New platforms to drive growth
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.
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