AL’s 3QFY21 results were weak on lower gross margins at 25.6% (PLe 26.8%) impacted by RM inflation and mix (higher MHCV share at 56% v/s 45% in 2Q). With healthy recovery in Tippers, ICV and LCVs, MAVs too are recovering which should drive volumes in 4Q. However, global shortage of semiconductors (ECUs) can likely impact production for few months. With improved economic activity linked recovery and a low base, MHCV recovery to benefit AL due to high dominance in HCVs. Also re-opening of schools/ public transport should support bus volumes. We cut FY22 EPS by ~8% to factor in likely production cut and unfavorable mix impact, while we maintain FY23 EPS.
OutlookWe raise target multiple to 14x EV/EBITDA (v/s 12x) for strong growth in LCVs and market share gains in MHCVs. Hence we maintain BUY with revised TP of Rs155 (v/s Rs133). Current valuations at 18.6x/13.2x FY22/23 EV/EBITDA reflect early recovery cycle and do not fully capture AL’s de-risking strategy of reducing M&HCV dependence.
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