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Buy Ashok Leyland Ltd For Target Rs.160

Outsized beneficiary of looming CV cyclical recovery

About the stock: Ashok Leyland (ALL) is a pure-play CV manufacturer domestically, with FY21 market share at 16.3%. The company is present in M&HCV trucks and buses as well as LCV goods segments.

* FY21 product mix – LCV goods 48.3%, trucks 45.8%, buses 5.6%

* Subsidiary Switch Mobility is focused on EV space with 280 vehicles on road

Q1FY22 Results: The company reported weak Q1FY22 results.

* Standalone operating income fell 57.8% QoQ to | 2,951 crore

* EBITDA was at negative | 140 crore vs. 7.6% margins in Q4FY21

* Consequent loss after tax came in at | 282 crore

What should investors do?

ALL’s share price has grown at ~9% CAGR over the past five years (from ~| 85 levels in August 2016), outperforming Nifty Auto index

* We retain BUY rating given CV revival play & structural margin tailwinds

Target Price and Valuation: We value ALL at revised SOTP based target price of | 160 (15x CV FY23E EV/EBITDA, 2x P/BV for investments; earlier TP | 150)

Key triggers for future price performance:

* Set to be an outsized beneficiary of impending M&HCV revival riding on government’s infra push and pickup in core industrial activity (mining, construction, road building). LCV to continue to gain from last mile mobility

* Blended ASPs to rise amid exports push in line with global top-10 vision

* Switch Mobility is targeting meaningful share of business from global EV addressable market of ~US$70 billion (2030)

* We build 28% volume & 38% net sales CAGR over FY21-23E; margins seen rising to 10% levels by FY23E on the back of operating leverage benefits and cost, cash, capex actions under Project Reset

Alternate Stock Idea: Besides ALL, in our auto OEM coverage we like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with target price of | 1,000

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