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Commodity inflation continues to weigh on margins

In 3QFY22, Ashok Leyland (AL) reported EBITDAM of 4% (-120bps YoY, vs. 3% in 2QFY22), 100bps below JMFe. Margin remained weak impacted by lower volume and high commodity inflation. Management highlighted that outlook for CV demand remains strong owing to increase in economic activity and replacement demand. The company aims for market share expansion through multiple launches in the CNG segment. While commodity costs continue to strengthen, AL is taking judicious price hikes and intends to ‘value sell’ its new modular AVTR platform. Also, as share of MHCVs increase vs. LCV, we expect EBITDA margin to improve going ahead. CV upcycle is still in its early stage and expected to gas in momentum and witness margin expansion. The electric vehicle business under Switch mobility continues to grow and expand. AL will continue to focus on cost-cutting initiatives to further support profitability. We estimate revenue CAGR of 37% and strong growth in profitability during FY21-24E. We maintain BUY with Dec’22 TP of INR 150. Delayed volume recovery and increase in competitive intensity are the key risk.

* 3QFY22 – weak performance on low volume: In 3QFY22, AL reported net sales of INR 55.3bn (+15% YoY, +24%QoQ), led by strong volume growth. Blended realisations increased 13% YoY (flat QoQ). Total volume increased by 24% QoQ (+2% YoY). EBITDA margin stood at +4% (vs. 3% in 2QFY22), 90bps below JMFe. Sequential improvement in margin was driven by operating leverage while high RM cost continued to impact gross margin. EBITDA stood at INR 2.2bn (-12% YoY). Adj. PAT was negative INR 0.4bn vs. JMFe of positive INR 0.3bn impacted by muted operating performance. Management highlighted that capex intensity is expected to remain low in near-term. Net debt in Q3FY22 stood at 4.2bn vs 3.2bn in Q2FY22. HLFL reported AUM of INR 25.8bn during 9MFY22 net NPA of 2.8%. Yield on advances stood at 13.86%

* Demand outlook: Management highlighted that the current fleet utilisation is improving and CV demand is expected to pick up further owing to increase in the economic activity (construction, mining, infra) and replacement demand. Replacement demand is likely to be supported by a) thrust towards movement to greener mobility (BS4 to BS6), b) increasing avg. vehicle age (9.5years), and c) scrappage policy. AL has seen a strong positive response for the AVTR range and Ecomet star. AL also launched trucks in the multi-axle and tipper ranges which have been well received by the customers. LCV volumes continue to be impacted by semi-conductor shortage. Its launch of CNG vehicles in ICV segment has been received well and led to market share improvement in 3Q (28% in 3QFY22 vs. 26% in 2QFY22).Other businesses such as defence and aftermarket continue to contribute strongly to revenues.

* Profitability outlook: Commodity inflation (higher steel prices) continues to remain a concern and the company has not been able to completely pass-on the cost inflation. Industry discounts continue to remain low in the LCV segment. The company has taken price hike of 2% in 3QFY22.In addition to price hikes; the company is also pursuing cost cutting measures such as material substitution and value engineering. AL also highlighted

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