Ashok Leyland Share Price - 38% upside: Buy, says Sharekhan, reveals reason why

Ashok Leyland Share Price: Sharekhan maintains buy recommendation on Ashok Leyland with a further upside of 38%. Sharekhan has arrived at a price target of Rs 131 on Ashok Leyland by assigning a target multiple of EV/EBITDA of 11.7x,  long term average EV/EBITDA multiple on its EBITDA FY2023E. The Ashok Leyland stock is attractively priced at EV/EBITDA of 7.9x and P/E of 14.9x its FY2023E estimates.

Ashok Leyland is a pure play on upturn in the commercial vehicle (CV) cycle. Sharekhan believes the CV industry is poised for upturn in the market because of faster than expected recovery in economic activities. There has been a continuous uptick in economic activities after the government announced unlock measures. There has been substantial improvement in infrastructure, road construction, and mining activities.

Sector Outlook - CV sales improving; Expect strong recovery in FY2022:

With the opening up of the economy under the government's unlock measures, business activities are picking up, resulting in improved CV volumes. The decline in CV sales has narrowed to 20% yoy in Q2FY2021 as compared to 85% yoy drop in Q1FY2021. Sharekhan expects strong double digit growth for the CV segment from FY2022. The expected normalisation of economic activities is likely to drive demand. Moreover, strong pent-up demand (CV volumes have been following the downtrend trend since the past eight quarters) is expected to drive CV volumes from FY2022.

Ashok Leyland outlook - Beneficiary of recovery in the CV industry:

Sharekhan believes the CV industry is poised for upturn in the market due to faster than expected recovery in economic activities. There has been a continuous uptick in economic activities after the government announced unlock measures. There has been substantial improvement in infrastructure, road construction, and mining activities. Channel check suggests fleet operators are running over 60% capacity and expect it to improve sequentially. New demand for trucks typically happens when fleet operators start operating above 80% utilization. Ashok Leyland will also benefit from replacement demand, which is likely to arise due to lower ownership costs for BS-VI vehicles as compared to BS-IV vehicles. Bus demand is also expected to rise from Q4FY2021, as the public resumes to normal life.

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Positive outlook on Ashok Leyland going forward:

Ashok Leyland expects industry demand to improve as the economy opens up and business activities gain momentum. The company is witnessing divergent trends for various segments in the CV industry. Tippers, multi-axle vehicles, and light and intermediate commercial vehicles are performing better, while the bus segment is yet to pick up. To ensure social distancing (people are avoiding public transport) and with schools not yet reopening, the bus segment’s demand is lagging behind. ALL is expected to benefit from new launches in intermediate commercial vehicles (ICV). The Bada Dost in LCV has been well received by the market.