India will be a very important market for Electric Vehicle segment – Ashok Leyland

Update on the Indian Equity Market:

Nifty 50 ended 46 points down at 15,815 (-0.3%) amid Finance Minister Nirmala Sitharaman’s announcement of another stimulus package. Among the sectoral indices, PSU BANK (+2.4%), METAL (+1.3%), and PHARMA (+1.3%) were the top gainers while MEDIA (-0.6%), IT (-0.5%), and FINANCIAL SERVICES (-0.3%) were top losers. Among the stocks, DRREDDY (+1.8%), HINDALCO (+1.74%), and DIVISLAB (+1.7%) were the top gainers. HDFCLIFE (-4.1%), TITAN (-1.32), and SHREECEM (-1.2%) were the top losers.

India will be a very important market for Electric Vehicle segment – Ashok Leyland
Edited excerpts of an interview with Mr. Gopal Mahadevan, Chief Financial Officer at Ashok Leyland with CNBC TV18 on 28th June, 2021:
Ashok Leyland reported revenues of Rs 70,005mn and turned profitable after 4 consecutive quarters of losses in 4QFY21.
• FY22 Outlook: Internally company is budgeting for a growth. The growth will depend on how the economy and country open up after the second wave. It will also depend on the third wave and how the delta virus turns out. Overall, the industry and company are expecting a good growth in FY22.
• Jun-21 performance: Sales of the commercial vehicle happens in the last 2 days of the month and it is early to comment on the revenue growth of the month of Jun-21. But a significant growth is not expected as the opening up of the economy has happened recently.
• Ashok Leyland is preparing for the growth in terms of supply, keeping sufficient inventory, being in touch with dealers, network and financials. At the same time the company is keeping track of costs and keeping itself efficient.
• The company expects growth if there is no third wave and economy is open consistently. The forecast for country’s GDP is 9-9.5% which means there is growth from now to Mar-22.
• For Ashok Leyland, the Light Commercial Vehicles (LCV) business seems very promising. The reason being launch of ‘Bada Dost’ which is a completely new segment where the company has seen growth and increase in market share as well. Company is very positive about the LCV segment and doesn’t see demand getting affected significantly as there is a lot of activity witnessed in cities till now. There is intra city transportation, which this segment caters to. E-commerce is also helping this segment to grow.
• Heavy Commercial Vehicles: Growth is seen in three segments. 1) Intermediate commercial vehicles have seen healthy growth where Ashok Leyland is present. 2) Tippers are growing because of the infrastructure impetus provided by the government. This will continue to grow and also there is positive overweight on real estate which will help the demand of Tippers to grow. 3) Multi-axle Vehicles are used for multiple purposes like interstate transportation. So, once these lockdowns or states open up fully, growth of multi-axle vehicles will be visible where Ashok Leyland is very well positioned.
• Plan of action: 1) Heading for LCV growth, 2) Keeping in touch with dealer and customers for both Tippers and Multi-axle vehicles, and 3) Keeping variants of intermediate vehicles ready to capture the market further when it starts growing.
• Scope of Electric Cars and Buses: Mr. Mahadevan thinks that future will be mixed of both green and electric vehicles. He sees capability being built in internal combustion and expects it to stay for few more years and the company will continue to build capabilities in internal combustion and diesel. Ashok Leyland is also future proofing the company by initiative of Switch where all the Electric Vehicles initiatives of the company going forward will be housed under Switch. Switch is 91.5% owned by Ashok Leyland. Switch will have a subsidiary in India which will take care of the global market and will be the manufacturing hub. Switch will also cater to the Indian market and SAARC markets. He believes that India is going to be a very important market as far as EVs are concerned.
• His comments on margin as steel prices are going up: Margins are a factor of three things: 1) Revenue and growth of revenue, 2) Raw Material, 3) Management of the middle line. Ashok Leyland is working on revenue and market share growth. They are also managing the middle line as efficiently as possible. To tackle the high raw material cost problem, company is running a project to improve the performance of the product and take out cost. So, when the steel prices will cool off in the 2HFY22, it is expected that the company will benefit from all these three initiatives.

Asset Multiplier Comments
• Healthy medium-term demand prospects along with market share gain possibilities and structural margin-accretive factors will help Ashok Leyland to achieve robust growth.
• We believe post the Covid second wave, the domestic auto industry is expected to continue on the path of recovery and also expect pent up demand post 1QFY22.
Consensus Estimate (Source: tikr. com and market screener websites)

• The closing price of Ashok Leyland was ₹ 125/- as of 28-Jun-21. It traded at 57x/22x the consensus EPS estimate of ₹ 2.2/5.7 for FY22E/ FY23E respectively.
• The consensus target price of ₹ 140/- implies a PE multiple of 25x on FY23E EPS of ₹ 5.7/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”