CMP: ₹44.95

Target: ₹70

Medium and heavy commercial vehicle (MHCV — Goods) industry is cyclical in nature and usually follows a set pattern of 3-5 years of up-cycle and two years of down-cycle. The previous up-cycle lasted from FY14 to FY19, posting a volume CAGR of 17 per cent. Following the historical trends, FY20 and FY21 are likely to be the two down-cycle years for the industry. While bulk of the decline has already played out during FY20, owing to Covid-19, we expect another round of moderate decline in FY21.

As each of the previous cycles have witnessed a peak-to-peak volume growth of 15-25 per cent, the expected recovery from FY22 offers a long runway of growth with volume CAGR of at least 20 per cent. What is a good time to buy Ashok Leyland? Tracking the CV cycle and stock returns of AL, we found that the return profile changes materially if accumulated during the down-cycle versus the first year of volume recovery. We estimate revenue growth of 12 per cent CAGR and EBITDA growth of 45 per cent CAGR over FY20-22E, driven by a sales up-cycle and margin expansion. The EBITDA estimates have been reduced by 46 per cent/24 per cent for FY21E/F22E to factor in near-term volume pressures.