Global brokerages keep neutral to sell rating on Ashok Leyland after Q4

Ashok Leyland shares fell more than 4 percent intraday on May 27 as global brokerages maintained neutral to sell rating after company's March quarter performance.

The stock has lost nearly 30 percent in the last one year amid slowdown especially after the liquidity crisis in September 2018. It was quoting at Rs 90.90, down Rs 2.75, or 2.94 percent on the BSE, at 1010 hours IST.

The country's second largest commercial vehicle maker's March quarter profit fell 12.1 percent YoY to Rs 653 crore, but revenue increased 0.8 percent to Rs 8,846 crore led by sales volumes, which increased 1.3 percent YoY and 36 percent QoQ to 59,523 units.

At the operating level, EBITDA (earnings before interest, tax, depreciation and amortisation) dropped 12.5 percent to Rs 985.5 crore and margin contracted 170 bps YoY but stayed above 11 percent mark to 11.1 percent in Q4.

Global brokerage houses have kept neutral to sell rating amid likely slowdown in sales in coming months that will result in muted earnings.

Brokerage: Nomura | Rating: Neutral | Target: Rs 97 | Return: 3.6 percent

We have a neutral call on the stock, but raised target price to Rs 97 from Rs 90 per share.

Valuations factored in the downcycle and the next upcycle is unlikely to happen before FY22. We also factored in 10 percent M&HCV (medium and heavy commercial vehicle) industry growth in FY20.

Company's guided capex range of Rs 1,000-1,500 crore over FY20-21 is higher than FY19.

Brokerage: CLSA | Rating: Sell | Target: Rs 65 | Return: 31 percent

We have a sell rating on the stock with a price target at Rs 65 as truck industry growth has slowed down in the last six months and we see a higher likelihood of a downturn ahead after five years of upcycle.

A falling share of higher-tonnage trucks in volumes is a further drag. Competition should intensify in a downturn, posing margin pressures. Hence we cut FY20-21 EPS estimates by 3-5 percent.

Brokerage: UBS | Rating: Sell | Target: Rs 80 | Return: 15 percent

We have a sell rating on the stock with a target price at Rs 80 as the outlook for FY20 & FY21 growth is muted.

Profit is ahead of consensus on utilisation of tax credit from LCV (light commercial vehicle) business merger.

Brokerage: Credit Suisse | Rating: Neutral | Target: Rs 94 | Return: 0.4 percent

We maintain neutral on Ashok Leyland with a target price at Rs 94 as Q4 was in-line with our estimates.

Gross margin was under pressure on higher discounting and commodity pressure but was offset by lower other expenditure.

For FY20, management expects a weak Q1 followed by some pick-up and sees 10-12 percent volume growth. The company looks to maintain margin at FY19 levels.

Brokerage: Emkay | Rating: Sell | Target: Rs 71 | Return: 24 percent

We expect FY19-21 revenue to remain subdued at 5 percent CAGR, due to a downturn in the MHCV sales cycle.

We expect domestic MHCV industry growth to taper to 8 percent in FY20E from 15 percent in FY19, and then decline by 10 percent in FY21E, led by a high base, surplus capacity with fleet operators and increasing cost of ownership.

We expect the margin to contract 320bps over FY19-21, on lower sale, adverse mix, higher marketing spends and the partial absorption of BS6 costs.

We expect earnings to slump at a 23 percent CAGR over FY19-21E. Hence, we retain sell rating, with a target price of Rs 71.

Brokerage: Kotak | Rating: Buy | Target: Rs 130 | Return: 39 percent

We maintain buy rating as stock valuations are attractive at 11x FY20e EPS, but have slashed target price to Rs 130 from Rs 140.

We expect the company to deliver 6 percent EBITDA CAGR over FY19-21 and see 12 percent revenue CAGR over FY19-21 on 5 percent increase in volumes.

We expect M&HCV industry to grow at a healthy pace in the medium term.