Ashok Leyland: Maintain ‘buy’ with TP of Rs 87

Q1 EBITDA margin at 9.4% was in line with our estimate (ahead of consensus by 60 bps), but revenue/PAT missed. Management remained non-committal on volume growth number for FY20 (earlier was expecting 10-12% industry growth) given the continued demand weakness.

While demand recovery remains crucial, it has initiated Rs 5-bn cost reduction program which should aid margin. LCVs along with increasing focus on exports and impending uptick in defence business to help reduce cyclicality and aid profitability in the medium term.

We cut volume and margin est. leading to 12%/11% cut in FY20/21 EBITDA. Stock has overreacted to slowdown worries in our view and trades at attractive valuations (core auto business at 4.3x FY21E EV/EBITDA; substantial discount to early down-cycle multiples. Maintain BUY with revised TP of Rs 87 (6x FY21E EV/EBITDA) vs. Rs 116 earlier.

Given the continued weakness and uncertainty in demand, management refrained from providing FY20 industry volume growth outlook (vs. expectations of 10-12% previously). Management believes volume growth can turn out to be flat if the current demand scenario persists. However, it is difficult to predict growth due to multiple issues like impending BS6 transition, possibility of reduction in GST by government (fleet owners postponing purchases in anticipation), and likelihood of fuel price increases on account of BS6.

Management is aggressively working on a cost reduction program which aims to reduce costs by Rs 5 bn and is on track to achieve this in FY20. Under this program, all overheads are being looked at and company is only spending on vital and capability building items. Discounting continues to be at very high levels in the industry. Avg. discounts in Q1 stood at Rs 350k-400k per vehicle. Management noted that AL is not leading the discounting practice and continues to focus on profitable growth. Management does not expect discounts to reduce going ahead.

Demand in AL’s export markets has been challenging. Countries such as the UAE and Sri Lanka have seen a retail slowdown, while Bangladesh and Nepal are doing well.

Ashok Leyland Limited