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Q3 EBITDA above estimates; Volume outlook remains positive

*For Q3FY23, Ashok Leyland’s revenue surged 63% YoY to Rs90.3bn, slightly above estimates. EBITDA grew strongly by 256% YoY to Rs8bn, 17% above our estimate due to better revenue and gross margin beat. Our FY23-25E EPS estimates are broadly unchanged, despite increased EBITDA estimates, owing to higher tax rate assumptions. We expect the domestic CV industry’s growth at 34% in FY23E, and the uptrend is likely to endure with an 8% CAGR during FY23-25E, driven by better macros, government’s thrust on infra spending, and replacement demand. We expect Ashok Leyland to increase its market share from 16% in FY22 to 19% in FY25E, led by better growth in higher tonnage categories/buses and new products. We reaffirm Buy with a TP of Rs183, based on 12x EV/EBITDA on FY25E estimates and Hinduja Leyland Finance’s value of Rs7/share. Key downside risks include: 1) Lower-than-expected demand in key geographies, 2) Increased competitive intensity, 3) Failure of new products, and 4) Adverse movement in commodity/currency rates.

* Q3 EBITDA beats estimates: Revenue grew by 63% YoY to Rs90.3bn (Emkay est.: Rs88.7bn), slightly above estimates due to robust spare-part sales. Volumes grew by 40% to 47,562 units and realization grew by 17% to Rs1.9mn/unit. EBITDA grew by 256% to Rs8bn, 17% higher than estimates. EBITDA beat was driven by higher-than-expected revenue and gross margin. EBITDA margin grew by 480bps to 8.8%. Gross margin expanded by 170bps to 23.7%, supported by better net pricing, favorable mix, and lower commodity costs. Overall, adjusted profit stood at Rs3.54bn (Emkay est.: Rs3.37bn), above estimates, due to higher operating profit. Tax rate stood at an elevated level of 36.7%. What we liked: 1) Strong volume performance with market share gains. 2) Strong margin performance. Margin expansion to continue in Q4 on better net pricing and scale. 3) Net debt reduced to Rs20.4bn as of Dec-22 vs. Rs26.8bn as of Sep-22. What we did not like: 1) Tax rate likely to remain high and the company will stick to the old regime as MAT credit benefits are yet to be utilized.

* Earnings Call KTAs: 1) Domestic MHCV demand remains strong, and the upcycle is expected to continue on better macros, government’s thrust on infra spending, and replacement demand. Demand is recovering from small transporters and first-time users. 2) In Q3, the company launched new products under brands such as Partner, Oyster, and Lynx. Going forward, the focus will continue on new products and launch of Bada Dost EV is expected in Jun-23. 3) FY23 capex is expected at Rs6bn. 4) For Switch Mobility, the company remains in discussions with potential investors and hopes to finalize fund infusion soon. 5) Hinduja Finance has recently raised Rs9bn to support its expansion plans. Listing is expected to happen in the subsequent quarters post receipt of regulatory approvals

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