Maintain REDUCE on Ashok Leyland - Demand bottoming out - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

While Ashok Leyland (AL) reported a 1QFY21 loss of Rs 3.9bn, the management is witnessing green shoots of demand with LCVs, ICVs and tippers witnessing a pick-up from COVID lows; demand for MHCVs (haulage trucks) remains weak. The OEM is focusing on LCVs to broad-base the sales mix and is rolling the Phoenix LCV in 3QFY21. We believe that the recovery is yet nascent and await a more meaningful pick-up in overall CV sales. Maintain REDUCE.

1QFY21 financials: Volumes (down 90/85% YoY/QoQ) were affected by the COVID-led lockdown. MHCV/LCV volumes declined by 96/78% YoY. Revenue declined by 89% YoY. EBITDA loss came in at Rs 3.33bn, owing to negative operating leverage. The company reported a loss of Rs 3.87bn.

Call takeaways: (1) Green shoots of demand: The OEM is witnessing a pick-up in demand from the COVID lows. In 2Q, the company will exceed 10,000 units (from ~3,800 units in 1Q). The management expects demand to be led by an improvement in ICVs, tipper sales (driven by a pick-up in infrastructure activities) and LCVs. (2) Phoenix LCV launch: The OEM will launch the Phoenix LCV (5-7.5T segment) in 3QFY21. AL's modular platform AVTR is well-received, and ~2,000 units have been produced. (3) Defence reforms: The management is enthused by the government's initiative to promote local manufacturing by banning the import of 101 products. This move will promote 'Make by India', where local manufacturers will develop indigenous technology. However, timelines remain unclear as yet. (4) Debt levels: AL's debt level as of Jun-20 has risen to Rs 42bn vs Rs 30.6bn in FY20, due to payments made to vendors. The debt level will moderate as demand improves/working capital cycle normalises. AL's ICDs to group companies has reduced to Rs 4bn due to repayment of Rs 1bn from its sister company.

Earnings: While we are reducing our FY21 estimates to factor in the weak 1Q, our FY22/23E estimates are mostly unchanged. We now value the stock at 15x (vs 13x earlier) to factor in the bottoming of demand and set a revised target price of Rs 57. Key risks: a sharper-than-expected recovery and favourable response to new launches.

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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