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Q2 EBITDA below estimates; Volume outlook remains positive

For Q2FY23, Ashok Leyland’s revenue grew by 85% yoy (3-yr CAGR at 8%) to Rs82.7bn, broadly in-line with estimates. EBITDA grew strongly by 3x yoy (3-yr CAGR at 33%) to Rs5.4bn, below our estimate of Rs6.3bn due to higher employee expenses on account of performance bonus payouts. Management expects margins to expand ahead on normalization of employee costs and commodity deflation. We have slightly reduced our FY23-25E EPS estimates by 2-4%, factoring in lower margin assumptions and higher tax rates. We expect the domestic CV industry’s growth at 30% in FY23E, and the uptrend is likely to endure with a 9% CAGR during FY23-25E, driven by better freight availability, higher infra spending, and replacement demand. We expect Ashok Leyland to increase its market share from 16% in FY22 to 18% in FY25E, led by better growth in higher tonnage categories, buses, and new products. We reaffirm Buy with a TP of Rs180 (Rs178), based on 12x EV/EBITDA on Dec-24E estimates (Sep-24E earlier) and Hinduja Leyland Finance’s value of Rs8/share. We have applied a 10% premium to fair value, considering the upside potential from value unlocking of the EV subsidiary (Switch Mobility). Key downside risks include: 1) Lower-than-expected demand in key geographies, 2) Increased competitive intensity, 3) Failure of new products, and 4) Adverse movement in commodity/currency rates.

Q2 EBITDA below estimates: For Q2FY23, Ashok Leyland’s revenue grew by 85% yoy (3- yr CAGR at 28%) to Rs82.7bn (est.: Rs83.8bn), broadly in-line with estimates. Volumes grew by 64% and realizations grew by 13%. EBITDA grew by 299% to Rs5.4bn (3-yr CAGR at 33%), 14% below Emkay estimates due to higher-than-expected employee cost. Employee cost grew by 32% to Rs5.3bn due to annual increments and bonus payouts. EBITDA margin expanded by 350bps to 6.5%. Overall, adjusted profit (3-yr CAGR at 30%) stood at Rs1.9bn (est.: Rs3.1bn), below estimates, due to higher-than-expected tax rate and interest cost. Tax rate stood at 37% in Q2FY23 vs. 28% in Q2FY22. Interest cost grew by 37% to Rs771mn. What we liked: 1) Strong volume performance with market share gains. 2) Price increases and commodity deflation are expected to support margins ahead. Price increases stood at 1% in Q2FY23 and 1.5% in Q3FY23. What we did not like: Net debt increased to Rs26.8bn as of Sep-22 from Rs15.5bn as of Mar-22.

Earnings Call KTAs: 1) Domestic MHCV demand remains strong, and the upcycle is expected to continue on better freight availability and replacement demand. Previous peak in MHCVs is expected to be crossed only in FY25. 2) Exports are expected to grow in FY23 on distribution network expansion and new products. 3) FY23 capex is expected at Rs6bn. 4) For Switch Mobility, the company remains in discussions with potential investors and hopes to finalize fund infusion soon. The investment plan over the next few years stands at $200- 250mn. The company has provided loan of Rs2bn to Switch Mobility. 5) Hinduja Finance has recently raised Rs9bn to support its expansion plans. Listing is expected by Jun-23. It has AUM of Rs317bn, income of Rs16bn, PAT of Rs2.15bn, GNPA of 6.3%, and NNPA of 4.4%.

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