MOSL: ASHOK LEYLAND (Buy)-Below our estimate; better mix dilutes adverse operating leverage
ASHOK LEYLAND: Below our estimate; better mix dilutes adverse operating leverage
(AL IN, Mkt Cap USD5.2b, CMP INR130, TP INR155, 19% Upside, Buy)
Demand recovery and ramp-up in LCVs and exports to drive a sharp recovery
- AL's 1QFY22 performance was impacted by an adverse operating leverage. Its performance continues to remain weaker than peers, but it is too early to assess due to discontinuities in the market. AL remains a pure play on a CV cycle recovery, with a focus on expansion of revenue pools.
- We have downgraded our FY22E/FY23E EPS estimate by 54%/5% due to COVID-related volume cuts and RM cost inflation. We maintain our Buy rating with a TP of INR155/share (12x Mar'23E EV/EBITDA + INR11/share for NBFCs).
Favorable product mix and price hike boost gross margin
- Revenue declined by ~58% QoQ to INR29.5b in 1QFY22 (est. INR27b). It reported an operating/adjusted loss of INR1.4b/INR2.8b (est. a loss of INR0.3b/INR2.1b).
- Net realization improved by 3% QoQ (-4% YoY) to INR1.64m (est. INR1.51m), led by higher contribution from non-Vehicle sales (+10pp QoQ). Volumes declined by 59% QoQ.
- Gross margin expanded by 280bp QoQ to 25.9% (est. 25%) on the back of better mix (non-Trucks is 47% of revenue v/s 34% in 4QFY21) and higher production than sales (30-50bp benefit).
- However, higher staff costs (+5% QoQ), one-off expenses of ~INR0.4b, and operating deleverage, resulted in an operating loss of INR1.4b (est. loss of INR269m v/s profit of INR5.3b in 4QFY21).
- Net debt increased to INR41.7b (v/s INR26.1b in Mar'21) due to higher working capital. There were no ICDs outstanding as of Jun'21.
Ashok Leyland Limited is a holding company. The Company is engaged in Commercial vehicles and related components. Through its subsidiaries, it is engaged in manufacturing and trading in Medium and Heavy Commercial Vehicle, Light Commercial Vehicles, Passenger vehicles, automotive aggregates, vehicle financing and engineering design services. It offers a range of 18 to 80-seater buses under categories, such as city application and electric buses. It offers a range of trucks, which include long haul trucks, mining and construction trucks, and distribution trucks. It designs, develops and manufactures defense vehicles for armed forces. It offers Light Vehicles, which include DOST, PARTNER, STiLE and MiTR. It offers power solutions for electric power generation, agricultural harvester combines, earth moving and construction equipment, and marine and other non-automotive applications. It has operations in India, Sri Lanka, Bangladesh, Mauritius, the Middle East and Africa.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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