Ashok Leyland - Margins outlook remain subdued - ICICI Securities

Ashok Leyland's (AL) operating performance in Q3FY21 was below consensus estimates as EBITDA margin came in at 5.3%. Gross margins eroded ~321bps QoQ to 25.6% due to deterioration in mix (M&HCV revenue share rose 11% QoQ to ~56%). Management indicated: a) economic activity resumption has been stronger on infrastructure side which has aided tipper/ multi-axle segment; b) commodity prices are likely to further stiffen in Q4 and price increases are unlikely to cover for these increases; and c) nature (voluntary/mandatory) of scrappage policy remains key for demand creation. We estimate volume rebound at ~35% CAGR in FY21E-FY23E, which we reckon, will raise asset efficiencies, margins for AL leading to healthy FCF generation (~Rs30bn cumulative FCF in FY22E/23E) assuming subdued capex intensity. Maintain HOLD.

Key highlights of earnings call:

- AL is witnessing strong traction as M&HCV demand picked up with market share gain in Q3 to 28.1% from 24.9% in Q2. Share of revenue of core M&HCV segment to 56% share in Q3 vis-a-vis 45% in Q2, thus added to pressures on gross margins.

- Capex for 9MFY21 stood at Rs4.5bn, company invested Rs0.9bn in HLFL and Rs1.5bn in Switch Mobility Ltd (erstwhile Optare); inventory for M&HCV stood at 3,181 units. Debt stood at Rs28.8bn (Rs30.76bn in Q2), while the company generated Rs1.6bn worth of operating cash from working capital release and used it for short-term loan repayment.

- Company took an exceptional charge of Rs850mn towards the VRS scheme, which includes a one-time charge of Rs320mn (Rs110mn towards leave encashment and Rs210mn towards deferment of leaves to FY22). This will aid cost reduction in future quarters.

- Discounts in absolute terms have gone up; however, AL has taken price hikes in Oct'20 and Jan'21 of ~2%/1.5%, respectively, to offset various cost inflation.

- Hinduja Leyland Finance has reported a collection efficiency of 90%+ with a capital adequacy ratio of 16.6%; GNPA: 4.3%; net NPA: 2.3%; book size of Rs266bn.

- Cost reduction programme on project Reset has led to significant savings (e.g. reduced administrative overheads from Rs8bn to Rs4bn).

- AL has continued to witness market share gains due to new product launches in the LCV segment (e.g. Bada Dost (2-3.5t)). LCV continues to be driven by strong demand from e-commerce, agriculture segment.

- Demand from infra segment, tippers (mining and construction), MAVs remains strong while demand is expected to improve for tractor trailer (movement of heavy cargo).

Shares of ASHOK LEYLAND LTD. was last trading in BSE at Rs.130.35 as compared to the previous close of Rs. 128.25. The total number of shares traded during the day was 1276722 in over 6228 trades.

The stock hit an intraday high of Rs. 131.05 and intraday low of 127.9. The net turnover during the day was Rs. 165307590.

Source : Equity Bulls

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