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Ashok Leyland-An Iconic Brand going thru temporary pain

Shares of the Commercial Vehicle(CV) Maker Ashok Leyland have fallen by more than 50% over the past year.

So what is causing such a steep fall in the share price?

Let us Analyse

A sharp fall in the Auto Sales Volume-Start of a downcycle

Beginning March 2019 the CV market has seen a sharp slowdown,with August sales being the worst,the company reported a 50% fall in sales volume.

Commercial Vehicle Industry is highly cyclical in nature and depends on the overall economic activity in the country.

Over the past 9 months the economy has seen a sharp slowdown with the Q1-FY20 growth slipping to a mere 5%.

Axles Load Norms

The new axle load norms approved by the government in the middle of last year has proved to be one of the main reasons behind the poor performance of commercial vehicles during the past few months.

The norms allows truck owners to increase load on the vehicle up to the new limit as prescribed by the government. The higher limit has in a way legalised overloading and given fleet owners the opportunity to sweat their existing assets more instead of purchasing new trucks.

According to reports,the new axle load norms has created a 20% excess capacity which is now in the process of getting absorbed.

Reduction in travel time due to GST implementation

Post-GST, travel time for long- haul trucks have reduced by at least a fifth,

A typical truck spent 20 per cent of its runtime at interstate checkposts (pre GST)...Inter-state check posts removed, travel time of long-haul trucks, other cargo vehicles cut by at least one-fifth.

This has again excess capacity which is now getting absorbed.

Uncertainty regarding BS-VI transition

All auto companies will stop production of BS-IV vehicles from April 1-2020.Under the new norms the BSVI vehicles will be expensive anywhere b/w 10-15%.

There was a expectation that dues to eminent hike in price there would be a lot of pre-buying.However there is no sign of pre-buying as of now and it seems it will be highly unlikely that there will by any.

Resignation of top Management

Vinod Dasari,MD who was instrumental in the rise of Ashok Leyland reigned effective 31 March 2019.

The void in the top management has created an added layer of uncertainty for the company.

The Commercial Vehicle industry is a highly cyclical industry whose fortunes depend on the economic activity

Let us now analyse the past cycles to understand the nature of the industry

In 2008 and 2014 there were similar downturns in the economy which led to a falling the CV industry.

As can be seen above both in 2008 and 2014 the volumes fell dramatically only the recover in the subsequent years.

Let us now look at the stock price movement from 2014 which was the bottom of the cycle to 2018 which was the peak of the cycle

At the bottom of the cycle the Ashok Leyland price was nearly Rs 17 and at the top it was nearly Rs 150.

Note:-Past performance is no guarantee of future performance,however it can give an understanding on the dynamics of the industry.

So what is the way forward?

Ashok Leyland is a good company with a strong balance sheet.

However the Commercial Industry(CV) it is operating in,is undergoing a cyclical downturn.

Investors must monitor the company for signs of a upturn in demand which could re-rate the stock from here.

Caution:Entering into a cyclical industry too early in a downcycle can cause severe erosion of capital,therefore investors must carefully monitor the company performance.

Entry and Exit are the most important aspects of investing in a cyclical company.

Disclaimer:-The author of this report is a Chartered Financial Analyst(CFA) from CFA Institute,USA,the views expressed in the above report are personal and at no point should be construed as an investment advise.Please consult your financial advisor before making any decisions.Reproduction of the above report is strictly prohibited.

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