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Seasonally weak quarter, outlook remains buoyan

Ashok Leyland (AL) reported topline decline of 17% qoq at  72.2 bn and a growth of 145% yoy. The qoq decline was driven by 19% qoq volume fall, while the yoy growth in topline was driven by 120% volume growth. However, the base quarter of last year being too low, we need to analyze based on Q4 numbers only. The realizations were up qoq on price hikes taken during the quarter and better product mix. (1) Higher mix of the M&HCV segment as well as higher mix of tractor trailer and >25T segment within the truck segment, (2) lower discounts and (3) price hikes led to growth in ASPs. EBITDA margins came in at 4.4% down by 450 bps sequentially. This was due to increased commodity costs and higher other expenses led by marketing costs associated with new launches in Q1. All other cost items below operating levels remained more or less flattish, PAT adjusted for one-time gain of  130 mn came in at  530 mn down from  4.3 bn qoq

Demand outlook in MHCVs to remain robust

We are witnessing a superlative 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 and construction activities falling in place. As the market has completely opened up, we see the truck numbers moving up further. We saw demand for tippers and MAVs moving up strongly followed by haulage vehicles and tractor trailers. The demand for buses is also expected to recover with opening of schools, colleges and offices. Following factors should drive the demand further -(1) increased government spends on infrastructure development and (2) strong replacement segment demand aided by higher fleet utilization levels. (3) New launches. The company recently launched the e-Comet Star ICV CNG range to address the gap in its portfolio (CNG mix in ICV segment has reached ~40% in FY2022 from 13% in FY2019). As a result, the company has improved its market share to ~32% in Q1 FY23 (from 26.1% in Q3 FY22). The company launched two tractor trailers (4225 and 4825 models) during the quarter. AL has currently an order book of 600 EV buses under its SWITCH India business strategy 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 15-20% and the Bus segment to grow at 30-35% in FY23E.

LCV sales to bounce back strongly as chip shortage issue revives

LCVs are currently facing some issues due to chip shortage. However, as this issue resolves, LCV are expected to be back on track quickly, which we expect to happen by Q3 FY23. The company has a LCV portfolio of products such as Dost and its variant Bada Dost, Guru, Mitra and Partner models. As the trend for online shopping increases, LCVs are finding demand for last mile transportation. LCVs being a high margin business are 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 a strong growth in the coming years. Management expects this segment to grow at 8-10% in FY 23E

Margins to recover further as input costs are expected to soften whilst demand surges

Q1 witnessed EBITDA margins dropping down to 4.4%, down 450 bps qoq, as input costs including steel prices spiralled northwards and marketing costs moving up on the launch of increased spends associated with new launches. Going forward, management expects input costs to soften in FY 23. Also management has indicated towards multiple price hikes in FY23 as demand moves up and discounting goes down. 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. We expect 7.5%/10.5% margins in FY 23E/24E respectively.

Outlook and Valuation

The company posted expectedly weak set of numbers in the seasonally weak Q1 when compared sequentially. 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. New launches also 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 CNG, tractor trailer and tipper segments. Buses demand is also expected to revive with pandemic fading off and markets completely opened up. On the margin front, modular programs, cost cutting initiatives, price hikes, superior product mix along with softening input costs should help margin growth. The near-term demand recovery may come under pressure due to higher interest costs and fuel cost hikes; however, we remain optimistic over the medium term led by pickup in the replacement segment given higher fleet utilization levels and strong fleet operators’ profitability. We maintain BUY with a higher target of ?175.

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