IGI Logo

Ashok Leyland (AL) reported solid topline growth of 14% qoq while a growth of 85% yoy on a low base. The base quarter last year was unusually low on chip shortage issue due to which we need to analyse the numbers sequentially. The qoq growth in topline was driven by 14% volume growth, as realizations grew flattish. The company gained significant market share yoy at 32.3% from 22.2% and 120 bps from 31.1% qoq. EBITDA margins expanded at 6.5% up by 210 bps sequentially. This was due to decreased commodity costs (78% of sales v/s 79.3% qoq) and lower other expenses (9.1% v/s 10.1% of sales) led by lower marketing costs and stable discounting. Other income was down qoq at ?199 mn, while tax rate was at 37%. PAT adjusted for one time gain of ?82 mn came in at ?1.9 bn up from ?550 mn qoq

Big market share gains, new launches and deeper penetration to drive volumes

We are witnessing a superb performance by the CV sector, especially on its heavier side due to economic recovery, pandemic losing its severity and underlying parameters such as infrastructure and mining activities, construction activities falling in place. As the market has completely opened up, we see the truck numbers moving up further. We saw demand for tractor trailers, tippers and MAVs moving up strongly followed by haulage vehicles. The demand for buses is also expected to recover with opening of schools, colleges and offices and EV versions of buses getting an encouraging response. This along with various partnerships and opening of dealerships across India has led to higher market share which rose 120 bps qoq and 10% yoy at 32.3% The deeper penetration has led to higher sales in North, East and Central parts of the country as well where AL is traditionally less present. AL has also launched various model variants in most of its segments across HP. The company recently launched the e-Comet Star ICV CNG range to address the gap in its portfolio (CNG mix in ICV segment had reached ~40% in FY2022 from 13% in FY2019). The company launched two tractor trailers (4225 and 4825 models) last quarter, which resulted in AL’s tractor trailer market share up to 26% from 18% yoy and tractor trailer’s contribution in the overall CV volumes up to 13% from 9%. AL has currently a strong order book for EV buses under its SWITCH India business arm pertaining to electrification of its vehicles. Overall, we expect AL’s market share to reach ~35% in FY2023E with easing of chip shortage issue. Management expects MHCV truck segment to grow at 21-23% while the Bus segment to grow >100% in FY 23E, which is in line with CRISIL’s estimates.

LCV sales to bounce back strongly as chip shortage issue revives

LCVs had been facing some supply issues owing to chip shortage. With currently this issue getting resolved, LCVs are almost back on track. The company has a LCV portfolio of products such as Dost and its variant Bada Dost, Guru, Mitra and Partner models. Among these models, Dost and Bada Dost are finding great response. LCVs being a high margin business is expected to add operating synergies and provide cost benefits to the company. Management mentioned that LCV volumes are driven by increased demand for last-mile connectivity, especially from the e-commerce, pharma and consumer durable sectors. Going forward with new launches in the segment (CNG and EV variants), we foresee strong growth the coming years. Management expects this segment to grow at 18-20% in FY23E in line with CRISIL estimates. In Q2, AL’s LCV sales rose by 28% yoy.

Margins to jump on multiple levers

Q2 witnessed a solid surge in EBITDA margins at 6.5% from 4.4% qoq, as input costs including steel and aluminium came down. Also discounts did not rise, while marketing costs normalized. Going forward, management expects input costs to further soften as the rest of high cost inventory is liquidated. Also, management has indicated taking multiple price hikes as demand moves up and discounting goes down. AL has already taken upto 5-6% price hikes YTD FY23 and intends to incur further price hikes in the rest of the current fiscal. The company is also into stringent cost cutting initiatives, adding value added products to their portfolio, while improving demand for higher tonnage trucks, haulage, ICVs & LCVs will augur well for margins as product mix improves. We expect 7%/10.3% margins in FY 23E/24E respectively.

Outlook and Valuation

The company posted healthy set of numbers and a scintillating market share growth in Q2 when compared both yoy and qoq. As Covid seems to be a past now, the CV demand is firming up well, supported by higher influx of infra projects, which may drive demand further and also due to good monsoons. New launches and focus on geographic mix seen in Q2 should help AL to further improve sales and fill in the gaps within the portfolio. LCV demand has been strong throughout the pandemic and is expected to strengthen as last mile transportation is a flourishing business, mainly driven by e-com success. Also, we expect AL to gain market share given its new launches in tractor trailer and tipper segments. Buses demand is also expected to revive with pandemic fading off and markets completely opened up. Both bus and LCV demand shall get a further fillip with ongoing strong demand for their EV variants with AL’s EV arm Switch Mobility getting good orders and credit worth ?2bn from the parent AL.

Also the company is well prepared to receive defense orders from GOI through its higher emphasis on the sector by including warship carriers, transportable bridges, armoured and nonarmoured trucks etc. AL is also planning to launch several trucks in the African and Latin American markets to buck the trend in the international markets. On the margin front, Modular program, cost cutting initiatives, price hikes, superior product mix along with softening input costs shall aid margin growth. To sum it up, we believe the ongoing CV upcycle to continue for next 1.5-2 years, which would result in to high earnings growth and higher valuations supported by low commodity cost benefits aiding margins. Divestment in Switch Mobility to act an additional trigger as and when and if at all it happens. We maintain BUY with a target of ?173.

To Read Complete Report & Disclaimer Click Here

For More  LKP Securities Ltd Disclaimer  http://www.lkpsec.com/

SEBI Registration number is INM000002483

Above views are of the author and not of the website kindly read disclaimer