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Margin pressure amid market share recovery

In Q3FY22, Ashok Leyland reported third consecutive quarterly loss on recurring level as it tries to regain its lost market share in MHCV truck segment. Share has improved from 22.5% in Q2 to 26.1% in Q3 and further to 28.8% in Jan’22. EBITDA Margin at 4% missed our est of 6% driven by higher RM cost in the quarter. We expect margin pressure to continue as company focuses on market share improvement with aggressive pricing and CNG model launches. While CV cycle recovery is expected to drive volume growth, but the huge miss in Q3 PAT and continued cost pressure, drives our earnings estimate cut of 47/22% in FY22/23. We expect value unfolding from the Switch Mobility business in the long term. Maintain BUY with revised TP of Rs158. New launches in Tippers and CNG segment could drive better than industry volume growth.

Another loss making quarter

AL reported adjusted loss of Rs363mn down from Rs832mn loss in Q2FY22. We were expecting a PAT of Rs675mn. Loss came on the back of lower operating performance even as volume rose 24% QoQ. Revenue came at Rs55.35bn, up 15% and 24% YoY and QoQ respectively, inline with our estimate. ASP was up 13% YoY and flat QoQ. EBITDA margin was up 100bps QoQ to 4%, however we were expecting a 6% margin on better volumes and mix. Gross margin contracted 120bps QoQ to 22.1%. During the quarter, AL completed the sales of EV business to its step down subsidiary – Switch mobility at a consideration of Rs2.4bn resulting in a profit of Rs961mn. Also, it made provision for onerous contract of Rs268.4 mn pertaining to EMAAS contracts. VRS scheme cost of Rs252.2mn and Rs40mn of impairments were the other exceptional items in the quarter. Hence a total of Rs420mn was take as exceptional gain in the quarter

Switch Mobility, huge potential of value unlocking

AL will be closing the funding round in coming months and once that happens, the payout of ALs EV business sale to Switch will come into the standalone business. It is in advance discussions for raising ~$200mn. Currently the EV bus capacity in UK is 200 units pa and in India it is 500 units pa. In Q3, Switch won a 300 Electric Bus order from Bangalore Metropolitan Transport Corporation. The company had also commenced the supply of the 40 nos electric bus order from the Chandigarh Transport Undertaking

Regaining market share by new products, CNG Variants; Margin takes back seat

We expect margin pressure to continue as company focuses on market share improvement with aggressive pricing and CNG model launches. We cut our margin estimates for FY22/23. CV cycle recovery is expected to drive volume growth. However, the huge miss (~Rs1.1bn) in Q3 PAT and continued cost pressure, drives our earnings estimate cut of 47/22% in FY22/23. We expect value unfolding from the Switch Mobility business in the long term. Maintain BUY with revised TP of Rs158. New launches in Tippers and CNG segment could drive better than industry volume growth. Also, LCV production is expected to improve with improving semiconductor supply in FY23.

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