Accumulate Ashok Layland; target of Rs 98: Dolat Capital Market

Dolat Capital Market's research report on Ashok Layland

AL reported weak numbers in Q2, impacted by the slowdown in the MHCV market and adverse product mix. EBITDA stood at Rs 804mn (-65% YoY) with contracted margin at 2.8% (-298bps YoY), led by negative operating leverage. However, the longer term outlook looks attractive with improving outlook for infrastructure, ecommerce and mining and traction in the hub-and-spoke model. Management expect CV numbers to see growth in 2HFY21. CV numbers are showing sequential improvement led by strong traction from the ICV (7.5-16 tonnes), Tractor haulage and Tipper segment. M&HCV volumes are also showing initial sign of recovery. Any recovery in the MHCV sales or reduction in debt remains key to stock performance in the near term. AL appears to be well placed to benefit from the imminent CV upcycle with adequate spare capacity, strong distribution network and recently beefed up product portfolio. It is also likely to benefit from its higher share in the >16T segment, as usually the mix shifts upward during up-cycles. However, rising diesel prices, lower fleet utilization (~60%) and weak financial condition of fleet operators continue to impact their buying appetite in the near term. The company has renewed its focus on LCV segment with a new model, ‘Bada Dost’ (GVW 3T/3.5T) in Sep-20, which will help to gain market share. The industry has already witnessed a sharp fall in the last two years and we anticipate a sharp recovery in FY22.

Outlook

We revise our FY22/23E earnings up by 1/32%. We expect margins to trend upwards with better volumes for high tonnage vehicle and model 8/9.8% EBITDA margins for FY22/23E. We value the stock at 20x FY23E earnings and recommend Accumulate rating with TP of Rs 98.

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