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Decent performance in a weak quarter

Net debt down by INR10.6b QoQ | Market share slips further

* Ashok Leyland (AL)’s 2QFY22 performance was decent despite headwinds such as declining market share and cost inflation. AL’s performance was comparable with that of peers despite 4.6pp QoQ decline in M&HCV market share, led by good growth in the LCV and export businesses. AL offers a pure-play on CV cycle recovery, with focus on expanding revenue pools.

* We downgrade our FY22E/FY23E EPS estimates by 11%/5% due to a weaker mix. We increase the EV/EBITDA multiple from 11x to 12x (in line with TTMT’s CV business), as we value it on early-cycle earnings. Maintain Buy, with TP of INR180 (12x Sep’23E EV/EBITDA + INR14/sh for NBFC).

Higher RM costs diluted by op. leverage

* 2QFY22 revenue/EBITDA grew 57%/67.5% YoY to INR44.6b/INR1.35b (v/s est. INR44b/INR1.4b). It reported adj. loss of INR832m (v/s est loss of INR944m and loss of INR2.8b in 1QFY22). 1HFY22 revenues / EBITDA / adj. loss stood at INR74.1b/-INR54m/ -INR3.6b (v/s INR34.9b/ -INR2.5b/ - INR5.3b in 1HFY21).

* Realizations grew 11% YoY (-1.3% QoQ) to INR1.62m (est. INR1.6m), supported by price increases and higher non-vehicle sales.

* The gross margin declined 550bp YoY and 260bp QoQ to 23.3% (est. 25%).

* However, lower-than-estimated staff costs (-420bp YoY and -540bp QoQ) diluted the impact of RM cost inflation and supported the EBITDA margin at 3% (est. 3.2%, v/s -4.7%/2.8% in 1QFY22/2QFY21). EBITDA stood at INR1.35b (v/s -INR1.4b in 1QFY22, est. INR1.4b).

* Adj. loss stood at INR832m (v/s est. INR944m and adj. loss of INR2.8b in 1QFY22).

* Net cash generated in 2QFY22 stood at INR10.6b, which helped reduce net debt to INR31.12b (v/s INR41.75b in 1QFY22).

Highlights from management commentary

* Demand outlook: HCVs (higher tonnage range) such as tippers are expected to see a further pickup in volumes on the back of infrastructural activities and mining. Fleet utilization has improved to 75–80%. With the resumption of activity, bus demand, which currently stands at 25% of normal demand, would pick up. LCV demand would come from the need to fulfill last-mile connectivity.

* Replacement demand: Recovery is expected on a) the huge transition in technology (from BS3 in Mar’17 to BS6), b) corporates’ increasing focus on environmental sustainability, c) improving confidence among fleet operators, and d) the implementation of the scrappage policy from FY24. The average age of the fleet at 9.5 years in FY21 was at the highest level (v/s 8.7 years in FY19).

* M&HCV market share eroded further by ~4.6pp QoQ (-710bp YoY) to 22.4%. LCV market share stands at ~23.3% in the 2–3.5 tonne category (the highest). However, the management is hopeful of recovering market share as a) it launches its CNG variants in ICV in 4QFY22, b) the southern market recovers and its reach expands in the northern and northeastern markets, c) the HCV segment recovers, led by recovery in infra/construction, and d) the Buses segment revives.

* Transfer of EV and eMaaS businesses: AL is transferring its EV business to Switch Mobility Automotive Ltd (India) for a cash consideration of INR2.4b. Additionally, it is transferring its Electric Mobility-as-a-Service (eMaaS) business to promoter-owned Ohm Global Mobility (Ohm) for INR650m – this would subsequently be transferred to Switch Mobility UK. These transfers are a part of the consolidation of all the EV and eMaaS businesses under Switch Mobility.

Valuation and view

Valuations at 31.4x/13.8x FY22/FY23E EV/EBITDA are in an early recovery cycle. This does not fully reflect AL’s focus on adding new revenue streams and profit pools. Any fundraise in Switch Mobility (EV business) could serve as a re-rating catalyst. We maintain a Buy rating, with TP of INR180.

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