Ashok Leyland Share price - Stronger MHCV recovery likely says Nomura

Nomura says Ashok Leyland will benefit more due to its higher share in higher tonnage trucks; new LCV range an added upside for the company. Nomura maintains their valuation based on an unchanged 10x FY24F EBITDA (which they believe fully captures a likely recovery), discounted back to FY23F and adds Rs 9.2 for investments. Ashok Leyland’s R&D capitalization is significantly lower than peers.
Medium and heavy commercial vehicle (MHCV) tonnage capacity in India has registered 6-10% CAGR over FY10-20 on a rolling 5-year basis. With a stronger economic recovery, Nomura now built in a 6.5% CAGR in the industry’s tonnage capacity including DFC (vs 5.5% earlier) over FY20-25F. Nomura expects MHCV tonnage capacity CAGR to be 3.3% (vs 2.5% earlier), taking into account 35k trucks per year demand lost to DFC. Thus, industry volumes would reach their FY19 peak levels by FY24.

Demand trends are improving as reflected in the higher truck activity levels and fleet operators’ profitability. FY21 is likely to see a decline in fleet capacity for the first time at least in the past 15 years, which in our view is not sustainable as capacity volumes are growing across most segments. Nomura maintain their view that higher truck prices due to commodity costs are likely to get passed on in freight rates if there is a requirement for trucks. They now factor in -33% / +85%/ +26% / +14% growth in MHCVs over FY21-24F (vs -33% /+50% / +40% / +15% earlier).

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Ashok Leyland best-positioned to benefit from upcycle:

Ashok Leyland is a pure play on the CV cycle. The company is also likely to benefit from its higher share in the >16T segment, as usually the mix shifts upward during upcycles. Its new LCV platform ‘Bada Dost’ has received strong response with LCV volumes up 30% yoy in Q3 FY21. This should be an added upside in this upcycle.

For Ashok Leyland in MHCV, over FY21-23F, Nomura now factors in -37% / +95% / +30% growth (vs - 33% / +47%/+38%). Nomura also raised our LCV estimates by 16% over FY21-23F. With this, Ashok Leyland’s utilization should ramp up to 95% by FY24F. Nomura raised their EBITDA margin estimates to 3.7% / 7.5% / 9.8% (vs 2.9% /5.7% /8.7%, leading to 35%/ 61% / 30% EBITDA upgrade over FY21-23F.