Buy Ashok Leyland, target price Rs 65: Motilal Oswal

Motilal Oswal has given a buy rating to Ashok Leyland with a target price of Rs 65. The share price moved down by -5.62 per cent from its previous close of Rs 52.45. The stock’s last traded price is Rs 49.50.
Ashok Leyland’s 4QFY20 revenue/EBITDA declined 57 per cent/81 per cent to Rs 38.4 billion/ Rs 1.83 billion, with recurring loss of Rs 118 million. FY20 revenue/EBITDA/PAT declined 40 per cent/63 per cent/83 per cent.

Volumes declined 57 per cent year on year (-18 per cent quarter on quarter) to 25,500 units. Net realization improved 1.3 per cent year on year (17 per cent quarter on quarter) to Rs 15,05,000, led by a better mix and lower discounts. As a result, gross margins improved 160bp year on year (+240bp quarter on quarter) to 28.9 per cent against a brokerage estimate of 27 per cent). EBITDA margins declined ~630bp year on year (-80bp quarter on quarter) to 4.8 per cent against brokerage estimate of 2.6 per cent due to higher staff cost and adverse operating leverage.


Investment Rationale

Ashok Leyland’4QFY20 performance was better than the brokerage expectations, led by a better mix. While the FY21 outlook is unclear, expansion in LCVs would reduce the pain. Net debt is inching up, but stands comfortable, says Motilal Oswal. The brokerage has lowered its FY21/FY22E EPS by 96 per cent/20 per cent to factor low volumes, adverse operating leverage, and increased gearing. It maintains a buy rating in anticipation of recovery from the second half of FY21 onward.

Valuations at 9.8 times FY22 EV/EBITDA and 2 times FY22 P/BV are in an early recovery cycle and do not fully reflect Ashok Leyland’s focus on adding new revenue and profit pools. The brokerage maintains a buy rating with a target price of Rs 65 (Rs 8/sh of Hinduja Leyland Finance + 10 times Jun’22 EV/EBITDA against 11 times 10-year median EV/EBITDA).

Source: Motilal Oswal

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 5088.04 crore, down -1.17 per cent from last quarter sales of Rs 5148.15 crore and down -47.83 per cent from last year's same quarter sales of Rs 9752.98 crore. The company reported net profit after tax of Rs 56.69 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 51.54 per cent stake in the company as of March 31, 2020, while FIIs held 16.94 per cent, DIIs 15.05 per cent and public and other 16.46 per cent.