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Ashok Leyland (AL) Standalone revenue increased 19.9% YoY at INR 48.1 bn. Realizations improved ~12% YoY and was flat QoQ. Volume increased ~7% YoY/ 72% QoQ to 3.8k units. Despite favourable mix of 50% share of MHCV, EBITDA margin came in at 5.3%. EBITDAM was impacted due to impact of higher raw material cost. EBITDA for the quarter stood at INR 2.5 bn, AL had a onetime exception loss of INR 460mn due to VRS. Adjusting for that, PAT for the quarter stood at INR 267 mn (-11%YoY), due to higher depreciation. Net debt for the company reduced from INR30.8bn in 2QFY21 to INR 28.8bn in 3QFY21.

Other highlights

* In 3QFY21, M&HCV trucks industry volume grew by ~16% YoY. For AL, M&HCV trucks grew at twice the industry growth rate, leading to market share gains in 3QFY21. Within M&HCVs, segments like ICV witnessed good growth with the rise in infra spends. Union Budget's thrust on investment in public infrastructure augurs well for the CV industry.

* Going forward, with the higher spending on mining and infra and broad-based economic recovery, demand for Tippers, Multiaxles vehicles and Tractor-trailers is set to rise. Green shoots are already visible and the management expects pick-up in replacement demand going forward. Vehicle scrapping policy is a favourable announcement but further details are still awaited. Industry is seeking an incentive based scrappage policy.

* LCV business is doing very well and demand is driven largely by e-commerce, Agri and Swach Bharat segments. Recent launch of 'Bada Dost' has been very well received. With the launch of Bada Dost, AL's addressable market went up from 18.3% to 20.3% and while the industry volume in the addressable market grew by 17%, volume growth for AL's LCV segment stood at over 30%, leading to market share gains.

* AL took a price hike of ~2% in Oct'20 and took further price hike of ~1.5% in 4QFY21 to partially pass on RM inflation. 'Project Reset' focuses on enhancing profitability by focusing on optimizing material cost, manufacturing & other overheads, value and volume enhancement, cash and capex management. The management expects the benefits of this program to be clearly visible in the coming quarters as the volume picks up. AL achieved cost saving of ~Rs5.4bn in FY20 on efficient cost management across all the functions.

* Capex incurred in 9MFY21 stood at Rs4.5bn towards modular platform, Phoenix variants and EVs. Capex for FY21 is expected at ~Rs7.5bn. Investment in 9MFY21 stood at Rs2.6bn, of which Rs0.9bn was for capital infusion in HLFL and Rs1.5bn was invested in Switch (Optare) during the quarter. Going forward, there will be some investment in HLFL (mainly growth capital) and Switch.

* AL generated Rs1.6 bn operating cash flow in 3QFY21, driven by reduction in working capital (WC) and consequently its net debt at the end of 3QFY21 stood at ~Rs28.8bn. Its D/E stood at 0.43x. AL raised debt in 1QFY21 to manage the WC requirements and expects debt to fall significantly by the end of FY21.

* Export volume grew by ~26% YoY in 3QFY21 on the back of new product launches and opening up of overseas economies. AL has redrawn its exports strategy and has a much larger product portfolio to offer to its customers globally. AL is focusing on enhancing its product capabilities and strengthening its dealerships in the Middle-east, Africa and SAARC regions and is looking to enter South East Asian markets.

Valuation & Outlook

While the near-term demand outlook to remain positive, we believe these positives are priced in. For FY22, with improved economic activities and a low base, we expect Revenue/EBITDA CAGR of 19%/29.9% from FY20 to FY22E and margins expanding by ~129 bps to 8%. AL is likely to gain share in domestic MHCVs from 32% in FY20 to 33-34% in FY22E, led by new products based on the modular platform. Similarly, market share is expected to increase from 9% in FY20 to 14-15% in FY22E, led by new product Phoenix LCV in 2.5-4.9T segments. Considering bottoming out in the domestic M&HCV sales volume, we value ASHLEY's standalone business at 15x FY22 EV/EBITDA and assign INR 8/sh for HLFL stake and recommend HOLD on the stock with a target of INR 120.

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