Ashok Leyland - A major CV player

PareshPatel · October 22, 2019, 10:32am

CV growth will take own time, Two major factors affected growth of CV along with Slowdown in the economy.

Axle loading norms - 20%+ (M&HCV having range of 25%) increase in loading capacity allowing truckers to ship more on their existing trucks. (Load carrying capacity improvement)
E-way Bill - Because of smooth process truckers witness 15% savings in time, allowing truckers to cover more KM in same day. (Turn around time improvement)

Combining above factors you have underutilized capacity in the system anywhere between 30%-40% as on date. (Over capacity)

Adding the impact of slowdown, this resulted around having 45-50% idle capacity (considering 10% impact of slowdown).

Adding further, NBFC plays significant role in CV financing, because of tight liquidity in the NBFC space, truckers are not getting loans approval like a past.

In general, demand will be a less at least for the near term unless we see huge infrastructure or mining activities starts in near term, except replacement demand probability of any revival in near terms are very low.

Disc : No Position.
(Inputs collected from two Gujarat based dealership and based on my past experience in CV mfg.industry)

Scorpio24 · October 22, 2019, 11:51am

Thanks Paresh, insightful indeed. Your point on CV financing is very critical, as NBFC crisis will take time to be sorted out.
As they say great new and great prices don’t come together, I initial look says, all the above is already in the price of the stock. Please remember, Ashok Leyland also has a stake in NBFC subsidiary.

All the above point mentioned by you will be from a 4-5 quarter view point, but if a investor have 3-4 year view, is this worth analyzing and start accumulating at this stage is the question. To arrive at this, we need to know what is the sales potential of CV 3-4 years from now.

lingalarahul7 · December 14, 2019, 1:41pm

Conf Call Q1FY20 Notes:

The total industry volume actualy went down by 17% to 74371 and I’m reading all SIAM numbers here. This was, in a way, while the number has degrown, we must also remember that there was a base effect of last year where the industry had grown quite significantly. But having said that, I would not want to kind of dilute it by stating that, that is the reason, but generally we are seeing that the demand has been challenging in the first quarter.
As far as ALL is concerned, we have gained market share. So on SIAM basis, if we were to look at it, our market share has grown from 30% to 34.1%.
Despite 9% and nearly 10% reduction in revenues, our EBITDA margin was at 9.4% as opposed to the same period when it was 10.7%. So we have been able to withhold the EBITDA margin because of the operating cost reduction that we started.
In domestic truck, we have sold 21095 units as opposed to 22629. So there was about a 7% reduction. And as far as bus was concerned, we were very much flattish. We had 4238 numbers invoiced as opposed to 4217, a very marginal growth. So overall, on the domestic truck and bus side, we were lower by about 6% as opposed to an industry volume degrowth of about 17%, which is why we have seen market share grow.
What I want to also share with you is that the composition of exports has been a challenge. Let me also share with you that our export numbers are only 1386 numbers as opposed to 3800. We have seen the export numbers coming down.
What I see at the moment on exports is that while exports is very, very important, I think we possibly will see traction in the second half because we have a Senegal bus order to be done. There is also Ivory Coast order to be done.
What we are focusing now as a strategy is to ensure that we are getting more and more traction on the project orders because at the retail level there is gentle dampening that has happened in the traditional market, especially if you take UAE and Sri Lanka. Bangladesh is doing reasonably well. Nepal is also doing well. But other than that, we are seeing some challenges in the export market.
We are expecting the defence orders to come in, in the second half and hopefully you will see that as an add-on to the profitability as we move forward.
LCV has done well. It has grown by 12%. We have had 12671 numbers being sold as opposed to 11273 and our market share in LCV now is about 18% - 18.5%.
On the export strategy, I know that we have not been able to achieve what we set out ourselves. There have been various challenges, and to be honest with you, in the last two to three years, the domestic market has been booming so much that there was a lot of allocation that was actually happening for domestic manufacturing also. This is one part.
But more importantly, we found that we need to have a lot more products available before we start foraying out into the new markets. I think in a quarter or so, we will have all the LHDs ready, so it is important to have the LHDs, RHDs, etc, and offer the full suite and then pursue the export strategy.
There has been this recent reorganization that has happened. Mr. Dheeraj could not join because he had to travel out of country on some other important thing. He was actually planning to take the call. I think now we have kind of reorganized, which I did mention that there is a reorganization in place. So now we have one COO, Mr. Anuj Kathuria taking care of the truck and bus, manufacturing and sourcing together and then we have another COO, Mr. Nitin Seth, who is taking care of the LCV, Defence, International Operations and Power Solutions business.
So this kind of also reduces the number of direct reports. At the same tme what happens is a lot of operating decisions can be taken on the ground instead of going up for everything and it is working reasonably well, and then, of course, I’m there so, the three of us along with other senior leadership team who are able to kind of take faster decisions.
We are well on track on the 500 crores of cost that we want to take out. We will achieve that by the end of the year. Even in Q1, if we were to look at it, the administrative overheads have come out. So, there is a lot of action that is happening across the company in manufacturing, in contract outsourcing, in some of the things which are not critical for manufacturing or capacity and we are only ensuring that only vital and capability building spends are being done.
There is also uncertainty about this whole GST. What is happening is, continuously there are talks about 28% being reduced to 18%, so some of the freight operators are deferring their purchases also. They are saying that, I mean, why would I want to pay 10% more GST.
This whole business is skewed to the month-end. So when it is at the month end, the dealer inventory is high.
I think we have a case where we will possibly see that the dedicated freight corridor as well as road transport systems will continue parallely and will continue to grow. I do not see each one snapping at the other and there are a lot of logistics issues in a dedicated freight corridor also, but I do not want to push it down.
There is a transshipment that has to happen, ultimately an end customer is going to look at. The end customer industry is only going to look at two things: he is going to see his inward freight cost and his outbound freight cost when he is buying from vendor and selling to customers.
The second most important thing that he is going to see is the time of delivery, which means this is the turnaround time. I don’t believe that we have the systems and processes where the delivery is going to beat the trucks, which is going to be door-to-door almost.
LCV business margins are even better thank Ashok Leyland’s margins. The other thing is even HFL’s operation they have continuously got better and better and better. So it has helped us.
If you look at it there has been an improvement in LCV, there has been an improvement in foundries, the greater than 25 ton sales have been better, our warranty charges have been coming off a bit this quarter maybe our provisions have been a little higher, but overall, in real terms, we are actually taking warranty cost out and then we have been fixing out distribution and then the K54, the two that we call the cost reduciton has also helped.
The defence revenues were a shade lower than Rs 50 crores for the current quarter.
I’m not investing into battery technology and all that because our philosophy at the moment is that I do not want to put something where I get locked in with one particular technology because battery technologies are evolving very, very fast. So it is for us to be nimble footed and flexible.
Hinduja Leyland Finance ensures that they account for about 13% to 14% of our entire portfolio. So they give help in both strategic and FTU, FTB sales also, but we are also keeping it at an arm’s length. Not more than 50% of the portfolio can be CVs of ALL, and not more than 15% will be the share.

Conf Call Q2FY20 Notes:

Q1 posted a 17% reduction in volume, but in Q2 the volume reduction was 53%, this was completely unexpected. As a strategy since we had gained market share in Q1 we decided to focus on reducing the total inventory in the system especially that of the dealership at the cost of our market share as this was needed to ensure dealers do not have hefty interest payout.
Thus, we saw a market share reduction in Q2 in domestic trucks. As at the end of June, the total inventory in the pipe was around 27500 numbers and on September 30, 2019 it was 18200. In October we have further brought this down to 12950. We believe this is the right way to forward.
Even with steep falls in revenues at 48%, we have been able to post an EBITDA of 5.8% and a positive PAT. If we adjust the PAT for the exceptional charge of VRS, the PAT would be 84 crores.
Our market share was at 30.4% as against 35% last year and if you look at the half year level the volumes for the industry was at 122500 as against 190800 last year, it was 36% lower compared to the same period last year.
We are still at 32.6% market share which is more or less the same market share as where we were a year ago.
We have brought the capex down from what we forecasted at 2300 crores to somewhere closer to 1800 crores at the moment.
We gained market share in Q1, we ceded a bit in Q2 purely because we wanted to ensure that the retails are higher than the wholesale so that, that is the only step that will help reduce inventory at our dealerships. So that was our planned strategy.
We are looking at higher international volumes effective April onwards.
The modular programs have benefits both at the back end in the production system where we are dealing with fewer parts, so as a result the productivity would see improvement and from a customer perspective as I explained, it allows them to really choose the product as they like.
So, as a result we feel that these products would be far more attractive in terms of a proposition to the customer and they will have the ability to look at various versions depending on the level of sophistication they require on the product.
The modular business program is something that you will see benefits in the short to medium term. The basic thing like Chairman mentioned is it reduces the complexity in the manufacturing. You are going to have much, much lesser number of part, which means that you would get the benefit of aggregate purchasing, you will reduce the number of vendors.
The manufacturability itself becomes a lot simpler and at the customer end what happens is he can choose the vehicle he wants, typically on a hub application segment basis and that is why it helps because it is a differentiator and we said that we were going to take the big bite now when we are moving to BS-VI, let us dow the modular design also parallelly because otherwise to do it in two steps is a highly time-consuming and expensive process.
Next year capex should come down.
The overall discount per vehicle if you were to look at it in the current quarter was something like about nearly 5 lakhs and 5.25 lakhs per truck. These are very, very average numbers, it doesn’t mean anything, but in the same quarter last year it was about 4.2 lakhs so we have an additional 1 lakh of discounts happening.
Revenue for the quarter, for the domestic truck it is around 45%, for the buses it is around 13%. Defence spares exports are again 12% his quarter and LCVs is 13%.
See the 3, 4 things that we are counting on is like this: why we do we say that possibly the worst is behind us is because one the monsoon has been extended, the second one is the continued onslaught of negative news also seems to have beaten off a bit. The inventory levels of the industry have come down to significant lows.
So hopefully, with all of this, that if the economy were to start reviving and then there has been some measures by the govt in terms of reducing corporate tax rates and they have also been saying that they will be introducing other measures to revive the economy.
If demand does pick up then you are going to see freight transporation going up because even retail, I’m not talking about truck retails, overall sales even at consumer level including shopping malls, FMCGs, various personal products, personal care products have all come off a bit.
Now if that starts to go up logic demands that freight will have to move and if that happens then you are going to see demand going up. So that is the perspective of which we are saying that we possibly feel that the worst is behind us and things will start improving, but we will get greater clarity in the next quarter.

Another update:
Ashok Leyland has hired Vipin Sondhi as its CEO. Vipin Sondhi has had a good experience in CV/CE industry through JCB India and Tecumseh India. Market seemed to have cheered the appointment on Thursday and Friday!!

Discl: Invested. Nibbling since August from three year horizon perspective. Added some in last 30 days as well. This is not a buy / sell recommendation. Please do your own due diligence.

ramraopatil · February 4, 2020, 12:02pm

hack2abi · March 7, 2020, 5:52am

Hinduja Leyland Finance – A small History

Introduction – Hinduja Leyland Finance (HLF) is majority-owned (92.4%) by the Hinduja group entities. Through Ashok Leyland (ALL) they hold 61.8% of HLF. If one is interested in ALL it is imperative to study the status of their main subsidiary HLF. ALL’s vehicles form 36.4% of HLF’s loan book as of Q2FY20.

Within HLF there is another company as well which focuses on housing finance.

Everstone invested in HLF sometime in 2013, since then HLF tried to come with an IPO twice, once in 2016 but them DEMON happened and the company cancelled IPO plans in mid-2017. The company filed for a DRHP again in mid-2018, roadshows were started as well but after the DHFL fiasco (probably IL&FS as well) the management decided to cancel the IPO plans again due to limited interest from investors.

As usual, I will post a chart repository at the end for you to get a better view of the charts.

P&L

Chart 1 – Both topline and bottomline have witnessed decent growth over the years.

Absolute Figures

Chart 2 – Depicts branches, disbursements, loan book and net worth.

Most of the branch network is set up in the ALL showrooms, which results in easier customer acquisition.

Both disbursement and loan book has clocked decent growth supported by healthy shareholder’s equity.

Loan Book Segmentation

Chart 3 – As of Q2FY20 the loan book comprised of 11% in LAP, 77% in vehicle finance. The company used to deploy some capital in the structures assets as well which were 7% of the loan book in FY16. New commercial vehicles form 50% of the book, 2+3W form 16. As of FY19, used commercial vehicles formed 10% of the book, and construction equipment finance 11%. Semi-urban and rural geographies formed 60% of the loan book while the share of first-time buyers was 44% in FY19.

Underwriting

Chart 4 – As I have said before, growing the balance sheet and P&L is easy in the lending business, surviving is not. The company is suffering from elevated GNPA and NNPA levels. Some of the increases are attributed to the management moving from 180+ DPD recognition norm to 90+ DPD. It should be noted that the management adopted the stricter NPA recognition norms well before the deadlines mandated by the regulator.

Write-offs and credit costs are also an issue, even after repossession of the collateral. Improvement in underwriting is warranted, though I must say they are doing better than Shriram Transport Finance Corporation (STFC) in NPAs currently.

Underwriting

Chart 5 – Provision Coverage Ratios are rising which is a must, a new metric here, NNPA/Net Worth is worrisome though declining. If all of the NNPAs are written off we would wipe out a substantial part of the company’s net worth.

Segmented GNPA

Chart 6 – Segmented GNPA %. LAP book has not been seasoned and thus witnessing lower GNPA. Vehicle portfolio is the main cause of the elevated consolidated GNPA.

Efficiency Metrics

Chart 7 – Company is maintaining healthy Capital Adequacy, NIMs have reduced over the years. I do not have the data but it is due to either higher cost of funds or lower book yield. ROA and ROE have declined somewhat due to higher credit costs. OPEX is in check.

Leverage

Chart 8 – Company has increased leverage over the years but has maintained it around 7.5x.

Capital Sources

Chart 9 – A majority of the capital is sourced from banks, quite a substantial amount is sold down as well.

Peer Analysis

Loan Book Peer

Chart 10 – In terms of scale STFC is biggest here followed by Chola.

Chola LBS

Chart 11 – Chola’s loan book is dominated by vehicle financing which forms 70+% of the book while the rest is home loans.

STFC LBS

Chart 12 – STFC’s loan book is also dominated by vehicle finance however we have more segmented data available. Heavy CVs form 45% of the book, Medium and Light CVs form another 23% and passenger vehicles form another 22%. They also do a bit of tractor finance, business and working capital loans.

Disbursements Peer

Chart 13 – In terms of disbursement Chola is almost 2x of HLF.

GNPA Peer

chart 14 – This is where the underwriting practices of the different managements are tested, STFC clearly has some issues, especially on such a large seasoned book. HLF, while it is doing better than STFC, also has elevated GNPAs especially on a book that is the smallest of the lot. Chola is the star here with contained GNPAs on large book size.

NNPA Peer

Chart 15 – Again similar story continues as above, CV financing is not bulletproof even though it is secured, it is affected by the cyclicality in the logistics business. The management of one of the companies in a recent conference call did say that our NPAs move with the cycle, in tough times the borrower’s cash flow is stressed but the cycles do not last for long and once business picks up the borrowers get current with the payments.

PCR Peer

Chart 16 – The provisions coverage ratio of all the company’s is in sub-40 range. This is probably due to the secured nature of lending and lower LTVs. However, it would not hurt anyone to see some higher PCR and reduce those NNPAs further. It will reflect a truer P&L.

NIMs Peer

Chart 17 – NIMs used to highest for Chola in the past however they are at par now with STFC. HLF’s lower NIMs means either they are having trouble sourcing cheaper funding or they have to price their loans lower to compete with the biggies. I would have loved to compare the cost of funds and book yields of these companies but I do not have that data yet.

ROA Peer

Chart 18 – In terms of ROA, HLF has a lot of catching up to do, while Chola and STFC were neck-to-neck in FY19.

ROE Peer

Chart 19 – Chola is the winner here with superior ROEs.

Equity Peer

Chart 20 – STFC is a behemoth in terms of the net worth it has collected over the years.

PAT Peer

Chart 21 – The size of the loan book directly affects the profits of the company.

Branches Peer

Chart 22 – This is an amazing chart to cap off the analysis. Chola is giving some stiff competition with the least amount of branches. While HLF has expanded its branch network well before its loan book is grown.

It would have been fun to see more comparisons in terms of business per branch or employees but pairing the superior ROEs of Chola with its smallest branch network shows that it is indeed the most efficient player with superior underwriting skills. However, it too is not immune to the business cycles of the industry it lends to.

Sources:

Annual Reports
Credit Rating Reports
Investor Presentations

Chart Repository:

https://drive.google.com/open?id=14G2q9Eo771rw7EpfRWUCefuHs1IBAPru

sarthakkumar19_ · March 20, 2020, 4:45am

Hello,

Can someone @lingalarahul7 explain why picking up stake in ALFL is such a huge negative. What are the apprehensions the market has.

Thanks

grovmo · March 20, 2020, 5:53pm

Apparently this would put stress on the already highly leveraged balance sheet.

Please have a read - https://economictimes.indiatimes.com/markets/stocks/recos/buy-ashok-leyland-target-price-rs-72-motilal-osswal/articleshow/74724593.cms. And there a few other articles as well.

suryaprakashv73 · March 20, 2020, 6:14pm

the company has debt of around 1700 crores , with D/E of 11%. with new purchase, i assume that it will jump to 3400 crores , with D/E of around 23% . is that correct?
There was a conference call two days back. is it possible to get the transcripts from somewhere?

grovmo · March 20, 2020, 6:21pm

Per screener, the Debt to equity is already 2.19 and would jump even further. Bit worried as invested at higher levels, anyone closely tracking the company if could please share their thoughts and outlook on the company here would be greatly appreciated

suryaprakashv73 · March 22, 2020, 7:15am

Standalone D/E is 0.08 (excluding buyback of Leyland Finance shares )
Consolidated debt is higher because of NBFC finance - Leyland Finance . Hence one can ignore the D/E of 2.1 .

grovmo · March 22, 2020, 8:20am

Thanks a lot mate… BTW some respite that the stock fall should hopefully see now. ALL will not only be buying 390 Cr worth of stake instead of originally planned 1200 Cr

ramraopatil · March 22, 2020, 2:18pm

One more article

disclosure - tracking

lingalarahul7 · March 22, 2020, 5:15pm

Request people who attended conf call to post their notes. Below are my thoughts based on whatever I could find online.

HLFL doesn’t look like a good NBFC with high NNPAs of ~4%. Though growth rates of financial companies are high, investors look at NPA numbers sharply for financial companies. Look at Repco finance for example, where growth hasn’t slowed too much but valuation corrected sharply due to rise in NPAs.

ALL is not cash flush to make such acquisitions. Company itself has some standalone debt, which can be worrying for investors during current situations.

Important question is why is it acquiring HLFL during current conditions? Why is providing exit to Everstone so important for ALL? What happened to HLFL IPO plans?
(People who attended conference call might have answer to above questions, request them to share)

In this selling market, looks like all you need a single additional point for investors to sell your stock and that seemed to have caused this fall.

Overall I think the risk-reward ratio has turned more favourable at current prices. Look at the way the stock rebounded when GDP growth picked up after 2011-13 period. The company is much stronger now than in 2013 with higher market share. I personally think we can expect a good rebound after all this fiasco ends and we get back to normal bull market but that can be a good wait. I was hoping that Q3FY21 / Q4FY21 will shift the pendulum but we might have to wait till Q3FY22 / Q4FY22 if Coronavirus impact is to stay.

Good news is that the company reduced the amount of stake it would acquire in HLFL implying additional debt could be lower.

Discl: Invested in Ashok Leyland and hence biased. Not a buy / sell recommendation. Please do your own research.

SKMohite · May 22, 2020, 1:34pm

Full fundamental Analysis

saumya2010 · May 23, 2020, 8:42am

Dr.stock · June 2, 2020, 4:02pm

dj123 · June 4, 2020, 4:25pm

harsh.beria93 · June 19, 2020, 2:30pm

Ashok Leyland is going to raise debt worth 200 cr. at an interest cost of 7.65%. Its incredible that one AA rated company can raise debt at 7.65%, whereas another AA rated company (Manappuram finance) paid 8.75% for a similar issue a week back!

Dev_S · June 19, 2020, 5:32pm

Nice observation, Could it be coz of security offered against loan. AL is offering 1.1X of asset, Manappuram is offering 1 times of receivables. Later seems bit riskier being a fin svc company.

harsh.beria93 · June 19, 2020, 5:38pm

Maybe! Also, Manappuram only raised 1.5 yr money whereas Ashok Leyland is raising for 3 years. We still don’t have an inverted yield curve in India, so ideally Ashok Leyland should have a higher coupon rate. I don’t have any insights as to why Ashok Leyland is garnering such attractive rates (and also who is offering these rates is not known yet). In any case, its good for Ashok Leyland investors (I hope!).