Have been studying ALL and posting some thoughts.
ALL and the M&HCV Market:
Ashok Leyland had about 25% market share during the previous downcycle in FY13, FY14. Over the past few years, the company has strengthened its position a lot by focussing on increasing distribution network and offering premium-ish products. Now, their market share hovers around 33%-34%.
The company is a very stronger player in South India but weaker in Northern and Eastern markets. Increasing their distribution in those markets helped increase their market share, however still not as good as they are at South. So the company may not benefit from any sudden growth in the market from Northern markets. This has happened in Q4FY18.
The M&HCV market is seeing lots of discounting from competitors. Though ALL is not the one driving the discounts, they are having to follow the route to some extent to stay competitive. The management is not at all happy with the discounting in the market and thinks it is not very sustainable for competitors to continuously do so. ALL believe in offering premium products, providing better service, penetrating distribution network over discounting. So they do walk away from deals where they have to provide the truck as well as leave money in the table to fleet operators. ALL’s average discounts are increasing however with time. So need to be a bit careful.
Market is observing a shift towards higher tonnage trucks. This is because of emergence of hub-and-spoke model being adopted by organisations after GST. So realisations of the company have been improving. Coming to growth rate of the market, CV industry follows the GDP growth rate of the country in the long run. If a company wants to grow faster than the GDP growth rate, then it should either increase its market share or increase its revenue share from exports.
Trucks will be the last ones to be affected by EV. However, intracity buses might be one of the first ones. ALL is already in the game here by trying out three variants like - Fast Charge, Swap, and Flash. Their swappable battery EV buses have been receiving some good attention from media.
From the MD to the entry level executive, everybody has three metrics in the company and the variable pay (performance bonus) is connected to that. Those three are market share, profitability and working capital. So all the three need to be balanced.
Innovation:
During the BS IV transition, all the competitors went to traditional solutions like SCR or EGR, however, Ashok Leyland has come up its in-house developed solution called iEGR, which is more Indian specific solution. One can go through the below video to understand how this works.
Though some European competitors involved into cheap tactics of publicizing negatively about the product, sales of Ashok Leyland stood strong which only suggests this was a successful technology. In fact, some STUs found that the TCO for iEGR vehicles is much lower and insisted on buying those.
The company is now working on modularizing its manufacturing process. They expect this to reduce the costs of the company. Coming from software engineering background, I’m a big fan of modular programming and comes with lots of benefits like easier plugging / unplugging of systems, localization of implementation and easier learning for new engineers. I’m not sure how much of the same benefits exist in truck manufacturing too but management says it will reduce their cost and is excited about it.
Another quick example I can think of is Ashok Leyland Sunshine school bus which has lots of safety features.
ALL is the only CV company to have achieved two Deming awards, which is like a pinnacle of quality.
Revenue Mix:
Have taken statements from management through various conference calls.
So these are only my estimates. So please take with pinch of salt.
Domestic M&HCV Trucks => 65-70%
Domestic Buses => 6-7%
LCV => <10%
Exports => 8%
Defense => 6-7%
Some other statements which I heard from conf calls are: For trucks are 20% of demand is from tippers; 40-45% of demand is from construction; Tippers + ICV account for 40%; Scooter carriers, car carriers account for 10%.
LCV Business:
LCV business was launched in the beginning of this decade and is a successful turnaround for the company. Dost, which is their flagship product for LCV, is super successful. They are not present in all ranges possible in LCV at the moment. The company plans to come up with lots of LCV products to fill the gaps in its product portfolio after BS VI transition. Current product portfolio addresses only 40% to 45% of the market.
LCV business operating margins are higher than the M&HCV business. So once this achieves scale, this should be margin accretive to the company. LCV business is far less cyclical compared to M&HCV and hence should also help de-volatize the company’s performance.
Other businesses:
ALL also sells gensets and spare parts along with commercial vehicles. However, I’m not too excited about these as their contribution to total revenues is low. On the gensets part, there has been no volume growth as they used to sell 15000 to 20000 gensets per year 10 years back and still at the same level now. Gensets contribute about 2.5% and Spare parts contribute about 6-7% to total revenues.
ALL also has a subsidiary called Hinduja Leyland Finance Limited (HLFL). This is an NBFC companies whose loan book primarily consists of loans given to M&HCV customers. 50% of their loan book is of M&HCV sales. Remaining comprises of 2W, 4W loans. And to some extent, even housing loans. Revenues are increasing strong from 814 crores in FY15 to 2560 crores in FY19. And profits have risen from 111 crores in FY15 to 275 crores in FY19.
Other subsidiaries which the company has are Optare and Albonair.
Optare is on the verge of turning around according to the management. However I see that its sales haven’t been rising much over the years and is continuously posting losses across the years. However, the losses (80 crores) are small enough to make it ignore it for now.
Albonair works on developing SCR systems which are to be used in Euro 4, 5 and 6 norms. The numbers of this company are too small to worry about (Revenues < 20 crores) for the size of the company. So didn’t dig too much.
How is ALL paning out in the current slowdown?
I’m focussing more on M&HCV sales as they form the major part of the company. LCV business just started getting momentum and is yet to take off fully. If you look at the monthly sales data below, you can see that the sales were down by 7% in Q4FY19 and 16% in Q1FY20.
However, this needs to be looked at with perspective that Q1FY19 has shown an exceptional growth last year. Below table would help you with that. Q1FY18 to Q1FY20 CAGR gives me CAGR of 9%. So I’m not really disappointed with Q1’s performance.
| M&HCV (Dom+Exp) | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | |
|---|---|---|---|---|---|---|---|---|
| April | 8918 | 8968 | 6549 | 7873 | 6549 | 4523 | 5251 | |
| May | 8635 | 10421 | 6139 | 7469 | 6888 | 4884 | 4932 | |
| June | 8427 | 11257 | 9202 | 8685 | 8016 | 5501 | 4717 | |
| July | 10996 | 9026 | 8182 | 8835 | 5750 | 6266 | ||
| August | 13158 | 10567 | 8201 | 8903 | 5832 | 4939 | ||
| September | 14232 | 11804 | 8958 | 12146 | 6625 | 4715 | ||
| October | 9797 | 9140 | 9575 | 7176 | 5865 | 4093 | ||
| November | 8718 | 10638 | 6928 | 6297 | 5204 | 2715 | ||
| December | 11295 | 15948 | 8782 | 9703 | 7210 | 3890 | ||
| January | 13663 | 13643 | 12056 | 11208 | 8009 | 5530 | ||
| February | 12621 | 13726 | 11329 | 10801 | 8230 | 5576 | ||
| March | 15235 | 17057 | 15277 | 13240 | 10027 | 7718 | ||
| Total | 140361 | 133439 | 113315 | 109762 | 77660 | 60342 |
The company is attributing the slowdown to the NBFC crisis as the whole industry depends on financing. Speaking of monthly sales, you can clearly see that the industry is seasonal and sees much higher sales in Q3 and Q4.
What’s coming next?
With the company achieving its vision of Global Top 10 players in M&HCV trucks and Top 5 in buses, its next goal is to be among Top 10 in CVs. Listed out some points which would help the company grow in coming years.
- BS-VI prebuy: Fleet operators are well aware of technicalities like BS-IV, BS-VI unlike car owners. So CV industry expects pre-buying during BS-VI transition. This should help pick up sales from Q2 and Q3. Pre-buy happens as vehicles cost increase after BS-VI introduction.
- Modular Platform: Modular Platform should help the company increase its product portfolio and also help manage its costs effectively.
- Scrappage Policy: After the BS VI, govt is expected to introduce scrappage policy which will help replace lots of trucks older than 20 years. Industry estimates there would be at least 3 lakh such trucks. So even if 20% such trucks are replaced, that would give additional 60000 sales. Current M&HCV industry size is close to 4 lakhs. If scrappage policy would be at 15 years, then the number of vehicles to be scrapped is even higher at 6 to 7 lakhs.
- Broader portfolio with LHD Variants + Fleshed LCV Portfolio: LHD variants will help penetrate export markets. BS VI would give entry into lot more export markets to whole auto industry. Booming LCV business to get more momentum with new products.
Current capacity of the company is at 200,000 to 220,000 for M&HCVs, with a bit of de-bottlenecking required, which will help the company grow without significant capex. Capacity fo LCVs is about 75,000. This might need to be pushed ahead given the rate at which their sales are growing.
The company suggested that CVs in the next decade might start making money in solutions mode than product mode. Will have to see what kind of interesting business models will emerge. I think this will be lead by EV penetration (mainly in buses segment).
Efficiency metrics:
20%+ consolidated ROCE during the good times, however <10% during bad times like in FY14.
However, standalone ROCE is much higher at ~30%.
Working capital is very strong. Continuously decreasing and almost close to 0.
| Working Capital | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Inventory Days | 33.55304742 | 26.77011275 | 41.79745666 | 31.20781239 | 36.81676448 | 48.67171966 | 55.17158294 | 62.89675753 | 72.419528 | 81.74229069 | |
| Receivable Days | 29.76065044 | 14.25395193 | 15.59487411 | 23.72456707 | 31.81812809 | 43.53479239 | 41.30290568 | 34.70375815 | 38.85755609 | 50.99719713 | |
| Payable Days | 56.72462033 | 61.53442669 | 51.06190878 | 43.85092324 | 72.43599437 | 81.7192023 | 72.3207859 | 72.49335325 | 99.59998184 | 129.3347665 |
Valuation:
P/E ratio of 11. Historically it was trading at 10-20 during the good times.
However dividend yield is high at 4%
Concerns:
- High debt of 15000 crores and low interest coverage ratio of 3 as per consolidated statements. I think this is due to their finance subsidiary (HLFL) which inflates their debt / interest numbers. They were planning to launch HLFL IPO and separate it out but couldn’t due to NBFC crisis breakout as they wouldn’t get the right valuations. Debt and interest coverage ratio look much better in the standalone statements.
- Every Annual Report starts with a letter from the chairman talking about the achievements. However, it was skipped in FY14 which was the worst year for ALL over the past decade. Also in the same FY14 AR, the consolidated financial statements didn’t include FY13 numbers avoiding comparison.
- Exit of Vinod Dasari to Royal Enfield. This man has played a super important role in the company over the past decade. Search for new CEO is still going on.
- Company is trying hard to increase their exports to 25% of revenues but has consistently failed to do so. Bright side is that they acknowledge that they didn’t achieve it and are now going to introduce LHD variants to penetrate more markets and are going to come with lots of LCV products post BS VI transition.
- Other expenses like “Power and Fuel”, “Service and Product Warranties”, “Packing and forwarding charges”, “Selling and administration charges” are increasing at faster rate than sales.
- GDP slowdown of the country. If this is a structural slowdown, CV industry would be badly impacted. However, if this is a temporary one, this is a good buying opportunity.
Further Research Ideas:
Gather construction and mining data from an official source and correlate it with ALL sales to check if we can get any interesting insights / lead indicators. If anyone knows any source, request you to share. I can dig if we can get interesting conclusions.
Discl: No holdings. However, find the current opportunity interesting. Please do your own research before investing.