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MOSL: ASHOK LEYLAND (Buy)-Broadening horizons-Focus on expanding and creating new profit/revenue pools

ASHOK LEYLAND: Broadening horizons; Focus on expanding and creating new profit/revenue pools

(AL IN, Mkt Cap USD4.5b, CMP INR114, TP INR148, 30% Upside, Buy)

 

Over FY18-21, we expect domestic M&HCV volumes CAGR of ~8% (base case), driven by economic recovery, proliferation of hub & spoke model, and overload restrictions. The growth rate could be even higher (~18% CAGR) if the proposed scrappage policy (for vehicles over 20 years old) is implemented in FY21. The competitive environment is benign, as reflected in the consistent price increases taken by OEMs and the stability in gross margins. After gaining market share profitably over FY15-18, Ashok Leyland (AL) is now shifting its focus toward expanding and creating new revenue/profit pools. This should likely drive revenue/EBITDA/PAT CAGR of 12%/15%/16% over FY18-22. A sharp improvement in the key performance indicators would be key driver of further re-rating.

 Unlike last three years, macros/regulations are now supportive

• Domestic M&HCV volumes increased at ~13% CAGR (FY15-18) from the downcycle of FY13/14, despite mixed macro trends, led by the recovery in infra and agri activity, and the strict implementation of the overload ban.
• We expect domestic M&HCV volumes CAGR of ~8% (under our base-case scenario) over FY18-21, driven by an economic recovery, proliferation of the hub & spoke model for the transport of goods, and increased demand for truck makers due to overload restrictions. The growth rate could be even higher (~18% CAGR) if the scrappage policy is implemented in FY21.
• Despite several headwinds (easing of the overloading ban in UP, an increase in rated load and a significant rise in diesel cost), momentum in CV demand remains healthy (growth of ~55% in FY19YTD, though off a low base - 1QFY18 had a pre-buy impact), indicating strength in the underlying demand drivers.