Ashok Leyland’s (AL) operating efficiency in Q3FY21 was under consensus estimates as EBITDA margin came in at 5.3%. Gross margins eroded ~321bps QoQ to 25.6% due to higher input expense pressures. Key medium-term business monitorables financial activity and development trends in infrastructure-led demand employed car demand/pricing trends and c) contours of scrappage policy. We estimate volume rebound at ~35% CAGR FY21E-FY23E, which we reckon will raise asset efficiencies, margins for AL top to wholesome FCF generation (~Rs 30bn cumulative FCF in FY22E 23E) assuming subdued capex intensity. Stock is up ~75% considering that Q2 earnings, valuations at ~15x EV EBITDA FY23E leave restricted space for disappointment. Key upside danger lies in the possibility of a nicely-incentivised scrappage policy. Downgrade to HOLD.
Key highlights of the quarter: Topline grew 20% YoY to ~Rs48bn as volumes rose 7% YoY at 33.4k units. ASP enhanced ~12% YoY driven by BS-VI introduction impact. EBITDA margin contracted slightly by 33bps to 5.3% as gross margin declined 88bps YoY to 25.6% due to steep commodity value inflation. Employee costs edged larger (by 265bps) to Rs 4.5bn as production ramped up. AL reported PAT loss of Rs 193m as AL took an exceptional charge of Rs 460m.
AL positioned to advantage from CV cycle revival. The CV segment has been in a downcycle considering that FY18 and, with ~70% income contribution from M&HCVs, AL is witnessing the commence of the next upcycle with excellent traction in ICVs and tippers Budget-driven infrastructure push is also anticipated to drive HCV demand (~35-40% CAGR FY21E-FY23E). AL, as a important player in the segment, has taken the downcycle as an chance to remodel its portfolio with the launch of a special AVTR platform for trucks and bring in new LCVs (e.g. Bada Dost). The LCV launches would assistance AL bridge the current item gaps (3-3.5T), improve its addressable market place to ~65%. The AVTR platform would bring a superior expense structure with enhanced consumer flexibility. Export push towards below-penetrated African and ASEAN markets is probably to additional enhance margins. Key to note Tata Motors has began to outperform AL on CV margins in the current quarters.