CVs: Tata Motors or Ashok Leyland?

Owing to robust economic activity and improvement in road infrastructure, the commercial vehicle industry has seen a sharp spurt in demand over the last three years or so.

Given the better economics of road transport vis-à-vis its railways counterpart, the demand is likely to hold itself in the medium to long term as well. Hence, if an investor wants to be a part of the CV growth story, how should one go about it?

In this article, we have made an attempt to scrutinise the past financial performance of two of the leading companies in the segment viz. Tata Motors and Ashok Leyland. Let us take a look at how do they stack against each other on various parameters.

As far as the growth in topline is concerned, Tata Motors has grown at a faster rate than Ashok Leyland over the past three years. While the CV industry has witnessed robust growth in volumes during the same period, Tata Motors has also been helped to a good extent by the stellar performance of its passenger car division.

After witnessing some initial hiccups during FY01, when the company posted a huge Rs 500 crore (Rs 5 billion) loss, the car division has recovered handsomely and has helped the company edge past its rival in terms of topline growth. Just to put things in perspective, car sales have more than tripled over the last three years and have given the company a market share of 14 per cent in FY04, an improvement of 6.5 per cent basis points over FY01.

In terms of profit margins, Ashok Leyland has been the more consistent of the two, as its margins have remained steady over the past five years.

However ironically, despite significant growth in its topline, margins for the former have failed to show any substantial improvement. This is perhaps, a result of the company's lack of pricing power and absence of a pan Indian presence.

In comparison, Tata Motors has witnessed a sharp turnaround in its margins and post the revival of car division, has managed to log in an improvement in margins year after year. Increased capacity utilisation of both CV as well as its car division, slashing of excess workforce, prudent financial management and vendor rationalisation programme has enabled the company to generate higher profits.

While Ashok Leyland seemed to have also employed most of these techniques, the improvement in margins is not as prominent as Tata Motors.

On the return ratios front, while Ashok Leyland has the better of Tata Motors on the net worth parameter, efficient utilisation of capital has seen the latter take the honours on the capital employed front. Just for the record, while Tata Motors has seen its working capital shrink from Rs 800 crore (Rs 8 billion) in FY00 to a negative Rs 1400 crore (Rs 14 billion) in FY04, the corresponding figures for Ashok Leyland stood at Rs 1000 crore (Rs 10 billion) and Rs 450 crore (Rs 4.5 billion) respectively.

If one were to look at the current valuations of the two companies then Ashok Leyland at a P/E of 17x its annualised 1QFY05 earnings is trading at a small premium to Tata Motors whose corresponding metric stands at 16x. Both the companies have lined up significant capacity expansion plans.

However, Tata Motors with its stronger balance sheet and diversified presence is relatively better poised to take advantage of the CV industry growth story. Also, after having tasted success in its passenger car foray, the company has big plans for the same and the division might double up as its second growth engine as has happened in FY03 and FY04.

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