Last Tuesday the GOI decided to increase the maximum axle load of heavy vehicles by 20-25% on both new and existing trucks.
Last Tuesday the GOI decided to increase the maximum axle load of heavy vehicles by 20-25% on both new and existing trucks. The rationale given for this decision is that: (i) current road conditions are much improved compared to 1983 when the load limits were defined; (ii) this will reduce logistics cost by ~ 2% and (iii) corruption occurred due to overloading. The government now intends to strictly enforce overloading restrictions.
While national highways have weigh-in-motion bridges to implement this, most state highways do not have such systems. Unless extra efforts are made by state governments, there is a risk of overloading continuing on state roads. At the same time areas where overloading is restricted will be able to carry 20-25% higher loads. This could substantially increase risk to MHCV industry growth. We will closely monitor on ground implementation to assess impact on demand.
For AL, given the MHCV segment market share loss to 30% in Q1FY19 from 34% in FY18, we now factor in 10% MHCV growth in domestic market vs 15% earlier, leading to 3% cut in our FY19F total volume estimates. Given lower volume estimates, we cut FY19/20F Ebitda by 4/8%. We factor in FY19/20F Ebitda margins of 11.2/10.9%. We cut our EV/Ebitda multiple for AL’s stand-alone business to 8x (from 11x) FY21F leading to valuation of Rs 106. We value the LCV subsidiary at Rs 10/sh and other investments at Rs 8/sh. We lower our TP to Rs 125 .We downgrade AL to Neutral as the current valuation at 7.7x FY20F EV/Ebitda is near our target range.
AL’s MHCV market share likely to remain under pressure
In the MHCV segment, market leader Tata Motors continues to aggressively take market share. We note that AL’s market share peaked at 34% in the past two years and is likely to remain under pressure. Thus, we expect AL’s volume growth to be lower at 10% than the industry’s 15% in FY19F.
Lower FY19-21F Ebitda by 4-11%
We lower our MHCV volumes by 3% over FY19-21F, owing to Q1FY19’s weak performance. We now factor in 10/10% growth in MHCVs, compared to 15%/10% earlier. We note that even this growth could be at risk due to higher axle load limits. Thus, our FY19-20F revenues are lower by ~4%. On the margins front, we cut FY20-21F margins by 40-70bp on lower operating leverage. Thus, our
FY19-21F Ebitda is lowered by 4%-11%. Overall, our EPS estimates are cut by 6%-15% over FY19-21F.