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Event update: Ashok Leyland (Outperformer) - Strong growth ahead

We attended Ashok Leyland’s Annual Global Conference 2018 in Chennai. The core M&HCV is expected to perform strongly in FY19 (robust demand from the infrastructure segment), while FY20 growth is likely to be driven by pre buying before a change in BSVI emission norms. Further, to de-risk the business, the management is looking increasing its product offerings in the LCV segment, it is also focussing on the defence business (targets a revenue increase of 6-7X from current levels), exports (expanding into new geographies) and spare parts (Digital initiatives).

• Demand momentum to continue: AL expects demand momentum for M&HCV to continue in FY19E, led by pick up in infrastructure and mining sectors along with a ban on overloading. The shift to higher tonnage vehicles is likely to continue, partly on account of GST implementation. Volume growth could continue in FY20E, driven by pre-buying due to change to BSVI.
• New launches in M&HCV and LCV segments: AL plans to launch 5 new products in the M&HCV segment in FY19 to address minor gaps in its product portfolio with respect to tonnage and export markets. Besides, the company plans to increase its share in the LCV segment by launching 1 new product every 6 months. However, AL has no intention to address the SCV segment, given the dilutive margins there.
• Focus on non-cyclical businesses: Management will continue to focus on non-cyclical businesses like exports, defence and spare parts. AL aims to expand volumes in key export markets of Dubai, UAE, Ivory Coast and ASEAN and has targeted 50% share in exports (~35% currently) over the next 3-4 years. The company expects 6-7x increase in defence revenues over next 5 years to Rs50bn. Further, AL’s digital initiatives (the service mandi app recorded Rs1bn revenues since Nov 2017) would boost the share of spare parts (from 13% currently).
• No major greenfield capex planned: Although AL has the capacity to meet increased demand through de-bottlenecking, management sees limitations from vendors and is closely working across the supply chain to ease supply constraints. The company has guided Rs10bn capex for FY19, of which, Rs6bn is likely to be incurred for product development with the remainder for maintenance capex/debottlenecking.

Valuation and views: We estimate 16% volume growth to continue in FY19E as the CV cycle has not peaked. AL’s improved competitiveness and medium-term plans to de-risk its business support our thesis. We raise FY19E/20E EPS by ~10-13% on stronger volume outlook. Maintain our Outperformer rating on the stock with a target price of Rs180 (based on 11x FY20E EV/EBITDA with Rs12 as the value of subsidiaries).