Ashok Leyland share: Nomura, Credit Suisse says roadblocks behind us, hike target price

Nomura has maintained buy rating on Ashok Leyland, increasing the target price to Rs 101 (38% upside potential) from Rs 73.

Credit Suisse upgraded Ashok Leyland to outperform rating from neutral, raising their target price to Rs 95.00 from Rs 68.70 driven primarily by 17-18% increases in FY22-23 EBITDA estimates.

Nomura believes Ashok Leyland will benefit more due to higher share in tonnage trucks; new LCV (Light commercial vehicles)range an added upside to the company. MHCV (Medium and Heavy commercial vehicles) volumes would reach their FY19 peak levels by FY25. For MHCVs over FY21 - 23, Nomura have factored in -33%/ +47% / +38% growth in volumes.

Nomura thinks demand is likely to stay challenging in the near term; fleet operator’s profitability is at a multiyear low. However, utilisation is improving and FY21 is likely to see a decline in fleet capacity for the first time in the last 15 years. So, they expect a sharp rebound in freight rates over next 6 months driving new truck demand.  Valuation based on near term EBITDA will not capture fully the margin recovery over FY24 – 25.    

Nomura believes that Ashok Leyland is a pure play on the CV cycle. The company will gain its market share in LCVs going forward; will address 65% market share vs 34% currently.

Credit Suisse (CS) highlights near term concerns on the timing of CV (Commercial Vehicles) cycle are now being resolved, with strong freight demand in September and seasonality supportive of sequential improvement over the next six months. Additionally, collection efficiency of CV loans has shaped up well in Sep and there is low likelihood of material repossession.

CS thinks beyond near term, recovery should mirror economic recovery. They find FY23 bottom-up volume estimates for key freight segments 20% above FY19 levels vs our MHCV truck estimate still 30% below, implying  truck fleet utilisation of 87%/92% in FY22E/FY23E, and likely further upside risk to our projections to the company.

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Further, Credit Suisse find replacement cycle could be strongest for CVs (vs PVs (Passenger Vehicles) and 2Ws (2-wheelers)) and could supplement growth over FY22-23E, and the optionality of a scrappage policy, though not their base case, does help tilt the risk-reward as well.

(Authored by Rahul Kamdar)