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Near term demand headwind persist; ALL to outperform

Ashok Leyland Q4FY21 numbers were broadly in line with our estimates. Its net sales grew by 82.4% YoY, on the back of 73.1% YoY increase in volumes. The company returned to profitability in Q4FY21 after four consecutive quarters of reporting net loss. Despite higher commodity cost inflation, higher operating leverage led to 286bps improvement in operating margins.

The second wave has impacted volume recovery for the industry and ALL. However, we expect healthy recovery for the CV industry in H2FY22 led by recovery in the rural economy and strong focus of the government on infrastructure. ALL being a pure play CV player would benefit from recovery in the CV cycle. Maintain Buy.

Result Update Q4FY21

* ALL net revenue grew by 82.4% YoY to Rs. 7,000 cr led by 73% growth in volumes. Both M&HCV and LCV reported a volume growth of 55.5% and 108% YoY. The net realizations were up 5.3% YoY and 10.3% QoQ. For FY21, ALL reported second consecutive year of volume de-growth (down 19.6%) which resulted in revenue decline of 12.4% YoY.

* Higher commodity cost pressure impacted gross margins for ALL in Q4FY21, down 582 bps YoY. However, higher operating leverage more than offset the impact of commodity cost as margins expanded 286bps to 7.6%. ALL reported a net profit of Rs. 241 cr as against a loss of Rs. 57 cr in the same quarter last year.

* Other key highlights: i) The management highlighted that demand remains challenging in Q1FY22, but expects healthy rebound, ii) To mitigate the impact of commodity price increase, ALL has taken price hikes recently, iii) ALL would incur a capex of Rs. 750 cr in FY22 which would largely be for maintenance.

Outlook & Valuation

The domestic CV industry is poised for healthy growth led by increased government spending on infrastructure, mining and pick-up in economic activity. We believe ALL stands to benefit from the upcycle in the CV industry given its strong position in the M&HCV and LCV segments. To reduce the earnings volatility, the company has sharpened its focus on increasing its revenue share from LCVs, spares, exports and defence.

On the margins front, a better product mix, higher operating leverage and better pricing would provide a cushion to margins against the rise in commodity prices. Factoring the demand uncertainty, we have lowered our estimates for FY22E. We maintain a Buy on the stock with a target price of Rs. 147.

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