Analyst Corner: Ashok Leyland – Maintain ‘Buy’; fair value at Rs 100

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February 19, 2020 7:36 AM

Revenues came in at Rs40.2 bn (-37% y-o-y), 5% lower-than-our estimate possibly due to a weaker product mix (higher mix of LCVs) and higher discounting amid weak consumer sentiment in Q3FY20.

Analyst Corner, Ashok Leyland, post BS-VI implementation, M&HCV units, raw material prices, M&HCV industryDecline in revenues was led by 29% y-o-y decline in volumes and 11% y-o-y decline in ASPs led by a weaker product mix (higher mix of domestic bus segment) and higher discounts.

Ashok Leyland reported Q3FY20 Ebitda of Rs2.3 bn (-65% y-o-y) in Q3FY20, which was 23% lower than our estimates led by lower-than-expected ASPs and lower-than-expected gross margin. We expect M&HCV industry to remain under pressure till H1FY21E due to weak economic scenario and steep price increase post BS-VI implementation. However, we expect domestic CV cycle to revive from H2FY21E onwards. Maintain ‘Buy’ with a revised fair value of Rs100 (from Rs95 earlier). Stock offers 8/12% free cash yield on our FY2021-22E estimates.

Ashok Leyland reported Q3FY20 net Ebitda of Rs2.3 bn (-65% y-o-y) in Q3FY20, 23% lower than our estimate led by lower-than-expected ASPs and lower-than-expected gross margin partly offset by benefits from cost management programmes initiated at the beginning of the year.

Revenues came in at Rs40.2 bn (-37% y-o-y), 5% lower-than-our estimate possibly due to a weaker product mix (higher mix of LCVs) and higher discounting amid weak consumer sentiment in Q3FY20. Decline in revenues was led by 29% y-o-y decline in volumes and 11% y-o-y decline in ASPs led by a weaker product mix (higher mix of domestic bus segment) and higher discounts.

Domestic truck volumes declined by 58% y-o-y in Q3FY20 led by 64% y-o-y decline in >16 tonne truck segment and 43% y-o-y decline in <16 tonne truck segment in Q3FY20. Ebitda margin came in at 5.6% (down 470 bps y-o-y), which was 130 bps below our estimate due to lower-than-expected gross margin partly offset by a sharp decline in employee cost.

Gross margin declined to 26.5% in Q3FY20 versus 29.9% in Q3FY19 and 31% in Q3FY20 due to an inferior product mix and Rs2.5-2.6 bn negative impact due to reversal of finished goods inventory (-600 bps impact) in Q3FY20 as production (12,698 M&HCV units were produced) was lower than wholesale volumes (18,122 M&HCV units of wholesale volumes) partly offset by a decline in raw material prices. The company reduced dealer and factory inventory from 27,500 units by end of Q2FY20 to 6,500 units by end of January 2020.

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