AL expects its key exports markets (e.g. Middle East, Bangladesh, Sri Lanka and Nepal) to gradually improve as many regions were still under covid lockdowns.
Ashok Leyland’s (AL) Q1FY22 operating performance was below consensus estimates as EBITDA margin dropped 1,238bps to -4.7%. Drop was largely driven by negative operating leverage even as fixed costs remained elevated on lower volumes. The earnings call focused on demand outlook: a) no new greenfield capacity planned; debottlenecking to be undertaken as demand increases; b) vehicle enquiries are rising and with the GoI’s infra push, M&HCV segment is expected to witness strong improvement in demand; and c) freight rates likely to edge higher as utilisation improves. We estimate AL’s volumes to rebound to ~31% CAGR FY21-FY23E driven by strong market share gains in LCV and M&HCV revival coupled with building of an EV-ready portfolio. AL remains a good proxy play to cyclical recovery in autos. Valuations remain reasonable (FY23E: FCF yield: 5%, EV/EBITDA: 13x). Maintain BUY.
Key takeaways from the earnings call: AL expects its key exports markets (e.g. Middle East, Bangladesh, Sri Lanka and Nepal) to gradually improve as many regions were still under covid lockdowns.
In the domestic market, demand push-back from axle load norms is likely over and demand for M&HCVs is expected to pick up on GoI’s strong infra push. Profitability of the M&HCV segment is expected to improve as production volumes ramp up.
Demand for LCVs is strong in e-commerce and white goods segments. Inquiries for tippers (38% of market) and ICVs (35%) are gradually picking up.
Company took price hikes of 2% each in Mar’21 and Jul’21. RM cost inflation for Q1 was at 12-15% for steel prices. EBITDA margin witnessed 0.5% contraction due to production being higher than sales. Improved mix tilt towards non-M&HCV segment at 48% share of sales (Q4: 65-70%) led to the dip in margins.
Outlook and valuations: We believe FY23E could start a multi-year upcycle in M&HCV demand with strong export ambitions from the new Phoenix, and AVTR platforms could boost margins to 11-12% trajectory. We value the core business at 14.5x (earlier: 14x) FY23E EV/EBITDA on the improving CV cycle outlook and add Rs 6/share for investments to arrive at an SoTP-based target price of Rs 156. Maintain BUY.