Ashok Leyland’s (AL) Q1FY22 working efficiency was beneath consensus estimates as EBITDA margin dropped 1,238bps to -4.7%. Drop was largely pushed by detrimental working leverage at the same time as fastened prices remained elevated on decrease volumes. The earnings name centered on demand outlook: a) no new greenfield capability deliberate; debottlenecking to be undertaken as demand will increase; b) automobile enquiries are rising and with the GoI’s infra push, M&HCV phase is predicted to witness robust enchancment in demand; and c) freight charges more likely to edge larger as utilisation improves. We estimate AL’s volumes to rebound to ~31% CAGR FY21-FY23E pushed by robust market share positive aspects in LCV and M&HCV revival coupled with constructing of an EV-ready portfolio. AL stays an excellent proxy play to cyclical restoration in autos. Valuations stay cheap (FY23E: FCF yield: 5%, EV/EBITDA: 13x). Keep BUY.
Key takeaways from the earnings name: AL expects its key exports markets (e.g. Center East, Bangladesh, Sri Lanka and Nepal) to step by step enhance as many areas had been nonetheless underneath covid lockdowns.
Within the home market, demand push-back from axle load norms is probably going over and demand for M&HCVs is predicted to select up on GoI’s robust infra push. Profitability of the M&HCV phase is predicted to enhance as manufacturing volumes ramp up.
Demand for LCVs is powerful in e-commerce and white items segments. Inquiries for tippers (38% of market) and ICVs (35%) are step by step selecting up.
Firm took value hikes of two% every in Mar’21 and Jul’21. RM price inflation for Q1 was at 12-15% for metal costs. EBITDA margin witnessed 0.5% contraction as a consequence of manufacturing being larger than gross sales. Improved combine tilt in direction of non-M&HCV phase at 48% share of gross sales (This fall: 65-70%) led to the dip in margins.
Outlook and valuations: We imagine FY23E may begin a multi-year upcycle in M&HCV demand with robust export ambitions from the brand new Phoenix, and AVTR platforms may enhance margins to 11-12% trajectory. We worth the core enterprise at 14.5x (earlier: 14x) FY23E EV/EBITDA on the bettering CV cycle outlook and add Rs 6/share for investments to reach at an SoTP-based goal value of Rs 156. Keep BUY.