CLSA increased their FY21-23CL EBITDA by 6-16%, raised target price to Rs 102 from Rs 94 and reiterated their BUY rating. Ashok Leyland’s Q2 FY21 results were better than consensus and CLSA’s estimates. EBITDA margin was at 2.8% (+430 bps vs CLSA expectations) driven by better than expected gross margins as well as lower employee and other expenses. Net debt declined by Rs 12 bn QoQ to Rs 30 bn in Q2.

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CLSA remains constructive on Ashok Leyland as it is a pure play on the improving truck demand cycle in India.

Q2 FY21 results scorecard – managing costs and working capital:

Revenue at Rs 28 bn (-28% YoY) outperformed volume (-33% YoY) due to BS6 related price hikes even though the mix was inferior. Gross profit / vehicle was flat YoY, implying that BS6 related cost push has been passed on. Staff + other costs declined 25% YoY, broadly in line with revenues. EBITDA came at Rs 804 mn (CLSA at loss of Rs 413 mn) and PAT loss came at Rs 1.4 bn (CLSA at loss of Rs 1.9 bn). Working capital turned negative (Rs 5 bn) in Q2 vs a positive Rs 8.6 bn in Q1.

Management commentary indicates a significantly stronger second half of FY21:

Ashok Leyland is preparing for significantly higher production in the second half of FY21 as volumes for all segments (except buses) are showing sequential recovery. MHCV industry wholesales were negligible in 1Q (-94% YoY), but have improved substantially in Q2 (-49% YoY) and Oct 20 (-2% YoY). Retail registrations for heavy goods vehicles declined 95% / 82% YoY in Q1 / Q2 and were down 53% YoY in Oct 20. Ashok Leyland spent Rs 2.7 bn in first half for capex and expects FY21 outlay to be within Rs 7.5 bn. Investments in subsidiaries stood at Rs 1.1 bn in first half. The financing arm’s (HLFL) profits are flat YoY in the first half of FY21. Ashok Leyland does not expect any requirement for provisioning related capital infusion into HLFL (Hinduja Leyland Finance Limited).

CLSA expects truck volumes to trough in FY21:

The peak to trough volume decline of 68% in the current down cycle (FY19-21) is the highest in the past three decades. CLSA forecasts the next cyclical peak in FY26 to achieve the flat volume vs the previous peak (FY19). This is a relatively modest assumption as truck volume has historically seen a 2-8% CAGR between two cyclical peaks. CLSA assumption still implies a FY21-26 CAGR of 25%.
Risks include a prolonged truck down cycle and market share losses.