Buy Ashok Leyland Ltd For Target Rs.175 - ICICI Direct
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Cyclical recovery, high double digit growth lies ahead
About the stock: Ashok Leyland (ALL) is a pure-play CV manufacturer domestically, with FY21 market share at 16.3%. The company is present in M&HCV trucks and buses as well as LCV goods segments.
* FY21 product mix – LCV goods 48.3%, trucks 45.8%, buses 5.6%
Q2FY22 Results: ALL reported steady Q2FY22 results; broadly on expected lines.
* Standalone operating income was up 51% QoQ to | 4,458 crore
* EBITDA was at | 135 crore with margins at 3.0% vs. 3.6% in Q2FY21
* Consequent loss after tax came in at | 83 crore
* ALL’s board approved; (i) sale of EV business to its subsidiary i.e. Switch Mobility on slump sale basis & (ii) transfer of e-MaaS (E-Mobility as A Service) business to Ohm Global Mobility Pvt Ltd, India, on slump sale basis, to be eventually housed under switch mobility with majority stake
What should investors do? ALL’s share price has grown at ~13% CAGR in past five years (from ~| 80 levels in November 2016), outperforming Nifty Auto index.
* We retain BUY rating given CV revival play & structural margin tailwinds
Target Price and Valuation: We value ALL at revised SOTP based target price of | 175 (15x CV FY23-24E avg. EV/EBITDA, 3x P/BV for investments; earlier TP | 160).
Key triggers for future price performance:
* Set to be an outsized beneficiary of impending M&HCV revival riding on government’s infra push and pick-up in core industrial activity (mining, construction, road building). LCV to continue to gain from last mile mobility
* Blended ASPs to rise amid exports push in line with global top-10 vision
* We build 23% volume & 30% net sales CAGR over FY21-24E; margins seen rising to 10.5% levels by FY24E on the back of operating leverage benefits and cost, cash, capex actions under Project Reset
Alternate Stock Idea: Besides ALL, in our auto OEM coverage we like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with target price of | 1,125
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