AL is a pure play on the CV cycle. It is also likely to benefit from its higher share in the >16T segment, as usually the mix shifts upward during upcycles.
Faster GDP growth would imply upside risk to our demand assumption.
AL to benefit more due to its higher share in higher tonnage trucks; new LCV range an added upside.
Medium and heavy commercial vehicle (MHCV) tonnage capacity in India has registered 6-10% CAGR over FY10-20 on a rolling 5-yr basis. Over FY20-25F, we build in ~2.5% CAGR in the industry’s capacity. This takes into account ~35k-40k per year truck demand lost to Dedicated Freight Corridor, but for which capacity would have grown at ~5%. Thus industry volumes would reach their FY19 peak levels by FY25F. Our model assumes a GDP CAGR of ~4-5% over FY20-25F. Faster GDP growth would imply upside risk to our demand assumption.
Near term, demand is likely to stay challenging, in our view. Fleet operators’ profitability is at a multi-year low. However, utilisation is improving and FY21 is likely to see a decline in fleet capacity for the first time in at least 15 years. Thus, we expect a sharp rebound in freight rates over the next six months, driving new truck demand. We thus factor in -33% /+50% / +40%/+15% growth in MHCV sales over FY20-24F.
AL is a pure play on the CV cycle. It is also likely to benefit from its higher share in the >16T segment, as usually the mix shifts upward during upcycles. AL claims 5-10% lower cost of operations due to its innovative BS-6 solution, though this is yet to be tested in the market. We expect AL to gain share in LCVs with ‘Bada Dost ’ platform, which should enable it to address 65% of the market vs 34% currently.
For AL, over FY21-23F we continue to factor in -33% / +47%/+38% growth in overall MHCV volumes. We have factored in slightly higher ASPs due to cost increases, and ~30%/36% higher LCV volumes in FY22-23F. Our Ebitda margin estimates are revised to 2.9% /5.2% /8.4% (from 1.5% / 5.8% / 8.9%). We introduce FY24F with 15% MHCV/LCV volume growth and Ebitda margin at ~10%.
We believe valuations based on near-term Ebitda will not fully capture the margin recovery over FY24-25F. Hence, we roll forward our valuation to 10x FY24F (FY23F earlier) EV/ Ebitda discounted back to March 2023F. This implies ~1x FY23F EV/Sales (in line with long-term average) as we expect margins to revert back to 10% by FY24F. Note that AL’s R&D capitalization is significantly lower than peers’ (Fig. 14). AL trades at ~0.75x FY23F EV/Sales, which we believe is attractive.