Robust performance; on cusp of cyclical recovery…
Ashok Leyland (ALL) reported a healthy operational performance in Q2FY21. Revenues came in at | 2,837 crore, down 28% YoY, courtesy higher than anticipated ASPs (| 14.6 lakh/unit). Total CV sales volumes in Q2FY21 were at ~19,444 units (down ~33% YoY). EBITDA came in at | 80.4 crore with corresponding EBITDA margins at 2.8%. Savings were realised under all cost heads. Consequent loss at the PAT level was limited to | 147 crore.
Bottom of domestic CV cycle around the corner
The Indian CV space has been adversely impacted by several demand and supply side issues over the last 18 months. Revised axle load norms along with peak volumes reached in FY19 and faster, efficient goods transport due to GST all coincided with slowing economic activity and tighter financing availability due to NBFC crisis. Covid disruption from March 2020 onwards further added to industry woes. While players across the board recorded encouraging MoM improvement in volumes post lifting of lockdown restrictions, it is only since September that dispatches (ex-buses) reached meaningfully close to pre-Covid levels (ALL posted -0.9%, 13.9% truck volume growth in September & October along with 16.5%, 14.2% LCV volume growth). Firmer freight rates and upturn in freight movement along with government focus on road building and infra spends bode well for the truck segment in particular, while LCV segment remains a beneficiary of lastmile connectivity and e-commerce applications. Management commentary suggests enquiries in tippers, tractor-trailers, multi-axle and LCV segments are rising. We expect domestic truck and LCV recovery to continue gathering pace over H2FY21E. Buses, however, are seen continuing to remain laggards amid ongoing closure of schools and offices along with concerns around public transport. We build ~7% total volume CAGR in FY20-23E.
Exports key to realising long term vision
ALL has in recent times revamped its product portfolio on M&HCV as well as LCV side by introduction of the modular AVTR range and Phoenix platform respectively. The upgraded range features left hand drive functionality along with right hand drive functionality, which is geared towards making the offerings more attractive in export markets. ALL has in the past outlined its ambition of being a top 10 CV manufacturer at the global level. Healthy traction for the company’s new products would be key in this regard. It currently has a presence in Middle East & Saarc countries and is looking at Africa and South East Asia as potential growth markets.
Valuation & Outlook
Exports key to realising long term vision Sales, PAT CAGR are expected at 14.3%, 77.8% CAGR, respectively, in FY20- 23E (low base). We believe a cyclical turnaround in domestic CV industry is close, as indicated by sharp improvement in recent volume prints. Hence, we maintain BUY on ALL, valuing it at | 100 (SOTP; 10x FY23E CV segment EV/EBITDA, 1.5x P/B for investments). Key upside risk to our estimates is mandatory and affirmative scrappage policy by the central government
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