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Ashok Leyland Ltd>
  • CMP : 145.2 Chg : 0.25 (0.17%)
  • Target : 180.0 (16.88%)
  • Target Period : 12-18 Month

04 Aug 2022

Bottomed-out margins; steady road ahead…

About The Stock

: Ashok Leyland (ALL) is a pure-play CV manufacturer domestically, with FY22 market share pegged at 16.4%. The company is present in M&HCV trucks and buses as well as LCV goods segments.

  • FY22 product mix – LCV goods 42%, trucks 52%, buses 6%

ALL reported muted results in Q1FY23

  • Standalone operating income for Q1FY23 was down 17.4% QoQ to ₹ 7,223 crore, amidst 18.6% sequential decline in volumes at 39,651 units.
  • EBITDA came in at ₹ 320 crore with margins at 4.4%, down 444 bps QoQ. All line items witnessed an increase with gross margins down 105 bps QoQ
  • Consequent PAT came in at ₹ 68 crore. Muted PAT performance was due to lower than expected margins and higher effective tax rate at 36.8%
What should Investors do?

ALL’s share price has grown at ~7% CAGR over the past five years (from ~₹ 110 levels in August 2017), outperforming Nifty Auto index

  • We retain BUY rating amidst cyclical recovery underway in the CV space, impending equity raise and consequent valuation pegging for its EV arm
Target Price Valuation

We value ALL at revised SOTP based target price of ₹ 180 (16x core FY24E EV/EBITDA, 2.5x P/BV for investments; earlier TP ₹ 160)

Key Triggers for future price performance
  • Pure play beneficiary of impending M&HCV revival riding on government’s infra push and pickup in core industrial activity with passenger (bus) segment to benefit from reopening of workplaces, schools and colleges.
  • Blended ASPs to rise amid exports push & improved product mix.
  • We build 20% volume & 28% net sales CAGR over FY22-24E; margins seen rising to 8% levels by FY24E on the back of operating leverage benefits and normalized input cost. Return ration are seen ~17% levels by FY24E
  • Expected equity raise in its electric mobility arm i.e. “Switch Mobility” with traction in EV demand from both private as well as government sector.
Alternate Stock Ideas

Besides ALL, in our auto OEM coverage we like M&M.

  • Focused on prudent capital allocation, UV differentiation & EV proactiveness


  • BUY with target price of ₹ 1,500

Key Financial Summary

Key Financials FY19 FY20 FY21 FY22 5 year CAGR (FY17-22) FY23E FY24E 2 year CAGR (FY22-24E)
Net Sales 29,055.0 17,467.5 15,301.5 21,688.3 1.6 29,339.7 35,309.0 27.6
EBITDA 3,135.7 1,173.6 535.1 994.5 -14.7 1,636.0 2,833.2 68.8
EBITDA Margins (%) 10.8 6.7 3.5 4.6 - 5.6 8.0 -
Net Profit 1,983.2 239.5 -313.7 541.9 -15.0 501.9 1,401.1 60.8
EPS (₹) 6.8 0.8 -1.1 1.8 - 1.7 4.8 -
P/E 22.8 188.8
RoNW (%) 24.3 4.7 -4.4 0.2 - 6.5 17.1 -
RoCE (%) 25.7 4.5 -1.9 2.1 - 7.6 17.7 -
Source: Company, ICICI Direct Research

Key takeaways of the recent quarter & Concall highlights

Q1FY23 Results: Margins bottomed out …

  • Standalone operating income came in at | 7,223 crore (down 17.4% QoQ). Total volumes for the quarter were at 39,651 units, down 18.6% sequentially with ASPs for the quarter coming in at | 18.2 lakh/unit, up 1.5% QoQ.
  • M&HCV volumes in the total sales volume mix (~63% in Q1FY23 vs. ~66% in Q4FY22). The company also gained market share in the truck segment which as of Q1FY23 was at 31.1% vs 30.6% in Q4FY22.
  • EBITDA for the quarter came in at | 320 crore with corresponding margins at 4.4%, down 444 bps QoQ. Gross margin declined was ~105 bps QoQ however was further aggravated by rise in employee cost and other expense which rose 116 bps & 222 bps QoQ respectively.
  • Consequent reported profit after tax stood at | 68 crore. Muted PAT performance was due to lower than expected margins and higher effective tax rate at 36.8% vs 9.7% in Q4FY22.

Q1FY23 Earnings Conference Call highlights

  • Q1FY23 witnessed strong momentum in domestic market compared to export market with domestic market share increasing QoQ aided by new model launches.
  • Company witnessed revival in demand from fleet aggregators & witnessed increase in fleet utilization levels & improvement of free cash flow in hands of fleet operators amidst reduced operating cost.
  • Management expects M&HCV truck industry to grow at 15-20% for FY23 primarily led by capex by government & revival in bus demand largely benefitting from reopening of schools and work places.
  • Company has taken ~1.5-2% hike during the quarter to offset rising input costs & would take further hikes to recover unrecovered cost, however company is still unable to recover hiked freight rates for which it is in discussion with clients.
  • Rise in other expense was largely due to various agreements entered into by company during FY22 and same have been revised due to inflationary scenario, further management expects it to taper gradually going forward.
  • Company expects to sustain market share amidst: (i) Increase in truck demand as a result of government spending, (ii) strong product offering with its CNG variant launch in Q1FY22 gaining good traction, (iii) offering existing LCV portfolio in CNG variants in coming 8-9 months
  • Hinduja Leyland Finance AUM stood~₹30k crores with disbursement of ~₹3,500 crores during Q1FY23, it has GNPA at ~3.7% & NNPA at ~2.3%
  • Capex incurred in Q1FY23 is ~₹115 crores with guidance for FY23 revised to ~₹750 crores vs ~₹550 crores in Q4FY22.
  • Due to chip shortage company witnessed 500-1000 units as loss of production in the LCV domain for Q1. 

  • Rise in steel price was ~₹4-5/kg for Q1FY23 and is now stabilizing with cost reduction program in place management expects to improve margins in coming quarters.



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