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MOSL : ASHOK LEYLAND: RM cost inflation, operating deleverage hurts performance

ASHOK LEYLAND: RM cost inflation, operating deleverage hurts performance

(AL IN, Mkt Cap USD5.7b, CMP INR154, TP INR185, 20% Upside, Buy)

• AL's 1QFY23 performance miss was due to higher than estimated cost inflation and operating deleverage. The recovery in market share is on track, driven by plugging of product gaps and recovery in Buses. AL is a good play on a CV cycle recovery, coupled with a recovery in market share and bet on expansion in revenue and profit pools.
• We upgrade our FY23 EPS estimate by 7% to reflect a strong volume recovery and price hikes, but maintain our FY24 estimate. We maintain our Buy rating with a TP of INR185 (11x Sep'24E EV/EBITDA and ~INR16/share for the NBFC).

High RM cost plus operating deleverage hurts margin

• Revenue/EBITDA/adjusted PAT grew 145%/LTP/LTP YoY to INR72.2b/INR3.2b/INR583m in 1QFY23 (est. INR68.3b/INR4.1b/INR1.1b).
• Realizations improved by 11% YoY and 1.5% QoQ to INR1.82m (est. INR1.72m), led by price hikes. Gross margin contracted by 5.2pp YoY (1.1pp QoQ) to 20.7% (est. 21.2%), adversely impacted by an increase of ~2pp QoQ in the RM basket, but diluted by price hikes.
• Operating deleverage led to an EBITDA margin contraction of 440bp QoQ to 4.4% (v/s -4.7% in 1QFY22 and our estimate of 6%).
• EBITDA declined by 59% YoY to INR3.2b (v/s a loss of INR1.4b in 1QFY22 and our estimate of INR4.1b). PBT before EO stood at INR946m (est. INR1.5b).
• Adjusted PAT stood at INR583m (v/s a loss of INR2.8b in 1QFY22 and our estimate of INR1.1b).
• Net debt increased QoQ to INR22.8b (v/s INR7.2b as of Mar'22).

Highlights from the management commentary

• Overall demand remains strong for M&HCVs. It is seeing some improvement in demand from small fleet operators. For LCVs, AL is yet to go pan-India in a big way due to capacity constraints.
• Commodity cost impacted by ~2pp QoQ, which is expected to more than reverse in 2QFY23. If the export duty on steel is removed, then there could be an increase in steel prices.
• Switch Mobility: It is in discussion to raise funds in Switch Mobility (OEM) and Ohm Mobility (a MaaS company). It is looking to end this fund raise in coming weeks.
• Operating working capital increased by INR14b QoQ to -INR1.67b due to an increase in finished goods inventory. This led to an increase in net debt to INR22.8b (v/s INR7.2b as of Mar'22).