REDUCE on Ashok Leyland - Green shoots emerging - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Ashok Leyland's (AL) 2QFY21 loss narrowed to Rs 1.45bn (vs. Rs 3.9bn QoQ). While LCV sales are back to pre-COVID levels, MHCVs are witnessing a slow pick-up from COVID lows. Ashok Leyland rolled out the 'Bada Dost' LCV in the quarter, and the company expects light truck sales to ramp up. While inquiries for haulage trucks are rising, the sales conversions remain delayed. Key monitorable is the pace of recovery in the MHCV segment. We value the stock at 10x EV/EBITDA and set a revised Sep-22 target price of Rs 75 (we are raising estimates by a nominal ~3% over FY22/23E). Key risks: a sharper-than- expected recovery and announcements of a scrappage policy.

2QFY21 financials: Volumes came in at 19.4k units (vs. 3.8k units QoQ). MHCV/LCV volumes declined by 53/5% YoY. Realisations at Rs 1.4mn were lower by 15% QoQ as the mix of LCVs has risen, post the launch of new products. EBITDA margin contracted 300bps YoY to 2.8%; however, it improved sequentially (EBITDA loss of Rs 3.33bn). 2QFY21 loss narrowed to Rs 1.45bn (vs a loss of Rs 3.87bn in 1QFY21).

Call takeaways: (1) Demand revival expected in 2HFY21: The OEM is witnessing a pick-up in demand from the COVID lows. M&HCV volumes are improving MoM, and LCV volumes are almost back to pre-COVID levels. Management expects demand to be driven by ICVs, tipper sales (driven by a pick-up in infrastructure activities) and LCVs. Inquiries for haulage vehicles are increasing, though conversions are delayed (2) Debt levels: AL's debt level as of Sep-20 has reduced to Rs 30bn vs Rs 42bn in the previous quarter. The debt level should moderate as demand improves and working capital cycle normalises. AL's ICDs to group companies reduced to Rs 3bn from Rs 4bn in the last quarter. (3) Leyland finance: Financing activities are normalising. HLFL reported revenue/PAT of Rs 14.7/1.4bn in 2QFY21, similar to last year's levels. 40-45% of loans are to MHCVs, while the balance is to other segments. NPA is currently at 2.3% of AUM.

Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.90.75 as compared to the previous close of Rs. 90.1. The total number of shares traded during the day was 1422931 in over 5699 trades.

The stock hit an intraday high of Rs. 91.3 and intraday low of 89.25. The net turnover during the day was Rs. 128378991.

Source : Equity Bulls

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