Ashok Leyland Ltd; Volumes come down to a standstill
Ashok Leyland Ltd (ALL) reported revenues of INR 6.5bn vs our est. of INR 5.8bn a decline of 89% YoY (-83% QoQ) on the back of significantly lower volumes during the quarter. Volumes declined by 90% YoY (-89% QoQ) to 3,814 units from 38,370 units last year. EBITDA stood at INR -3.3bn vs out est. INR -2.7bn. Net loss for the period stood at INR 3.9bn vs out est. INR -3.4bn. Total Industry Volumes (TIVs) were 4,000 units for the quarter. Loss in volumes is attributable to the nation-wide lockdown.
Battered CVs riding down the Covid wave; Cost optimization all the way
Q1 has been a challenging quarter for the company, ALL has been already been grappling with the CV downturn and Covid 19 has further dented demand. TIVs stood at 4,000 units vs 49,607 units in Q4FY20. We expect volumes to improve post December 20 going into Q4 and Ashok Leyland to clock avg sales of 1) MHCV 29k units; 2) LCV 14k units depending on how the pandemic situation pans out. Demand for LCVs is picking up and the company is rapidly scaling up capacity to match it.
In tune with the last quarter, the company has further saved INR 1.2bn this quarter by deploying K54 program last year. We expect further savings of INR 5bn which will drive margin expansion for the company. Factoring in a gradual recovery, we estimate EBITDA margins at 7%/6%/8% for FY20A/FY21E/FY22E.
Exciting new opportunities in AVTR; New launches in the pipeline
During Q1, ALL introduced its AVTR range of Modular vehicle in the HCV segment which we expect will drive volumes in the next few years as operations and demand scale up. AVTR will cater to significantly large set of customers and will offer options to customize the vehicle significantly. The modular platform is aimed to assist the company in terms of efficiency and cutting down working capital.
ALL will be launching a slew of new trucks in the LCV segment based on its Phoenix model with the 1 st model to debut in the next 60 – 90 days. It will cater to 5-7-ton segment and will drive volumes for LCVs in Q2. However, any recovery in the CV space will only be possible on the back of govt. initiatives.
Valuation & Outlook
CV industry is a highly cyclical market and directly proportional to GDP growth. Due to a slump in volumes, we anticipate the 60-70% pent up demand and scrappage policy to revive the volumes in the segment and take Ashok Leyland to profitable quarters. This being said, we are optimistic on the outlook for CVs driven by 1) Infrastructure spending; 2) Scrappage policy implementation & 3) Pick up in construction as well as mining activities going ahead. We upgrade our rating to BUY (earlier ACCUMULATE) and raise our Target price to 73 valuing it at 18x FY22 EPS, an upside of 20% at current levels
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