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Q4 numbers in line with expectations

After almost 2 years of difficult times, Ashok Leyland (AL) reported 83% yoy and 45% qoq rise in topline as volumes rose by 41% yoy and 26% qoq. The yoy rise was on a low base of last year stemming from certain structural issues in the CV industry. The sequential rise was due to opening up of economy post the lockdown and the CV cycle being in an expansion phase.

The Q4 demand was driven by LCVs and trucks. The bus segment is on a decline due to social distancing issues and the schools, colleges and offices being shut. The realizations were up by 6.2% yoy and 16% qoq on price hikes taken and product mix tilting towards LCVS. The company’s MHCV and LCV market share was on an increasing trajectory as newer products like Bada Dost performed exceedingly well. Margins came in at 7.6%, 230 bps up qoq on cost control, better product mix and price hikes sequentially despite input costs moving up sharply.

The management highlighted that there was an unprecedented, fast and sharp hike in input costs which was seen in Q4 numbers as RM cost to sales increased to 76.9% from 71.5% yoy and 74.4% qoq. Below the operating profits level, other income grew by ~10-11% qoq and yoy, while depreciation moved up by 16.4% yoy and 12.4% qoq. On the back of these levers, we saw the company recovering from losses yoy and from wafer thin profits qoq. Profits adjusted for one-time gain of ₹374 mn came in at ₹2.04 bn, up 332% yoy.

Demand recovery in MHCV trucks to gain momentum post Wave #2

The MHCV volumes have seen a revival in line with the economic recovery, regaining speed in infrastructure and mining activities, construction activities led by opening up of economy and lower Covid numbers in Q3 and Q4. As the market has started to open up, we see the truck numbers moving up further. We saw demand for tippers and haulage vehicles moving up followed by tractor trailers and MAVs in Q4. With announcement of upcoming voluntary scrappage policy in the recent Union Budget, the GOI has raised hopes for higher truck demand.

The demand for buses is also expected to recover with possible opening of schools, colleges and offices in H2 if the Wave #3 of the pandemic does not occur. In Q1 of FY22, we witnessed sharp surge in Wave #2 which led to a setback to the improving MHCV trend. However, with cases reducing now, we expect a bounce back in demand with rural India coming back into foray with anticipated good monsoon. We therefore expect a stronger and sharper rise in demand in H2 of FY22 and record 30%/18% growth in MHCV business in FY22E/23E respectively.

LCV business remains strong and robust throughout the Pandemic

LCV business volumes of AL grew by 7% qoq and 112% yoy to 17,042 units, which was a very strong growth. The company has a portfolio of products such as Dost and its variant Bada Dost, Guru, Mitra and Partner models. Out of these, Dost and Bada Dost form the bulk of volumes, with Bada Dost selling 4550 units in Q4 just after its launch in Q3 when it sold 2500 units, lifting up AL’s LCV market share above 21% from 18.3% yoy. LCVs being a high margin business added well to the margins in Q4 and are expected to add operating synergies and provide cost benefits to the company.

On the exports front, demand went down by 10% yoy impacted by weakness in the Middle East and Sri Lanka. The company expects exports to show a good recovery in FY22E and FY23E. This will be led by launch of new products in LCV/ICV segments such as the recent launches of Falcon and Gazelle LCVs in Saudi Arabia, continued recovery in African markets and entry in to new markets like ASEAN region.

Margins to move northwards despite RM costs headwinds

Q4 saw a solid surge in margins at 7.6%, despite input costs including steel prices spiralling northwards. Also the discounting remained at higher levels. But because of the price hikes taken by the management in Q3 and Q4, superior product mix tilted towards LCVs and cost control measures taken by AL, we witnessed margins offsetting the headwinds.

Going forward, management expects input costs to soften in H2. Also we believe management will take further price hikes as demand moves up and discounting goes down. The company is also into stringent cost cutting initiatives and improving demand for higher tonnage trucks, haulage, defense orders & LCVs will augur well for margins. LCVs like the Bada Dost and others are widening the LCV market share, which we expect to increase the LCV contribution in the product mix. We expect 7%/11% margins in FY22E/23E.

Outlook and Valuation

We saw a super recovery in numbers in Q4 based on improvement in economy, especially on the trucks and LCVs side. Good monsoon and higher influx of infra projects may drive demand further despite the Wave #2 of pandemic. LCV demand has been strong throughout the pandemic and is expected to strengthen as last mile transportation is a flourishing business, mainly driven by e-com success.

Buses demand is also expected to revive with pandemic fading off. On the margin front, Modular program, cost cutting initiatives, price hikes, superior product mix will offset the higher input costs. Reduction in inventories (3400 units) and limited capex growth (₹7.5 bn) will lead to improvemnet in return ratios. We maintain BUY with a target of ₹145.

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