Reiterate REDUCE on Ashok Leyland - Increasing focus on LCVs in tough times - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

Ashok Leyland (4QFY20): Increasing focus on LCVs in tough times. Reiterate REDUCE
(TP Rs 47, CMP Rs 52, MCap Rs 154bn)

AL's margins in 4Q at 4.8% were largely in line with our estimates. We believe that the CV cycle will witness a delayed recovery, due to the COVID outbreak as well as the low utilisation levels (post the axle norm increase by 15%). Further, the DFC remains an overhang and will impact the extent of recovery. The OEM is focusing on LCVs to broad base the sales mix. We reiterate our Reduce Rating.

4QFY20 Financials: Volumes (down 57/18% YoY/QoQ), remains affected due to the downturn in the CV cycle. MHCV/LCV volumes declined 61/45% YoY. Revenues declined 57% YoY and EBITDA margin contracted 640/85bps YoY/QoQ to 4.8%. The co reported a loss of Rs 573mn. There was an exceptional loss of Rs 687mn towards impairment of investment in its UK subsidiary - Optare. APAT was at Rs 114mn.

ICD's/group investments: The OEM has recently increased its stake in Hinduja Leyland finance (by purchasing the stake of Everstone) and has invested Rs 5bn as ICDs in group companies. While gearing levels are under check (below 0.5x), we believe that the management should adopt a calibrated approach towards group investments. Ashok Leyland has reduced investments in group companies over FY15-17, which had led to an improvement in return ratios.

Call & other takeaways: (1) Debt levels: Cos' debt as of FY20 was ~Rs20bn. However, the current net debt levels have risen to ~Rs 40bn and are expected to moderate as demand improves/working capital cycle normalizes. The company has given Inter Corporate Deposits of Rs 5bn to group companies in FY20. (2) BSVI transition: The BSVI transition has been smooth for the co with AL carrying nil BSIV inventory. As the OEM focused on inventory rationalization, they could limit the discounts in 4Q. (3) LCVs: The OEM will launch the Phoenix LCV shortly in the 5-7.5T segment - AL is focusing on this segment to de-risk the business model/benefit from higher e-commerce led demand. (4) MHCV recovery: The management believes that a pick-up in volumes is expected from 2QFY21 and will be led by an improvement in tipper sales (driven by a pick-up in infrastructure activities). Also, the co believes that the modular platform- AVTR will support volumes.

Reiterate REDUCE: We are tweaking our estimates and set a revised TP of Rs 47 @ 13x FY22 EPS (vs. 46 earlier). Key Risks: A sharper than expected economic recovery

Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.48.2 as compared to the previous close of Rs. 46.95. The total number of shares traded during the day was 3783107 in over 13260 trades.

The stock hit an intraday high of Rs. 48.6 and intraday low of 46.85. The net turnover during the day was Rs. 180393422.

Source : Equity Bulls

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