Ashok Leyland's (AL) Q4FY21 operating performance was a beat to consensus estimates as EBITDA margin came in at 7.6%. The earnings call shed more light into management outlook towards growth, few key thoughts are: a) focus on market share gains led by LCV segment (new product launches under the Bada Dost brand), b) margins have strong levers : i)better mix (higher LCV share), ii)lower fixed costs, iii)superior sourcing efficiencies due to AVTR platform, c) exports remain a key focus area led by the African and MENA region; new (6-7) distributor expansion is likely to drive growth in FY22E, d) dedicated freight corridor is unlikely to have any major impact in industry volumes. AL remains a good proxy play to a cyclical recovery in autos. Valuations are reasonable (FY23: FCF yield: 6%). Maintain BUY.
Key highlights of earnings call:
- AL's M&HCV Q4FY21 volumes grew 111% YoY to reach market share of 28.9% vis-à-vis 27.6% YoY (Market share for FY21 was up 0.8% at 28.9%). Superior TCO delivery and better fluid efficiency has led to success of the AVTR platform. LCV demand was driven by e-commerce and growth in rural economy, LCV volumes were up 7% with the launch of Bada Dost (4.5k units sold in Q4).
- On margins, LCV business is significantly more profitable vis-à-vis MHCV. Industry pricing behaviour in M&HCV has remained weak in Q4; however, management expects the same to improve as demand improves. Fixed cost reduction exercises continue across various programs (e.g. parts sourcing, design) which would aid margins amidst cost increases in commodity prices.
- On exports, AVTR and Phoenix platforms have strong capabilities for exports; AL is increasing distribution network in key regions like Africa (6-7 new distributors added in Africa/ MENA region in FY21).
- Capex in FY21 was Rs6.2bn (FY20: ~Rs13bn) while investments stood at ~Rs3.7bn (FY20: ~Rs4.5bn). Net debt in FY21: Rs26bn (0.37x). Capex for FY22 is expected to be Rs7.5bn as AL has no plans for any major brownfield or greenfield expansion. Investment in subsidiaries is likely to reach Rs2-2.5bn (including HLFL).
- Inventory levels at factory stood at 3.4k units. AL took price increases in Q3 and Q4 to partially offset continued commodity price hikes.
- The dedicated freight corridor (DFC) is unlikely to impact AL sales as existing load from current passenger line is expected to shifted to DFC.
- AL has witnessed strong performance in power solutions business with a dominant share in construction engines. In defence segment, stallion and super stallion range are strong brands; AL plans to expand its armoured vehicle offering in FY22/23.
Outlook and valuations
We believe H2FY22E could mark the start of a multi-year upcycle in M&HCV demand. We value the core business at 14x FY23E EV/EBITDA on improving CV cycle outlook and add Rs6/share for investments to arrive at an SoTP-based target price of Rs143. We maintain our BUY rating on the stock.
Upside risks: Well incentivised scrappage policy, faster CV upcycle.
Downside risks: Slower than expected margin improvement, market share loss.
Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.123.35 as compared to the previous close of Rs. 118.2. The total number of shares traded during the day was 6280898 in over 26328 trades.
The stock hit an intraday high of Rs. 129.35 and intraday low of 122. The net turnover during the day was Rs. 786427665.