Ashok Leyland - New platforms to drive growth - ICICI Securities

Ashok Leyland's (AL) operating performance in Q1FY21 was marred by steep negative operating leverage (~89% drop in revenues) as EBITDA margins came in at -51.2%. Key medium term industry demand monitorables: a) freight demand growth trends; b) competitive intensity; c) impact of DFC implementation. On AL side, healthy FCF generation (6.2% yield FY22E) is expected to be driven by better asset utilisations, lower capex intensity. We expect strong volume rebound (~30%) in FY22 rebound, factor ~19% EPS CAGR over FY20-FY22E. The key upside risk remains a well-incentivised scrappage policy, which could kick start replacement demand cycle. However, this policy remains a binary event. We maintain our ADD rating with a revised target price of Rs65 (earlier: Rs57).

- Key highlights of the quarter: Topline declined 89% YoY to ~Rs6.5bn with 88% YoY fall in volumes, largely contributed by 96% decline in M&HCV volumes and flat ASP (down 0.7% YoY). EBITDA margin shrunk 6,065bps at -51.2% on higher employee expenses (up 4,561bps) and other expenses (up 2,081bps). Gross margin improved 577bps YoY and 696bps QoQ to 35.9% primarily due to sharp correction in production volumes. Company took an exceptional charge of Rs16.7mn towards discontinuation of certain LCV products.

- Key takeaways from earnings call: a) Production currently stands at 30-35% of pre-Covid levels; demand for LCVs is increasing as Hosur plant ramps up; in M&HCV segment good traction is visible in ICVs and tippers; increased government spending on infrastructure may spur demand in cement sector for HCVs; b) AVTR platform has been well received by customers; Project Phoenix is to be launched in Q3; c) net debt rose to ~Rs42.5 largely due to pending vendor payments, repayment of short-term obligations and maintaining sufficient liquidity; d) HLFL has realised interest income almost at par YoY as the book under moratorium decreased from 75% in April to 40% in July; housing finance book size for HLFL stood at Rs1.7bn; and e) capex for FY21 likely to be Rs5bn-6bn with no incremental capital infusion required for HLFL, even as external PE funding to raise Rs2bn is being sought.

- Maintain ADD: We believe the FY22E could be strong growth (~30% YoY) rebound year for AL owing to low base effect, normalizing economic growth vis-à-vis FY21 (~40% decline in FY21E). We tweak our FY22E estimates up by ~5.4% while factoring-in better cost efficiency. We value the core business at 12x (earlier:11x) FY22E EV/EBITDA and add Rs7/share for investments to arrive at a SoTP-based target price of Rs65 (earlier: Rs57). Maintain our ADD rating on the stock.

Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.61.55 as compared to the previous close of Rs. 61.05. The total number of shares traded during the day was 7807011 in over 20976 trades.

The stock hit an intraday high of Rs. 65.3 and intraday low of 60.3. The net turnover during the day was Rs. 490357716.

Source : Equity Bulls

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