Buy Ashok Leyland Ltd For Target Rs.156 - ICICI Securities
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Difficult quarter; gross margins remain resilient
Ashok Leyland’s (AL) Q1FY22 operating performance was below consensus estimates as EBITDA margin dropped 1,238bps QoQ to -4.7%. Drop was largely driven by negative operating leverage as fixed costs remained elevated on lower volumes. With the GoI’s infra push and commodity prices reaching new highs, key industry monitorables are: a) pace of recovery of economic activity and capex trends across segments; b) used vehicle demand/pricing trends; and c) trends in freight rates/fleet utilisations.
We estimate AL’s volumes to rebound at ~31% CAGR across FY21-FY23E driven by strong market share gains in LCVs and M&HCV revival coupled with building of an EV ready portfolio. AL remains a good proxy play to cyclical recovery in M&HCV segment. Valuations remain fair (FY23E FCF yield: 5%, EV/EBITDA: 13x). Maintain BUY.
* Key highlights of the quarter: Topline declined 58% QoQ to ~Rs29.5bn as volumes fell by a similar 59% QoQ to ~18k units. ASP witnessed a marginal 1% growth QoQ at Rs1.6mn/vehicle driven by commodity-led price hikes. EBITDA margin slumped 1,238bps to -4.7% even as gross margin improved 278bps QoQ to 25.9% (aided by better fixed cost absorption due to higher inventorisation). Employee expenses and other expenses rose 864bps and 652bps respectively and the company reported PAT loss of Rs2.8bn.
* Pivot into electric mobility could be the key driver of long-term value creation: AL has planned strong targets to build an EV ecosystem with Switch Mobility to accelerate the electrification in buses, LCVs. With ‘digital twin’ technology and OHM pay-as-you-use mobility-as-a-service model, the company plans to democratize zero-carbon mobility with superior TCO offerings. We believe, longer term success of Switch mobility could create meaningful value for AL.
On the core business, domestic CV segment (~60-70% of revenue) has been in a downcycle since FY18 and AL, is likely to benefit from the demand recovery. GoI’s infrastructure push along with strong demand from the mining sector are expected to be key drivers of this recovery. AL has also enhanced its exports push in its existing markets of GCC, SAARC and Africa, and expansion in newer geographies (e.g. CIS and Asean).
* Maintain BUY: We believe H2FY22E could start a multi-year upcycle in M&HCV demand with strong export ambitions from the new Phoenix, while AVTR platforms could boost margins to the 11-12% trajectory. We upgrade our FY22E/FY23E estimates by ~4.7%/9.5% on the back superior fixed costs control. We value the core business at 14.5x (earlier: 14x) FY23E EV/EBITDA on the improving CV cycle outlook and add Rs6/share for investments to arrive at an SoTP-based target price of Rs156 (earlier: Rs143). Maintain BUY.
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