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Buy Ashok Leyland Ltd For Target Rs. 155

Going Green: Preparing for the future of mobility

We attended AL’s investor meet highlighting the company’s strategies for e-mobility products and services.

The key takeaways:

* In the next decade, management expects a reduction in the share of ICEs and increased acceptance of CNG, electric, LNG and hydrogen-cell based CVs. AL’s subsidiary Switch Mobility (SM) will spearhead all future efforts in e-mobility in both global and domestic markets. AL has invested $130mn so far, and further investments of $150-200mn are anticipated in the next 2-3 years, to be mostly raised from strategic and financial investors.

* SM background: AL’s holding in SM stands at 92%. SM manufactures E-buses and has technical collaborations with partners such as Siemens. It has a distribution reach in 50 countries. Its 280 E-buses have completed 26mn miles in global and domestic markets. SM is focusing on improving the total cost of ownership (TCO) through light-weighting, modularization and captive battery pack assembly/BMS solutions. Future products expected are next-generation buses, vans and cargo vehicles.

* SM to address global E-bus and E-LCV market, which is set to be $70bn+ in size by 2030: The E-bus market is expected to increase 12x from $1.4bn in 2020 to $16bn in 2030, while the E-LCV market is likely to surge 14x from $4bn in 2020 to $55bn in 2030 (Source: Mckinsey, Frost & Sullivan). Addressable market calculations exclude China region.

* SM’s E-MaaS (Electric mobility as a service): As TCO remains in favor of ICEs in the near term, E-MaaS business models are expected to support EV penetration. They include pay-as-you-use models such as vehicle subscription, vehicle-as-a-service, battery-as-aservice, and gross cost contracts. Under these kinds of services, 110 vehicles are already under operation in India. The service is being offered through a connected platform, which provides telematics solution, access to the charging infrastructure, battery services and other value-added services.

* Dr. Andrew Palmer appointed as Executive Vice Chairman and CEO of SM: With 41- years of experience, he was associated with Nissan as COO and Aston Martin as CEO. He was responsible for launching the world’s first modern day EV – Nissan LEAF. He has been a non-executive director of AL since 2017.

* Retain Buy with a TP of Rs155: AL offers the best play on the fast-evolving CV recovery. We expect the robust volume/revenue CAGR of 38%/44% in FY21-23E, coupled with EBITDA margin expansion from 3.5% in FY21 to 10.6% in FY23E, to drive strong FCF generation of Rs16bn/year, and an improvement in net debt/equity to 0.1x by FY23E. Our Mar’22E TP of Rs155 is based on 13.5x EV/EBITDA on FY23E and Hinduja Leyland Finance’s value of Rs6/share. Although we have not ascribed any value to the loss-making Switch Mobility, considering increased management focus and long-term E-mobility potential, we believe there could be upside risks to our fair value.

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