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SSKI raises Ashok Leyland to 'outperformer'

NetScribes/Rajiv Banerjee

SSKI Securities has upgraded the investment recommendation for auto major Ashok Leyland from 'underperformer' to 'outperformer'. The domestic brokerage firm has cited ALL's favourable product mix towards non-cyclical business segments and cost-cutting initiatives as reasons for the re-rating.

On the Bombay Stock Exchange, the scrip closed Rs 66.65 on Wednesday, below its previous close of Rs 65.30.

"Although the economic climate is yet to show any sign of immediate reversal, we expect orders from defence and the passenger bus segment to enable the company return to positive volume growth territory in FY2002. ALL's moves to upgrade technology could have negative cost implications in the near term, but will improve its long-term competitive advantage," says the SSKI research report.

The report says that ALL's product mix shows a near equal distribution between the cyclical goods segment (trucks) and other, more stable businesses like passenger buses, industrial engines, spares as well as supplies to the defence sector. The company has also managed to increase its presence in the export market, primarily buses.

All these factors enabled the company to fare better than the industry in FY2001. The company's overall volumes declined only 14.2 per cent compared to the industry average of 22.8 per cent.

"We believe that increased orders for buses (CNG fitted engines), spillover of defence supplies, and ALL's relatively stronger presence in the multi-axle, tractor trailer and tipper segments will drive an estimated 6 per cent volume expansion in FY2002," the report says.

Despite stagnant volumes and higher costs due to the implementation of stage-I emission norms, the company's margins have risen to 11 per cent from 9.4 per cent a year ago, the report says, adding, they would have been higher but for the substantially higher wages paid out following a new agreement.

"We believe that ALL's margins will continue to expand next fiscal, in tandem with volume growth and a stable cost to sales ratio," it says.

After successfully adapting 'Hino' engines to meet stage-I norms last year, the company has now tied up with ZF of Germany for supply of gearboxes and Dana Meritor for axles. While outsourcing could have some adverse impact on the company's cost structure in the near term, ALL would benefit in the long term as India opens up to global competition, the report says.

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