IGI Logo

One the cusp of growth recovery

Ashok Leyland’s (AL) Q2FY22 operating performance was in line with consensus estimates as EBITDA margins were resilient (up 19bps YoY to 3%). The margin was aided by operating leverage and lower fixed costs (AVTR platform) amidst higher input cost pressures. Underlying economic recovery, improving fleet utilisation and ageing fleet (>9 years) augur well for pickup in replacement cycle (H2 onwards). The scrappage policy (FY24 onwards) is also likely to aid new vehicle demand and support the multi-year growth cycle. We continue to favour the CV cycle recovery theme and estimate AL’s volumes to rebound at ~31% CAGR FY21-FY24E driven by strong market share gains. AL is building unique electric business models under the Switch/OHM brands which can also aid value unlocking. Valuations remain reasonable (FY23E FCF yield: ~4%). Maintain BUY.

* Key highlights of the quarter: Topline grew 57% YoY to ~Rs44.6bn as volumes rose 73% YoY to ~37k units. ASP fell 9% YoY to Rs1.2mn per vehicle due to adverse mix. EBITDA margin expanded slightly by 19bps YoY to 3% due to tighter cost control even as gross margin shrank 547bps YoY to 23.3%. Employee expenses and other expenses were down 419bps and 147bps respectively as AL reported PAT loss of Rs832mn.

* Key takeaways from earnings call: Management indicated: a) M&HCV demand in Q2 witnessed ~15% shift from higher tonnage vehicles to ICVs fueled by CNG; AL would also introduce new CNG products in Q4; b) improving passenger traffic and intercity operations are expected to aid growth revival in the bus segment; c) Q2FY22-end M&HCV inventory stood at ~3k units (down from 4.4k in Q1); d) working capital improved to Rs320mn from Rs11.3bn in Q1 resulting in FCF of Rs10bn; capex in H1FY22 was Rs1.75bn (Rs2.9bn in H1FY21); investment in H1FY22 stood at Rs40mn vs Rs1.09bn in H1FY21; net debt was at Rs31.1bn (lower by Rs10.6bn QoQ); e) EV initiatives have been moved to Switch Mobility (including OHM), which will be 90% owned by AL; manufacturing for India and SAARC region will be done in India; f) exports were up 49% YoY as AL renewed its push in its existing markets of GCC, SAARC and Africa, and expanded in newer geographies in the CIS and Asean regions.

* Maintain BUY: We believe FY22 is the likely start of a multi-year upcycle in domestic M&HCV demand with AL also driving strong export growth strategies via new products (e.g. Phoenix), while also lowering unit costs via AVTR platform. Continued impact of the steep input costs rise and lag effect of pricing along with weaker than anticipated recovery in key segments (esp. buses) have led us to cut our earnings estimates by ~77%/4% for FY22E/23E. We roll forward to Sep’23 earnings, value the core business at 14.5x Sep’23E EV/EBITDA and add Rs6/share for investments to arrive at our target price of Rs179 (earlier: Rs156). Maintain BUY.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer