The ongoing cyclical downturn in the commercial vehicles (CV) industry has been the principal reason for the under performance of the Ashok Leyland stock. After growing at over 30 per cent in each of the last two years, volumes in the medium and heavy CVs segment have taken a breather in the last few months.

It has grown only by eight per cent year-on-year in April-October 2011, thanks to rising interest costs, slowing economy and a high base. Leyland has performed worse than the industry during this period with domestic volumes shrinking by about 7.5 per cent. What has contributed to this fall is the drop in demand for multi-axle vehicles in the southern markets where it has a 30 per cent market share and for tractor-trailers in the western region.

Besides, unlike the last two years where orders for buses from state transport undertakings (JNNURM Scheme) pepped up passenger vehicle volumes for the company, the current year has witnessed a reduction in these orders. Moreover, although the company has been making periodic price increases, cost pressures have pulled down profits from about Rs 290 crore to Rs 240 crore in the first six months of 2011-12. Going forward, with freight rates remaining stable, an expected peaking out of interest rate hikes may boost demand for CVs.

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