This, coupled with higher depreciation/interest cost, resulted in recurring loss of ~Rs 11.8 crore.

Ashok Leyland’s Q4FY20 performance was better than expected, led by a better mix. While the FY21 outlook is unclear, expansion in LCVs would reduce the pain. Net debt is inching up but stands comfortable. We lower our FY21/FY22E EPS by 96%/20% to factor in low volumes, adverse operating leverage and increased gearing. We maintain our ‘buy’ rating in anticipation of recovery H2FY21 onward.

Q4FY20 revenue/Ebitda declined ~57%/81% to ~Rs 3,840 crore/Rs 1,830 crore, with recurring loss of Rs 18 crore. FY20 revenue/Ebitda/PAT fell 40%/ 63%/83%. Volumes fell ~57% y-o-y (-18% q-o-q) to ~25.5k units. Net realisation improved 1.3% y-o-y (17% q-o-q) to Rs 1,505k, led by a better mix and lower discounts. Gross margins improved ~160bp y-o-y (+240 bsp q-o-q) to 28.9%. Ebitda margins fell ~630 bps y-o-y (-80 bps q-o-q) to 4.8% due to higher staff cost and adverse operating leverage. Ebitda fell ~81% y-o-y (-19% q-o-q) to Rs 1,830 crore. This, coupled with higher depreciation/interest cost, resulted in recurring loss of ~Rs 11.8 crore.

The major capex cycle is over for now except M/CE capex. Investments in subs would be largely for Optare (UK-based bus manufacturer). With the AVTR launch (modular platform), Ashok Leyland is focusing on selling value to the consumer and not on discounts. LCV under Project Phoenix would be launched in the next three months.

May’20 end net debt was at ~Rs 4,000 crore as the company completed payments to its vendors. Gross debt as of Mar’20 stood at Rs 3,100 crore. Cash burn of Rs 150–170 crore per month was witnessed in lockdown. Valuations at 9.8x FY22 EV/Ebitda and 2xFY22 P/BV don’t fully reflect Ashok Leyland’s focus on adding new revenue and profit pools. Maintain ‘buy’ with TP of ~Rs 65 (Rs 8/share of HLFL + 10x Jun’22 EV/Ebitda v/s ~11x 10-year median EV/Ebitda).