidated June quarter revenue at Rs 1,486 crore. It gained another 2 per cent in morning deals on Friday.

    Analysts see prospects in the stock. The stock had 9 ‘buy’, 8 ‘outperform’ and 15 ‘hold’ calls on the publicly available Reuters Eikon database on Friday. It also had 5 ‘underperform’ and 2 ‘sell’ ratings.

    Saji John of Geojit Financial Services said the historically low valuations have made the stock an attractive bet, and a small positive trigger can lead to a strong upside. He has a ‘buy’ rating.

    Jefferies, too, has maintained a ‘buy’ rating, with a price target of Rs 75. It said the Indian truck industry has been in a deep downturn since November 2018 with volumes falling 47 per cent year-on-year (YoY) in FY20 and a further 93 per cent YoY in 1QFY21.

    Valuations at multi-year lows
    The ALL stock traded at Rs 62 on Friday, 30 per cent below its 52-week high hit in January, down 25 per cent on a year-to-date basis, 41 per cent for three years and 31 per cent for five. The multi-year low valuations coupled with hopes of recovery in the commercial vehicles (CV) segment were together making it a juicy bet, analysts said.

    “The decline in the stock was clearly overdone. If you want to play on commercial vehicle recovery, this is the best pick. I believe the CV segment is in for a turnaround,” said Ambareesh Baliga, an independent analyst.

    “Talking from a longer-term perspective, the stock may be in for a direction change if we see a sharp recovery in monthly sales numbers,” says Baliga.

    “I was one of the few who stuck my neck out on the stock when it traded at Rs 45. I said Ashok Leyland is a steel and there was consensus negativity. The stock is up 35 per cent from there on and I think the numbers are belying those consensus estimates,” said Sanjiv Bhasin, Director, IIFL Securities.

    Bhasin says Ashok Leyland will be an outperforming auto stock in the six months. He expects an imminent turn in the CV and MCV cycle.

    Is the defence opportunity big?
    The Hinduja group company says it sees a large opportunity in the defence space as the government seeks to cut imports and focus on increasing local sourcing of defence equipment.

    Ashok Leyland is one of the largest providers of logistic vehicles to the Indian armed forces. In an analyst call on Thursday, the company laid out a blueprint to tap the opportunities in the defence business.

    That helped investors overlook the Rs 389 crore loss posted for June quarter, which was by and large on lines of analyst estimates.

    The defence business currently contributes only 5 per cent of total revenues, and some analysts believe this share may go up if the company can manage to procure substantial orders going ahead.

    But others remain skeptical. “On the defence side, it is only a 5 per cent exposure currently. When we spoke to the management, they said they may see a lot more orders, pushing up this share. However, things are still on paper and yet to translate,” said John of Geojit.

    Baliga feels the change in thrust to defence will not move the needle much for Ashok Leyland, although it is sentimentally positive. He says trucks and transportation vehicles used in the defence sector were mostly procured indigenously anyway.

    Is a CV recovery near?
    The company says it expects an early recovery in the commercial vehicles business and unveiled plans to cut debt. June quarter sales declined to one-10th due to weak Covid-19 disruptions and other macro-economic factors.

    Brokerage Jefferies estimates ALL’s truck volumes to decline 30 per cent YoY in FY21, and then grow 80 per cent/25 per cent YoY in FY22-23. The FY23 volume estimates were still 17 per cent below the FY19 peak.

    The brokerage says Ashok Leyland’s plan to launch a new LCV platform in September quarter should provide some booster.

    Saji John of Geojit Financial says the LCV (light commercial vehicle) segment is seeing some kind of recovery for the company in recent times on the back of new advanced models and rising rural participation, but the MCV (medium commercial vehicle) segment has a lot of headwinds.

    “The CV sector is still expected to be on the weaker side for the second year, unless the scrappage policy kicks in,” he said.

    Jefferies’ analysts said while the near-term demand visibility is weak, the pendulum has swung too far and the deep cyclical nature of the industry will play out over next 1-2 years. “We expect a strong rebound in FY22-23 on an exceptionally low base,” they said.

    Other analysts say the CV and MCV (medium commercial vehicle) cycle may turn soon, and that would make a strong case for the stock.

    Waiting for scrappage policy
    A lot depends on the much-awaited scrappage policy that India is planning to bring in. The government is seeking a commitment from the automobile companies about their incentive to buyers.

    Even the naysayers believe the much-awaited scrappage policy, if it materialises, it can help the CV sector.

    ICICIdirect says the revival pace is dependent on pick-up in the broader economy and some policy intervention (scrappage policy). “For Ashok Leyland, the demand picture stays muted, although we may be close to a trough of the cycle,” analysts at the brokerage wrote in a note on Thursday. It has a ‘hold’ rating on the stock.

    Debt reduction
    The company is also expecting the debt level to come down sharply this financial year. At the end of June, net debt stood at Rs 4,247 crore. Inter corporate deposit, which has turned investors skittish, has started to come down to Rs 400 crore in August from Rs 500 crore in March.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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