Buy Ashok Leyland; target of Rs 124: Emkay Global Financial

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Emkay Global Financial's report on Ashok Leyland

Our overtly constructive view on the CV cycle rests on three fundamental pillars: 1) a deep appreciation of replacement cycles – which always kick in as exogenous catalysts fade; 2) somewhat crude but practical assessment of the system’s capacity utilization; and 3) unusually strong gross margins for transporters despite a severe demand shock. At least, these all should aid 24% yoy growth in MHCV volumes in Q4FY21 and a further 85% in FY22. ALL offers the best play on the fast-evolving CV recovery. First, ALL’s market share in MHCVs will touch its cyclical high of 34% as 25T trucks reclaim their share of the segment. Second, plugging product gaps in 3T plus LCV market offers immense scope for market share gains. Last, management has clearly articulated its capital allocation which caps investments in the ancillary businesses at about Rs2.5bn/year or 18% of FY21-22E OCFs.

Outlook

We are raising our TP for ALL to Rs124 on the back of an increase in volume and margin assumptions.

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