Buy Ashok Leyland\, target price Rs 74: Emkay Global

Emkay Global has given a buy rating to Ashok Leyland with a 12-month target price of Rs 74. The share price remained unchanged from its previous close of Rs 48.60. The stock’s last traded price is Rs 48.60.

Ashok Leyland’s Q4FY20 results were weak due to lower volumes, but came above the brokerage estimates. Revenue fell by 57 per cent year on year to Rs 38.4 billion, above estimates of Rs 33.7 billion, owing to higher-than-expected realisations and spare part revenues. EBITDA margin contracted 640 bps to 4.8 per cent against the brokerage estimate of 4.5 per cent. Led by the lockdown and expectation of a gradual pickup in demand, Emkay Global has cut FY21E volume by 25 per cent, but broadly retains FY22 volume forecast. It expects recovery from Q4FY21E onwards led by the low base, replacement demand and gradual improvement in economic activity.

Investment Rationale


The brokerage’s EBITDA estimate for FY21 has been reduced by 34 per cent to Rs 7.6 billion, led by lower volume and margin assumptions, but FY22E EBITDA remains broadly unchanged at Rs 20.5 billion. The brokerage has introduced FY23E EBITDA at Rs 27.8 billion, factoring in revenue growth of 23 per cent. The stock trades at 8 times EV/EBITDA and 2.1 times P/B vs. historical average of 12 times EV/EBITDA and 2.6 times P/B. It has retained a buy rating with a target price of Rs 74 (Rs 76 earlier) based on 10 times EV/EBITDA on FY22E, and Hinduja Leyland Finance investment value at Rs 9/share.

Key downside risks are the sustenance of weak macro environment, low incentives in scrappage policy, slow execution of infrastructure projects, high competitive intensity and adverse commodity prices.

Ashok Leyland-EmkayGlobalJune302020


 Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 5088.04 crore, down -1.17 per cent from last quarter sales of Rs 5148.15 crore and down -47.83 per cent from last year's same quarter sales of Rs 9752.98 crore. The company reported net profit after tax of Rs 56.69 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 51.54 per cent stake in the company as of March 31, 2020, while FIIs held 16.94 per cent, DIIs 15.05 per cent and public and other 16.46 per cent.