ndia-headquartered Ashok Leyland, part of the Hinduja Group and the third largest commercial vehicle manufacturer worldwide, is eyeing the Egyptian automotive market through a joint venture with the state-owned El-Nasr Automotive Manufacturing Company (NASR), a press statement by the Ministry of Public Enterprise Sector said.
An official delegation from Ashok Leyland led by its President of International Operations Amandeep Singh met the Egyptian Minister of Public Enterprise Sector Mahmoud Esmat to discuss partnering with NASR to manufacture electric commercial vehicles in the country.
Other participants in the meeting included Mohamed El-Saadawy, Chairman of the Holding Company for Metallurgical Industries, Khaled Shedid, President of NASR and Wafa Tofelis, Managing Director for Mass Transport Vehicles Industry.
The statement said Egypt is focussing on localising the electric vehicle industry, including electric CVs and promoting their use in public and private mass transport.
It quoted the Minister as saying that Egypt has a local market capable of absorbing the production and regional trade agreements that support exports in line with the Indian company’s goal of establishing an integrated production centre for electric vehicles in Egypt for local and African markets.
Ashok Leyland’s chairman expressed interest in a JV with NASR, adding that Indian banks could be a source of financing for the project.
The statement said Egyptian officials also presented their plan for developing and rehabilitating NASR’s existing facilities. At the same time, the Ashok Leyland delegation undertook a plant visit to see the company’s existing production and service facilities.
Ashok Leyland is present in 50 countries through 10 factories, including an assembly facility in the UAE.
TataMotors Q3FY24 commentary on CV Revenue being up by 21% despite Qty sales rising only 1.1%; similarly just going by monthly sales figures, Ashok Leyland Qty sold is expected to drop by around 0.64% but would be interesting to see if the Revenue and Profits can rise and hence the stock price.
Btw from a longer term perspective if i view from P/B multiple, Ashok Leyland is only slightly expensive at 5.8 with 10 yr average at 4.8… Specially given the market currently.
Disclosure: holding but wary of the cyclical nature of CV
I wrote a DETAILED article talking about the business of Ashok Leyland - here
Pros
Infrastructure boom – GoI is spending BIG on infrastructural development and that will benefit AL + other CV players. A substantial amount has been earmarked for Capex in the Union Budget (around 10L CRORE) + the Government wants to convert 8 LAKH diesel buses into e-buses over the next 6 years.
An astute management – AL is part of Hinduja Group which is a high pedigree conglomerate. On the earnings call, the management was very clear about it’s intent – it will NOT sacrifice profits / margins to gain market share but focus on the quality of the product instead. Over the last 10 years, AL has transformed itself from being a south centric player to a pan-India player with strong market share in most regions that it operates in.
High barriers to entry – CV market is not easy to enter. It requires a lot of capital, and it takes a long time to achieve break-even, so you need deep pockets. No major entrants are expected in the short term.
Future Growth drivers for AL: M&HCV Business – the management believes that the industry is moving towards higher tonnage tractor trailers which has a higher selling price + higher margins. Globally, the penetration of high tonnage tractor trailers is quite heavy and in India it is only 20%. With goods roads that should increase and bode well for AL going forward and should help it expand margins. LCV Business – LCV business has higher margins compared to M&HCV. Is less cyclical. And the current product portfolio addresses only 40-45% of the market, which means there is more room to grow and more variants that AL can launch in the future. Investing in new technologies – AL is investing in EVs (through it’s step down subsidiary Switch Mobility), and in hydrogen fuel cells, hydrogen ICEs. In EVs, via Switch Mobility – it recently unveiled it’s e-LCVs which already has a pre-booking of 13,000 units. In e-buses, it has an order book of 1300+ e-buses. AL is also getting ready to launch electric trucks very soon.
Cons
Cyclical industry – the growth in CVs is a factor of the growth in the economy, Any slowdown in the economy would adversely effect this industry and it is quite cyclical.
High competition - even though the barriers of entry are quite high, existing players are quite BIG and very competitive. Tata Motors is the largest CV player in India.
Commodity prices – the business is heavily dependent on commodity prices, especially steel. Although AL has been able to pass on increase in commodity prices to end customers, in a highly competitive scenario this might not always be possible
High Debt – There is a significant debt on the books of AL, primarily because of the financing subsidiary (HLFL). However, investors should keep tabs on this # to ensure it doesn’t balloon out of control.
No FY25 guidance – in the Q3 earnings call, no forecast was given by the management on estimated deliveries / revenue #s for FY25.
Promoter Pledging – the promoters are pledged some of the shareholding, which is a red flag in case the stock price start to drop drastically
Conclusion
I think AL is being valued as a traditional CV company and the future potential in the e-bus / e-LCV / e-Truck segment is not being baked in. That said, it has to prove itself that it can capture a significant portion of the EV market to be able to command a premium valuation.
Disclosure: Not invested, tracking closely - waiting for a 10-15% correction to make a BUY decision.
