Ashok Leyland - Focus on enhancing profit levers - ICICI Securities

Ashok Leyland's (AL) operating performance in Q2FY21 was below consensus as EBITDA margin came in at 2.8%. FCF in H1 remained negative at Rs9.4bn; better working capital management has led to reduction in debt levels (Rs30.76bn). Key focus points of earnings call: a) fleet utilisation trends are witnessing improvements; b) overall demand trends are witnessing improvements led by segments like Tippers, ICV's; c) high management focus to improve organisational improvements to improve profitability structure; and d) AL is also leveraging digital initiatives from the uptime centre, remote monitoring system on AVTR platform to improve customer satisfaction. The key upside risk remains a well-incentivised scrappage policy. We maintain ADD.

Key takeaways from the concall:

- M&HCV total industry volume jumped to 24,552 vehicles (down ~50% YoY). Market share jumped from ~17% in Q1 to ~29% in Q2. Tipper, tractor-trailer and MAV are witnessing strong demand and form a significant share of revenues for AL.

- ICV market share up from ~10% five years ago to 22-23% in H1. Bus demand has been delayed from State transport units and educational institutions and corporate transportation operators.

- Capex in H1FY21 was Rs2.7bn (Rs7.5bn for FY21) mainly towards new platforms and EVs. The company has made investments worth Rs1.08bn of which Rs0.9bn was capital infusion in Hinduja Leyland Finance (HLFL) in Q2.

- As part of Project Reset selling and admin expenses are likely to trend lower on YoY basis; focus remains on improving profitability via every possible business lever.

- AL generated cash worth Rs12bn from reduction in working capital and to a net debt of Rs30.76bn in Q2. AL received ICD payment of ~Rs1bn (outstanding: Rs3bn).

- HLFL H1 revenue and PAT stood at Rs14.7bn and Rs1.45bn (post Rs1.35bn Covid-19 related provisions), respectively. NPA stood at ~2.3% of AUM, with 40-45% contributed by M&HCVs; book under moratorium stood at 30-35%.

- Share of revenue stood at engine - 5%, spares - 14%, LCV - 20%; aftermarket revenue has reached pre-Covid levels; replacement demand may grow as more sectors are re-opening and improvement in utilisation levels reflects the same.

- On exports, new products are expected to aid growth as distribution capability is also being increased. AL is targeting select markets in Africa and South East Asia even as Middle East and SAARC markets are slowly reviving.

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

Keywords