Ashok Leyland Q3 FY21 results were below expectations, mainly due to lower than-expected recovery in EBITDA margins. Net revenue grew by 19.9% yoy to Rs 4814 cr in Q3 FY21, led by 7.1% growth in volumes and 11.9% growth in average realisations. Ashok Leyland reported EBITDA margin contraction of 33 bps yoy at 5.3% for the Q3 FY21, which was lower by 233 bps from their expectations. Ashok Leyland share price closed yesterday at Rs 131.5, down Rs 1.1 or 0.8%.

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Sharekhan have revised Ashok Leyland’s volume estimates upwards on expectation that the CV industry is ready for an upturn. Sharekhan expects Ashok Leyland’s EBIDTA margin will improve aided by benefits arising from operating leverage and cost-cutting initiatives taken up by the company under ‘Project Reset’. As per the management, under the Project Reset, the company will focus on pricing, network profitability, supply chain de-bottlenecking, and other manufacturing overheads. Operating leverage (due to volume growth) and cost-control initiatives would lead to steep improvement in margins. OPM is expected to reach double-digit levels in FY2022E (closer to FY2019 levels).

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Ashok Leyland’s margin contraction was due to the rise in the raw material cost per vehicle by 13.3% yoy. The raw material per vehicle jumped 3.2% on qoq in this quarter. As a result, Ashok Leyland EBITDA grew by 12.7% yoy to Rs 254 cr in Q3 FY21. The adjusted PAT declined by 4% yoy to Rs 27 cr in Q3 FY21, due to higher depreciation and interest cost. Sharekhan reiterates Buy rating on Ashok Leyland with a revised price target of Rs 151.

Ashok Leyland is the second largest medium and heavy commercial vehicle (MHCV) manufacturer with 32% market share. In MHCV buses, Ashok Leyland is the market leader commanding market share of 45%, while its market share stands at 29% in MHCV trucks. Ashok Leyland is focusing on reducing its dependence on the cyclical truck business, which constitutes about 65% of revenue currently.
Ashok Leyland is improving its light commercial vehicles (LCV) business and is targeting market share gains with the launch of new products. The company has also identified CV exports and defence as key focus areas. Ashok Leyland is planning to increase its distribution network in Africa and other Southeast Asian countries to boost exports.

With the ‘Atmanirbhar Bharat’ push in the defence sector, the government is targeting increased sourcing from domestic private players, which would benefit players such as Ashok Leyland. Sharekhan expects Ashok Leyland’s profitability to improve significantly, with its EBITDA growing at 157% CAGR for FY2021-23E. Sharekhan thus remains positive on Ashok Leyland’s growth prospects and retains Buy rating on the stock.

Ashok Leyland Key risk:

The second wave of COVID-19 pandemic can disrupt economic sentiments and affect prospects of the CV industry’s recovery. Pricing pressures to defend domestic market share would affect margins. Also, if the commodity prices continue to rise going forward, it can affect Ashok Leyland’s profitability.