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Forgettable quarter; July enquiries encouraging

Ashok Leyland (AL) reported revenue of Rs29.5bn for Q1FY22, down 58% QoQ on 59% volume decline and 3% ASP growth. ASP growth came as a positive surprise, as mix of CV sales was adverse. The revenue contribution from businesses like power solutions, defense, after market, and digital customer solutions improved.

The share of nonMHCV revenue increased from 35% in Q4FY21 to 48%. EBITDA loss was Rs1.4bn and PAT loss was Rs2.8bn (our estimate: Rs2.2bn). AL is seeing signs of revival like improved enquiries in July, and believes that effect of axle load revision is coming off. LCVs continue to benefit from e-commerce segment. We have cut our volume estimates by 2%/1% for FY22/23 to factor in slower recovery. We continue to value AL at 15.5x FY23E EV/EBITDA, in line with its long-term average. Maintain BUY, with a revised TP of Rs153. A third wave would pose a risk to our estimates.

Forgettable quarter, as volumes declined 59% QoQ on lockdowns

AL reported revenue of Rs29.5bn for Q1FY22, down 58% QoQ on 59% volume decline and 3% ASP growth. ASP growth came as a positive surprise, as the mix of CV sales was adverse. The revenue contribution from businesses like power solutions, defense, after market, and digital customer solutions improved. The share of non-MHCV revenue increased from 35% in Q4FY21 to 48%. EBITDA loss was Rs1.4bn and PAT loss was Rs2.8bn (our estimate: Rs2.2bn).

Signs of recovery in M&HCV, LCV stable; Bus recovery still some time away

If the third wave is not serious, demand is expected to come back, driven by underlying economic growth, higher infrastructure spends, and lower interest rates. The management believes that the effect of revised axle load norms has come off now. In addition, it is seeing good number of enquires in July, despite multiple challenges on the truckers’ side such as higher fuel cost, expensive financing, etc. The LCV market is stable, with AL’s MS increasing beyond 20% from 14%. The company is working with dealers to ensure lower dealer inventory cost. For the Bus segment, majority of the orders are driven by STUs, as schools and offices remain shut.

Focusing on non-MHCV business expansion to mitigate cyclicality

Non-MHCV business accounted for 48% of total revenues in Q1FY22. Management indicated that LCV, aftermarket, parts, defense and power solution business all played an important role in stabilizing the financial performance, as these businesses have higher margins than the core MHCV business. It was also confident about LCV industry post Covid, as it will be driven by last mile delivery by e-commerce firms. The company will continue to focus on non-MHCV business to improve diversity.

Maintain BUY

We have cut our volume estimates by 2%/1% for FY22/23 to factor in the second wave impact. The stock is currently trading at 13.3x FY23E EV/EBITDA. We continue to value AL at 15.5x FY23E EV/EBITDA, in line with its long-term average. Maintain BUY, with a revised TP of Rs153. A third wave would pose a risk to our estimates.

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