Published on 4/12/2019 9:57:27 AM | Source: HDFC Securities Ltd

Option Strategy Ashok Leyland Ltd By HDFC Securities

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Demand stabilising at lower levels

2QFY20 was a weak quarter as EBITDA margin declined to 5.8% (-360bps QoQ). However, demand trends are bottoming and industry expects that the announcement of a scrappage scheme will likely aid sales over FY21. We Reiterate NEUTRAL with a TP of Rs 75 (13x on Sep- 21 EPS) as we lower our FY20/21 EPS by 15/2%.


* Financial: Vols (-44/-27% YoY/QoQ) remain affected due to slowdown in the CV industry (MHCV/LCV declined 56/11% YoY). Revenue/EBITDA declined 48/72% YoY. EBITDA margin came in at 5.8% (-500/- 360bps YoY/QoQ) due to negative operating leverage. PBT declined 97% YoY. This was due to an exceptional loss of Rs 648mn owing to VRS expenses. Adjusted for the above, APAT declined 81% YoY to Rs 1bn.

* Demand is bottoming: While on ground demand is weak, it has improved on the margin led by good monsoons. AL has reduced wholesales ahead of the BSVI transition and inventory is now lower at ~13,200 units in Oct-19 (vs 18,200 units MoM). Discounts have risen to Rs 525,000 in 2QFY20 as compared to Rs 425,000 sequentially. The expected pre-buy window is likely to be shorter and will play out in 4Q. After falling 38% YTD, CV sales are bottoming at current low levels led by higher discounts, government measures (depreciation benefit) as well as good monsoons.

* Industry is hopeful of a scrappage scheme: Managements of OEMs/auto ancillaries expect the long awaited scrappage scheme to be announced, which will benefit industry volumes in FY21. The nature of the scheme and incentives provided for phasing out older trucks will determine the success of the same.



We maintain NEUTRAL

(1) While CV sales remain lackluster, they are stabilizing at lower levels

(2) While any introduction of a scrappage scheme will aid sales in FY21, the expected commissioning of the DFC will impact demand over the medium term

(3) In the current cycle, AL has a well capitalized balance sheet and is better prepared to withstand the downturn.


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