Buy Ashok Leyland; target of Rs 115: Emkay Global Financial

Emkay Global Financial's report on Ashok Leyland

Q2FY21 revenue declined 28% to Rs28.4bn (est.: Rs29.7bn), slightly below estimates. EBITDA margin contracted 300bps yoy to 2.8%, but was better than our expectation of 1.5%, owing to cost-reduction efforts relating to manufacturing, marketing and other fixed costs. We believe that the recent recovery in MHCV industry volumes will transform into a cyclical rally - with 24% growth in Q4FY21E and 66% in FY22E, owing to replacement demand and higher industrial output. AL’s differentiated models that offer lower total cost of ownership and its strong presence in 25T+ categories should help recover its MHCV market share to 33% by FY22E. In addition, LCV share should increase to 15% in FY22E from 9% in FY20, led by new products.

Outlook

We expect volume/revenue/EBITDA CAGRs of 12%/17%/34% over FY20-23E. We retain Buy rating with a TP of Rs115 (Rs89 earlier), based on 12x FY23E EV/EBITDA (10x Sep’22E earlier) and Hinduja Leyland Finance investment value at Rs5/share.

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