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Higher realization and operating leverage drive beat

Recovery in market share underway | Net debt down INR20b QoQ

* AL’s 4QFY22 performance was driven by lower than estimated cost inflation, operating leverage, and cost cutting measures. It recouped its market share by 4.3pp QoQ to 30.4% in 4QFY22. AL is the best play on a CV cycle recovery, along with a recovery in market share and expansion in revenue streams and profit pools.

* We maintain our FY23E/FY24E EPS and our Buy rating with a TP of INR170 per share.

Operating leverage offset high RM cost impact

* Revenue/EBITDA/adjusted PAT grew 25%/45%/97% YoY in 4QFY22 to INR87.4b/INR7.8b/INR4.2b (est. INR79.75b/INR4.7b/INR1.8b). The same in FY22 grew 42%/86%/LTP YoY.

* Realizations grew 13% YoY to INR1.79m (est. INR1.64m) on the back of higher M&HCV sales and a 2% price hike in 4QFY22. Gross margin contracted by 130bp YoY to 21.8% (est. 21.3%), led by cost inflation.

* The benefits of operating leverage led to a 120bp YoY expansion in EBITDA margin to 8.9% (est. 5.9%). PBT before EO stood at INR5.3b (est. INR2.2b).

* Adjusted PAT stood at INR4.2b (est. INR1.8b v/s a loss of INR374m in 3QFY22). It has booked a net EO income of INR4.7b on account of a reversal of impairment provisioning for its investment in Optare.

* The board declared a dividend of INR1/share for FY22.

* Debt reduction: FCFF stood at INR22.5b in FY22 (v/s -INR5.95b in FY21) due to an improved CFO, which stood at INR26.4b (v/s INR211m in FY21), and lower capex of INR3.9b (v/s INR6b in FY21). As a result, net debt reduced to INR7.2b in FY22 (v/s INR27b/INR29b in 3QFY22/FY21).

Highlights from the management commentary

* The outlook for CV demand: Demand for M&HCVs remains strong, with a growth in core sectors like Construction, Mining, and Agriculture; increased government spends on Infrastructure projects; and pent-up Replacement demand. It is also seeing a recovery in the Bus segment, with educational institutes and offices opening up.

* ICV: AL will launch four new CNG models in different tonnage categories, adding to the two launches in Feb’22. The ICV segment is 32-33% of the CV market, with CNG constituting 40% of the ICV. With an increasing CNG portfolio, the management is looking to further increase this share.

* Switch Mobility: The management’s focus is on getting the right kind of investors whose thought process aligns with AL. In the interim, AL will provide any funding support, if required.

Valuation and view

Valuations at 19.8x FY24E P/E and 10.9x EV/EBITDA are reflecting in the early recovery cycle. However, this does not fully reflect AL’s focus on adding new revenue streams and profit pools. Any fundraise in Switch Mobility (EV business) can serve as a re-rating catalyst. We maintain our Buy rating with a TP of INR170 per share (~12x Jun’24E EV/EBITDA and INR15/share for NBFC).

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