Expect H2FY22 to be even better- Ashok Leyland

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 18,000 (-0.6%) near its low of 17,959. Among the sectoral indices, AUTO (+2.5%), IT (+0.5%) were the only gainers. PSU BANK (-2.1%), OIL & GAS (-1.4%) and PHARMA (-1.3%) led the laggards. Among the stocks, MARUTI (+7.3%), M&M (+3.0%), and TATAMOTORS (+2.4%) led the gainers, while SHREECEM (-3.0%), RELIANCE (-3.0%), and HINDALCO (-2.5%) led the laggards.

Excerpts of an interview with Mr. Gopal Mahadevan, CFO and Whole Time Director, Ashok Leyland (ASHOKLEY) with CNBC-TV18 on 15^th November 2021:

• Things were expected to improve in April-21 but the second wave of covid impacted Q1FY22 for the entire industry and eventually, Q2FY22 saw a sharp recovery. With the reduction in covid cases, increased levels of vaccination, and reopening of economic activities, things are expected to improve quite swiftly in Q3FY22 and Q4FY22.
• This will have a positive impact on the commercial vehicle industry. The core industries like infrastructure, commodities, and the manufacturing sectors are already showing good growth which augers well for the CV industry, specifically the truck segment.
• Ashok Leyland is waiting for public transport to improve which hasn’t happened yet. Although offices are resuming, schools are still shut. The impact of office resumption will be seen on increasing bus volumes.
• From Ashok Leyland’s standpoint, Light Commercial Vehicles are doing well and their market share stood at 23% in Q2FY22.
• Ashok Leyland is trying its best to improve volumes and share of customers, consistently.
• They are going to launch their CNG range of intermediate vehicles by Q4FY22 which would again kind of improve their presence in the ICV segment.
• Ashok Leyland took a price hike of 2-2.5% approximately in Q1 and Q2FY22. They took a price hike in Q3 as well to set off some part of the raw material price increase, especially steel where the prices have gone through the roof due to consistent price increases.
• They do expect costs to soften as things begin to rationalize. One thing to watch out for would be the semi-conductor demand because it is quite significant. There are constraints not only for the CV sector but also for passenger cars, 2-wheelers, and electronics. When this eases out, a push from the supply-side towards greater delivery will be seen.
• Gross margins are expected to improve as demand improves.
• Three reasons why a fraction of market share was lost:

1) Market share is based on wholesale. However, Ashok Leyland doesn’t intend to pump stocks into dealerships beyond a certain point. It is only focused on maintaining customer accounts and adding new ones.

2) Ashok Leyland is a significant South player but the volume growth there has not been as good as what it was in the rest of the country. South volumes are expected to start catching up in 2HFY22, especially in December and January which will push Ashok Leyland’s market share up.

3) CNG plays an important role in the ICV segment which accounts for a third of the overall MHCV market in terms of trucks. So, with the launch of CNG vehicles in the fourth quarter, market share is expected to go up.

• At ₹ 3100 crores, its net debt position is comfortable and the D/E ratio is at 0.5. Ashok Leyland will continue to optimize net debt, work on working capital and astutely manage Capex.
• The chip shortage issue was expected to be solved by September-21 but that hasn’t happened yet. In South-East Asia, capacities are being set up. As per analyst reports, the chip shortage is expected to ease by Q4FY22.
• Ashok Leyland expects this to ease out and doesn’t see chip shortage as a permanent issue. Once capacities are set up and distribution gets rationalized, the shortage should come off.

Asset Multiplier Comments

• We expect the raw material inflation to impact the bottom line in the medium term.
• With the gradual reopening of the economy, bus demand is expected to pick up. The reopening of schools will also provide an impetus to the demand for buses.
• With the launch of CNG vehicles in the fourth quarter and the anticipated festive demand, we expect an improvement in EBITDA margin levels.

Consensus Estimate (Source: market screener and tikr.com websites)

• The closing price of ASHOKLEY was ₹ 147/- as of 16-November-21. It traded at 237x/ 28x/ 19x the consensus EPS estimate of ₹ 0.6/ 5.2/ 7.6 for FY22E/ FY23E/FY24E respectively.
• The consensus target price of ₹ 152/- implies a PE multiple of 20x on FY24E EPS of ₹ 7.6/-.

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