Ashok Leyland share price has trebled since April-2020, outperforming Nifty-50 by 130%: Jefferies retains Buy with revised price target of Rs 150

Ashok Leyland share price has trebled since April-2020 outperforming Nifty-50 by 130% as the confidence on truck recovery gathered pace. Jefferies believes the stock still holds potential for healthy returns given the truck industry is at the very early stage of an up-cycle. Ashok Leyland’s Q3 EBITDA rose 13% YoY, first growth in 2Y, but was 30% below Jefferies estimate. The share price of Ashok Leyland is Rs 131, up Rs 2 or 1.8%.

Indian economy is recovering well, manufacturing has picked up, construction is reviving, freight is up YoY and an infra-focussed budget has set the stage for a big rebound in trucks. Jefferies stay positive on Ashok Leyland but believe investors should moderate return expectations from here versus the 3x rally since Apr-2020 as stock is already at 5.1x/4.5x FY22E/FY23E PB vs last peak of 5.7x.
 

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Trucks in early stage of an up-cycle:
 
Trucks were in a deep downturn since Nov-2018 with industry wholesales down 47% YoY in FY20 and 73% YoY in first half of FY21. Demand has improved steadily in recent months and registrations rose from a weekly run rate of 300 units in July (-91% YoY) to 3.9K units in Jan (-15% YoY). Indian economy is recovering well, manufacturing has picked up, construction is reviving, e-way bills are up YoY and an infra-focussed budget has set the stage for a big rebound in trucks. Jefferies factors in industry volumes growing 65%/20% YoY in FY22/FY23; Jefferies FY23 volumes are still 11% below FY19 peak.
 
Ashok Leyland’s Margins and balance sheet should improve too:
 
Ashok Leyland's EBITDA margins contracted from an average 11% in FY16-19 to 6.7%/3.1% in FY20/FY21E, and the sharp rise in metal prices is posing further headwind. Trucks, however, is a concentrated market with two OEMs commanding 80% share, resulting in good cross-cycle profitability. Jefferies expects margins to recover to 8.5%/10.8% in FY22/FY23. AL's balance sheet worsened from net cash of Rs 7.4 bn in FY19 to net debt of Rs 42 bn in Q1 FY21, but has started to ease with net debt down 33% in the last two quarters to Rs 29 bn. FCF should also turn positive in FY22 after being negative for three years.
 
Indian truck cycles are usually long and have averaged 4.3 years in the last four decades, although the start of the railway freight corridor could eat into the strength of the next up-cycle. Jefferies believes it's time for investors to moderate return expectations as stock is already trading at 5.1x/4.5x FY22E/FY23E PB versus last cycle peak of 5.7x. Jefferies cut FY22E EPS by 8% factoring slightly lower margins, but broadly maintained FY23 estimates. Jefferies retained Buy with revised Rs150 PT (17% upside) based on 5.2x FY23E PB.