Ashok Leyland - Play on hope of M&HCV demand rebound - ICICI Securities

Ashok Leyland's (AL) operating performance in Q2FY21 was below consensus estimates as EBITDA margin came in at 2.8%. FCF for 1H remained negative at Rs9.4bn; yet lower YoY by Rs8.8bn (better working capital management). Net debt has reduced QoQ to Rs30.7bn (1Q:Rs42.8bn). Key medium term industry monitorable: a) Freight demand growth trends; b) used vehicle demand/pricing trends; and c) structural impact of DFC implementation. On AL we model in volume rebound of ~21% CAGR FY21-23, which is expected to raise asset efficiencies and lead to healthy FCF generation (3.6%/6.4% yield FY22/FY23 respectively) assuming capex intensity is subdued. The upside risk remains a well-incentivised scrappage scheme, which could aid demand. Maintain ADD.

- Key highlights of the quarter: Topline declined 28% YoY to ~Rs28.4bn with 23% YoY fall in volumes at 21.5k units. ASP's declined 6.1% YoY driven by weaker product mix (~53% decline in M&HCV volumes). EBITDA margin shrunk 298bps at 2.8% as gross margin declined 217bps YoY to 28.8%, higher employee expenses (up 217bps) at Rs3.7bn. AL reported PAT loss of Rs1.4bn as finance costs were up 190% at Rs872mn.

- AL positioned to benefit from the CV cycle revival: CV segment has been in a downcycle since FY18 driven by economic weakness coupled with industry overcapacity issues creating demand-supply mismatch. Post >70% decline of volumes since FY18, the M&HCV segment is witnessing good traction in ICVs and tippers; increased rural infrastructure spending is expected to spur healthy demand (~25-30% CAGR for FY21-23E). Improving demand/pricing outlook in used-vehicle market would be a key leading indicator for new vehicle demand. AL as a key player in the segment has taken the opportunity of the downcycle to remodel its portfolio with the launch of unique AVTR platform for trucks and bring in new LCV's (e.g. Bada Dost). The LCV launches would help AL bridge the gap in the existing product gaps (3-3.5T), increase its addressable market to ~65% (earlier: 34%). AVTR platform would bring it superior cost structure with enhanced customer flexibility.

- Maintain ADD: We believe FY22E can be a strong growth (~35% YoY) rebound year for AL aided by a low base effect. We cut our FY22E estimates by ~8% as we factor in increased commodity cost pressures. We rollover to Sep'22E and value the core business at 13.0x (earlier: 14.0x) Sep'22E EV/EBITDA and add Rs7/share for investments to arrive at a SoTP-based target price of Rs91 (earlier: Rs80). We maintain our ADD rating on the stock.

Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.91.25 as compared to the previous close of Rs. 90.75. The total number of shares traded during the day was 421933 in over 3802 trades.

The stock hit an intraday high of Rs. 92.05 and intraday low of 90.65. The net turnover during the day was Rs. 38595980.

Source : Equity Bulls

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