Company Update : Ashok Leyland Ltd By Motilal Oswal Financial Services Ltd
Restructuring at Switch UK initiated
Ashok Leyland hosted a concall to discuss its decision on the cessation of Switch’s UK manufacturing and assembly operations, for which, it has begun employee consultations. The weak demand for EV buses and the uncertain outlook for e-buses in UK has made manufacturing operations unviable in the region, and hence the decision. On the other hand, Switch India continues to do well and is expected to deliver EBITDA break-even by FY25E and PAT break-even over next 4-6 quarters led by a healthy order backlog. As a result, management does not foresee any need for impairment of investments in Switch as the decline in value at the UK entity is more than offset by the increase in value at the India entity. This restructuring is positive for AL as the UK entity will no longer be earnings dilutive at a consolidated level. However, the recent increase in promoters pledge is likely to remain an overhang on the stock.
* Loss at Switch UK for FY25 is estimated at GBP20-25m. Optare UK reported a loss of INR4.6b in FY24, with cumulative investments in the business amounting to INR21b as of FY24, along with a recently announced INR5b.
* Net debt at Switch UK currently stands at GBP80m, but is due for repayment by FY29. The equity infusion by AL of INR5b approved in Feb’25 will be partly used towards debt repayment and partly for closure-related expenses (estimated at GBP5-10m). Management does not foresee any further fund requirement in either Switch UK or in India in the near future.
* Switch India is expected to deliver INR 9-10b in revenues in FY25E and is expected to be EBITDA positive in FY25E. On the back of a strong order backlog of 1300 buses, management expects Switch India to treble volumes in this segment in FY26E. As a result, management expects Switch India to be break-even at PAT level over next 4-6 quarters.
* Switch India will focus on contracts with outright sale and not enter into GCC contracts. All the GCC contracts would be delivered through Ohm Mobility, which is likely to need funding support at a later stage.
* However, management does not foresee any need for impairment of investments in Switch as the decline in value at the UK entity is more than offset by the increase in value at the India entity.
* Management also indicated that it will pursue equity fund raising option only when valuations are favorable.
* Management expects to receive NOC from RBI for the Hinduja Leyland Finance reverse merger very soon. Post this, the process of Valuation of both companies would be initiated, swap ratio would be determined and all necessary approvals would be taken.
* Valuation and view: Post restructuring, Switch UK will cease to be earnings dilutive at a consolidated level, which is a key positive for AL. Also, neither of the Switch entities are expected to need any funding support in the near term. However, the recent increase in promoter pledge is likely to remain an overhang on the stock. Maintain Buy with a TP of INR 255.
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