Analyst Corner: Ashok Leyland to gain due to higher-tonnage trucks

Faster GDP growth would imply upside risk to our demand assumption.

AL to benefit more due to its higher share in higher tonnage trucks; new LCV range an added upside.

Medium and heavy commercial vehicle (MHCV) tonnage capacity in India has registered 6-10% CAGR over FY10-20 on a rolling 5-yr basis. Over FY20-25F, we build in ~2.5% CAGR in the industry’s capacity. This takes into account ~35k-40k per year truck demand lost to Dedicated Freight Corridor, but for which capacity would have grown at ~5%. Thus industry volumes would reach their FY19 peak levels by FY25F. Our model assumes a GDP CAGR of ~4-5% over FY20-25F. Faster GDP growth would imply upside risk to our demand assumption.

Near term, demand is likely to stay challenging, in our view. Fleet operators’ profitability is at a multi-year low. However, utilisation is improving and FY21 is likely to see a decline in fleet capacity for the first time in at least 15 years. Thus, we expect a sharp rebound in freight rates over the next six months, driving new truck demand. We thus factor in -33% /+50% / +40%/+15% growth in MHCV sales over FY20-24F.

AL is a pure play on the CV cycle. It is also likely to benefit from its higher share in the >16T segment, as usually the mix shifts upward during upcycles. AL claims 5-10% lower cost of operations due to its innovative BS-6 solution, though this is yet to be tested in the market. We expect AL to gain share in LCVs with ‘Bada Dost ’ platform, which should enable it to address 65% of the market vs 34% currently.

For AL, over FY21-23F we continue to factor in -33% / +47%/+38% growth in overall MHCV volumes. We have factored in slightly higher ASPs due to cost increases, and ~30%/36% higher LCV volumes in FY22-23F. Our Ebitda margin estimates are revised to 2.9% /5.2% /8.4% (from 1.5% / 5.8% / 8.9%). We introduce FY24F with 15% MHCV/LCV volume growth and Ebitda margin at ~10%.

We believe valuations based on near-term Ebitda will not fully capture the margin recovery over FY24-25F. Hence, we roll forward our valuation to 10x FY24F (FY23F earlier) EV/ Ebitda discounted back to March 2023F. This implies ~1x FY23F EV/Sales (in line with long-term average) as we expect margins to revert back to 10% by FY24F. Note that AL’s R&D capitalization is significantly lower than peers’ (Fig. 14). AL trades at ~0.75x FY23F EV/Sales, which we believe is attractive.

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