Buy Ashok Leyland; target of Rs 89: Emkay Global Financial

Emkay Global Financial's report on Ashok Leyland

Q1FY21 results were weak due to lower volumes, but came in above estimates. Revenue stood at Rs6.5bn, a decline of 89% yoy vs. the estimated 87% fall. EBITDA loss at Rs3.3bn was better than our expectation of -Rs3.6bn, owing to better gross margin and lower employee cost. We expect a gradual revival by the end of FY21, led by a low base, replacement demand and pick-up in economic activity. In last three up-cycles, the average period of positive growth has been 4 years, and minimum growth from trough to peak is 90%. AL is likely to gain share in domestic MHCVs from 32% in FY20 to 33% in FY22E, led by new products based on a modular platform. Similarly, the market share should increase in LCVs from 9% in FY20 to 15% in FY22E, led by new product Phoenix LCV in 2.5-4.9T segments.

Outlook

We expect volume/revenue/EBITDA CAGRs of 12%/16%/33% over FY20-23E. We retain Buy and OW stance in sector EAP, with a TP of Rs89 (Rs74 earlier), based on 10x Sep’22E EV/EBITDA (Mar’22E earlier) and Hinduja Leyland Finance investment value at Rs11/share.