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Long term growth visibility intact

Ashok Leyland (AL) is the second-largest Commercial Vehicle (CV) manufacturer in India. It has a strong presence in the truck segment with a market share of 29% as of FY21.

* Q4FY21 revenue grew by 45%QoQ due to recovery in the volume by 32%. This was largely attributed to the pick in the construction activities & E-Commerce business (LCV segment).

* Despite steep increase in RM price, on a sequential basis margin expanded by 230bps, on the back of revenue enhancement and operational efficiency.

* We expect the economic activities to recover gradually at current level and expect meaningful pick up by H2FY22, due to seasonally strong quarters and opening up of restrictions.

* We believe AL is likely to gain market share owing to new trucks in the modular platform & through LCV brand Bada Dost.

* Positively, AL is carrying robust capex plan in Electric vehicle under the UK Subsidiary ‘Switch’ and to use India as an export hub.

* Considering the positive announcement by the company and Govt.’s intent to kick start the Infra development, we except the valuation to continue at current level, and reiterate our buy rating.

Volume to pick up gradually..

Q4FY21 revenue grew by 45%QoQ due to recovery in the volume by 32%. This was largely attributed to the pick in the construction activities & E-Commerce business (LCV segment). The growth in the Heavy vehicle segment was 58%QoQ and LCV segment came lower at 6%QoQ. Despite steep increase in RM price, on a sequential basis margin expanded by 230bps, on the back of revenue enhancement and operational efficiency. We expect the volume to pick gradually and revive strongly by H2FY22, owing to strong economic activity.

During Q4, AL’s market share in the truck segment came at 30% from 28.3% sequentially. The Bus segment to recover in the near term owing to opening up the restriction. Announcing in the budget for procuring 20000 buses will augur well for the CV Industry. AL inventory at plants level as on 31st March 2021 is 3400 units and network inventory is adequate to channelize sales at retail level. We believe the discounts will be down owing to demand pick & inventory correction.

Medium to long term triggers to remain

We expect the Govt.’s reform action to support growth in the medium to long term . In addition the company strategic initiative to consolidated all the electric mobility under the UK subsidiary ‘Switch’ (earlier ‘Optare’) will augur well for the company . On a medium term the entire electric vehicle business will move to switch , which will also develop EV specific platforms in buses and electric light commercial vehicles.

AL’s already supplied E–buses to cities like Ahamedabad and Patna will move to Switch. We believe the domestic truck segment revival is largely depend upon the scrappage policy and faster execution of the infra projects. However, the near term headwinds due to higher steel price and non availability of semi conductors to put pressure on margin for an extended time.

Strong support from LCV business.

The company has been successful in gaining market share with products like Dost and its variants like Bada Dost, Avatar and Partner models giving a tough time to its competitors. In addition, the company’s has embarked a modular platform strategy to reduce the parts per vehicle. This could result in better economies of scale, production planning and improved supply chain management to reduce cost of the vehicle.

Valuations

We believe that the short term headwinds has been factored in the stock price and not expecting any meaningful decline as the volume numbers are currently at its low, and recover gradually with the opening up of restriction. We value AL at 12x EV/EBITDA on FY23E & reiterate our buy rating with a target of Rs145.

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