The stock of Ashok Leyland, India’s second-largest truck maker has plunged considerably and the company has lost almost a quarter of its value in the past three months. This is due to the consecutive ten months decline in the sales volume of medium and heavy commercial vehicles (MHCV).
The price-book (P/B) multiple at present is 2.3. Economic Times reported Bloomberg’s statement that Ashok Leyland is at a 27% discount to its long-term
average. Although further diminution is expected in
the valuation in the backdrop of the frailty of demand, the stock is likely to retain the P/B multiple above one which is above the all-time low of 0.5-0.6. The average downcycle period for MCHVs in the past five cycles is around three years with an average volume drop of 17% during the period. When the trailing 12-months volume (TTM) falls below 20% the P/B slips below one. The present TTM volume is 12% down.
Experts expect a volume drop of 15-20% for the current and next fiscals, as a result, there is a probability of P/B slipping below one. The valuation will not hit the rock-bottom considering the improved balance sheet and franchise of Ashok Leyland. The company had net cash of INR 700 crore in FY19 compared with net debt of INR 4,700 crore in FY14. It has a book value of INR 28 in FY19 and experts believe the P/B to reach 1.5-1.6 in the current cycle.
The demand trend will be decided by the stance the government takes on the scrappage policy. There are 9 lakh trucks aged between 15 and 25 years. If 20% of this fleet is scrapped, it will amount to 50% of the country’s total MHCV volumes in FY19. This will increase the capacity utilization of truck makers. In case this does not happen, the volume in FY20 might contract due to the higher axle loads and deceleration of economic activity.