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Conference call takeaways
Ashok Leyland’s (AL) operating performance in Q3FY20 was below consensus expectations as EBITDA margin slumped 466bps to 5.6%. Gross margin declined 342bps to 26.5% mainly due to weak product mix, higher discounts and conversion costs. Key points from the concall: a) customer discount amid BS-VI transition continues to be elevated at ~Rs525k/vehicle; b) near term M&HCV outlook expected to remain weak due to subdued economic activity, low consumer sentiment and tepid freight demand; and c) AL undertakes cost control measures across labour costs (~20% savings targeted) and capex (expects to spend ~Rs 13bn). The key upside risk remains a strong scrappage policy, which could trigger replacement demand. However, it remains a binary event and more clarity would be needed before we factor it into our estimates. Maintain HOLD. Key highlights of the call
* Management indicated M&HCV inventory at 6.5k units (dealer inventory: 3.1k; plant inventory: 3.4k units), down from 18.2k in Q2 (27.5k units in Q1). LCV inventory stood below expectations at 10 days for the imminent BS-VI transition.
* Production rationalistion measures were done to re-align inventory caused ~Rs2.5bn increase in material cost as overall cost got spread over a lower production volume.
* In the quest to maintain market share, discounts remain high with average incentive of Rs525k per vehicle on a unit price of Rs2.3mn. Certain models even witnessed higher discounts – up to Rs700k per vehicle.
* Capex was trimmed to ~Rs13bn for FY20 (earlier target: >Rs.20bn). Q3 capex stood at ~Rs4bn (9MFY20 at Rs9.6bn). Investments in 9MFY20 stood at Rs.0.58bn with FY20 target of ~Rs1.2bn.
* During the quarter, the company significantly reduced debt to Rs19bn (from Rs27bn in Q2) aided by the inventory reduction exercise. Of the total debt ~ Rs13bn is longterm debt and ~Rs7bn in short-term.
* Management indicated increased focus on high-ROCE segments for the future, e.g. LCV, defence and aftermarket.
* In the domestic business, M&HCV continues to contribute the lion’s share at ~41% of sales, with LCV, exports, defence and spares contributing 14%, 9%, 1% and 9% respectively. AL expects to grow export markets by 20% in FY21, led by Africa, Bangladesh and Sri Lanka.
* Cost reduction program is underway and likely to lead to ~20% savings (Rs5bn in FY20 and target of Rs6.5bn for FY21) as employee cost rationalisation has been initiated with rollout of VRS scheme and one-time bonus reversal.
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