Ashok Leyland Rating: buy- Q4FY22 numbers were ahead of expectations

Ashok Leyland Rating: buy- Q4FY22 numbers were ahead of expectations

23 May    Finance News

We expected AL’s results to beat consensus estimates. Q4FY22 EBITDA/margin at Rs 7.76 bn/8.9% was 16/36% ahead of Nomura/consensus estimates. Raw material/sales came in at 78.2%, +33bp.

q-o-q (Nom: 77.5%). Other expenses came in at 7.9% and staff cost was 5%. Net debt was Rs 7.2 bn (~Rs 18.9 bn FCF in FY23F).

Management commentary: Demand is expected to pick up on likely continued economic revival and improving capex cycle. Market share has improved backed by CNG/AVTR range (~30% in Q4FY22). AL will expand CNG (4 variants), tippers and LCV range in FY23F. It targets double-digit margins with price hikes and cost reductions; the company was able to retain ~75% of price hikes (2-2.5% in April 22). Capex is planned at Rs 5-6 bn in FY23F. Fund raising plan is in progress for Switch Mobility (Unlisted), the E-CV arm of AL.

Our view: We maintain our view of a strong CV upcycle (+50/15% y-o-y) in FY23/24F, backed by our detailed analysis of capacity requirements. Our freight operators profitability estimate is at a 3-year high. Improvements in market share in Q4FY22 is an incremental positive. Further, we expect expansion of CNG to support market share in FY23F. Price hikes and operating leverage should lead to margin improvements. We think effective implementation of the scrappage policy can pose upsides to our estimates.

Estimates: We factor in MHCV volumes at 110k (+49%)/127k (+16%) – higher by +6%/ flat. To factor in higher raw material costs, we slightly lower EBITDA margin to 8/10.3% (from 8.8%/10.8%), leading to 4%/3% cuts in our EBITDA estimates for FY23/24F.

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SOTP-based TP of Rs 168 based on 12x FY24F EV/EBITDA

We maintain our target EV/EBITDA multiple for AL at 12x FY24F. The stock’s current valuation at ~9.6x FY24F EV/EBITDA (adjusted for subs) is attractive, as we expect EBITDA to increase ~4x over FY23-24F. We currently do not assign any value to AL’s EV subsidiary – Switch, which raised $18 mn from Dana Inc. for a ~1% stake (implying a valuation of $1.8 bn). In our coverage, we believe TTMT, BHFC and Sona (all rated Buy) would also benefit from strong CV cycle.

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