Ashok Leyland stock corrects 30% in a month

Cost Pressures on Ashok Leyland

Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:02:50+05:30

On 16th November, the stock of Ashok Leyland had hit a 52-week high price of Rs.153.50. However, since then it has been consistently losing value with the fall becoming extremely sharp in the last few weeks.

From the peak of Rs.153.50 on 16-Nov, the stock fell to touch a 52-week low of Rs.93.20 on 08-March. What exactly has gone wrong with the stock in the last few weeks that it has tanked so sharply?

The recent fall in the stock actually marks a 15-month low for the stock. The stock has corrected 22% in a week and nearly 30% in a month. While the index has also been weak during this period, the stock of Ashok Leyland has fallen much harder.

In a way, it has been a mix of weak quarterly results, pressure on margins and limited traction as far as top line sales of commercial vehicles is concerned. Oil prices are just adding to the problems.

For the quarter ended December 2021, the stock of Ashok Leyland reported 123 basis points year-on-year fall in its EBITDA margins. The earnings before interest tax and depreciation and amortization (EBITDA) margins represent the number as a percentage of sales.

The EBITDA margins fell from 5.23% to 4% on a YoY basis. This was largely on the back of higher raw material costs. Raw material costs in Q3 increased to 77.9% YoY for Ashok Leyland.

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To a large extent, the recent sharp fall in the stock price has been driven by the rally in commodity prices in the aftermath of the Russia Ukraine war. These geopolitical events and the likely sanctions to be imposed on Russia have been a key factor driving up the price of most metals that go into the manufacture of automobiles. Prices hikes have been undertaken to offset the impact, but that has only helped to some extent.

However, the sharp rally in commodity prices leading to higher input costs is one part of the story. There are other reasons too. Then there is the higher cost of ownership on account of higher funding costs and higher prices of petrol and diesel.

The supply chain constraints have forced the company to go slow on production with the result that volumes have been muted leading to inadequate absorption of fixed costs. All these factors also contributed.

However, on the positive side, there are also some green shoots that are favouring Ashok Leyland. Firstly, the demand for medium and heavy commercial vehicles (MHCV) is expected to remain strong on the back of a low base.

In addition, even if OEM demand growth at median rates, replacement demand is likely to be robust. Also, other factors like the announcement of scrappage policy, pickup in construction and mining and higher infrastructural spending are also key factors in keeping the top line robust for ALL.

Finally, let us also spend a moment on the EV plans of Ashok Leyland, which remains the fulcrum of its future growth. It may be recollected that the electric vehicle (EV) business of Ashok Leyland has already been transferred to Switch Mobility.

The parent company, Switch UK, is planning to raise funds and also enhance capex. As demands for EVs pick-up in tandem with the growth cycle, the Ashok Leyland EV business should stand to gain.

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