Stock Update

Ashok Leyland Limited

Beneficiary of recovery in the CV industry
Powered by the Sharekhan 3R Research Philosophy Automobiles Sharekhan code: ASHOKLEY Result Update

3R MATRIX + = - Summary
Right Sector (RS) ü Š We reiterate our Buy rating on Ashok Leyland Limited (ALL) with a revised PT of Rs 151,
owing to faster than expected recovery in macro-economic activities, leading to benefits
Right Quality (RQ) ü in the CV industry
Right Valuation (RV) ü Š ALL’s Q3FY21 results were below expectations, mainly due to lower than expected
recovery in EBITDA margins.
+ Positive = Neutral - Negative Š We expect ALL’s profitability to improve significantly, with its EBITDA growing at 157%
CAGR for FY2021-23E.
What has changed in 3R MATRIX Š Despite the run up in the stock, it is still available below its historical average multiples.
The stock is trading at P/E of 18.3x and EV/EBITDA of 10.2x its FY2023E estimates. We
Old New retain our Buy rating on the stock.
RS  Ashok Leyland Limited’s (ALL) Q3FY21 results were below expectations, mainly due to lower-
than-expected recovery in EBITDA margins. Net revenue grew by 19.9% y-o-y to Rs 4,814
RQ  crore in Q3FY21, led by 7.1% growth in volumes and 11.9% growth in average realisations. The
company reported EBITDA margin contraction of 33 bps y-o-y at 5.3% for the Q3FY21, which
RV  was lower by 233 bps from our expectations. The margin contraction was due to the rise in
the raw material cost per vehicle by 13.3% y-o-y. The raw material per vehicle jumped 3.2%
on q-o-q in this quarter. As a result, EBITDA grew by 12.7% y-o-y to Rs 254 crore in Q3FY21.
Reco/View Change The adjusted PAT declined by 4% y-o-y to Rs 27 crore in Q3FY21, due to higher depreciation
and interest cost. We have revised ALL’s volume estimates upwards on expectation that the
Reco: Buy  CV industry is ready for an upturn. We expect ALL’s EBIDTA margin will improve aided by
benefits arising from operating leverage and cost-cutting initiatives taken up by the company
CMP: Rs. 128 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
Price Target: Rs. 151 á 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
á Upgrade  Maintain â Downgrade
(closer to FY2019 levels). ALL is the second largest medium and heavy commercial vehicle
(MHCV) manufacturer with 32% market share. In MHCV buses, ALL is the market leader
Company details commanding market share of 45%, while its market share stands at 29% in MHCV trucks. ALL
is focusing on reducing its dependence on the cyclical truck business, which constitutes about
Market cap: Rs. 37,575 cr 65% of revenue currently. ALL 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
52-week high/low: Rs. 139 / 34 CV exports and defence as key focus areas. ALL is planning to increase its distribution network
NSE volume: in Africa and other Southeast Asian countries to boost exports. With ‘Atmanirbhar Bharat’ push
438.6 lakh in the defence sector, the government is targeting increased sourcing from domestic private
(No of shares) players, which would benefit players such as ALL. We expect ALL’s profitability to improve
significantly, with its EBITDA growing at 157% CAGR for FY2021-23E. We thus remain positive
BSE code: 500477 on ALL’s growth prospects and retain Buy rating on the stock.
NSE code: ASHOKLEY Our Call
Free float: Valuation - Maintain Buy with a revised PT of Rs. 151: We have revised ALL’s volume estimates
142.37 cr upwards on expectation that the CV industry is ready for an upturn. We expect ALL’s EBIDTA
(No of shares) margin will improve aided by benefits arising from operating leverage and cost-cutting
initiatives taken up by the company under ‘Project Reset’. The sudden increase in economic
Shareholding (%) activities related to infrastructure, mining and e-commerce has led to strong sequential growth
in vehicles. In the M&HCV space, the company has increased its market share to 28.1% in Q3FY21
Promoters 51.1 from 24.8% in Q3FY20. We remain positive on ALL and expects it to be beneficiary of upturn in
CV cycle. Despite the run up in the stock, the stock is available below its historical average
FII 16.2 multiples. The stock is trading at P/E of 18.3x and EV/EBITDA of 10.2x its FY2023E estimates. We
retain our Buy rating on the stock.
DII 17.6
Key risk
Others 15.1 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
Price chart margins. Also, if the commodity prices continue to rise going forward, can affect the company’s
profitability.
160

120
Valuations Rs cr
80 Particulars FY19 FY20 FY21E FY22E FY23E
40 Revenues 29,055 17,467 13,729 22,654 29,246
0
Growth (%) 10.2 (39.9) (21.4) 65.0 29.1
EBIDTA 3,136 1,174 545 2,041 3,593
Jun-20

Oct-20
Feb-20

Feb-21

OPM (%) 10.8 6.7 4.0 9.0 12.3

Net Profit 2,041 395 (241) 864 2,053
Price performance Growth (%) 16.9 (80.6) (161.0) (458.3) 137.7
(%) 1m 3m 6m 12m EPS 6.8 0.8 (0.7) 2.9 7.0
P/E 18.9 156.9 (189.4) 43.5 18.3
Absolute 5.5 43.8 149.5 54.6
P/BV 4.5 5.2 5.4 5.1 4.3
Relative to EV/EBIDTA 11.6 33.3 71.4 18.7 10.2
1.4 25.5 114.5 28.8
Sensex ROE (%) 24.5 5.4 -3.5 11.6 23.5
Sharekhan Research, Bloomberg ROCE (%) 22.6 4.0 (1.6) 10.4 21.7
Source: Company; Sharekhan estimates

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ALL’s operational performance lags expectations in Q3FY21: Ashok Leyland Limited’s (ALL) Q3FY21 results
were below expectations, mainly due to lower-than-expected recovery in EBITDA margins. Net revenue grew
by 19.9% y-o-y to Rs 4,814 crore in Q3FY21, led by 7.1% growth in volumes and 11.9% growth in average
realisations. The average realisation improved on back of price hikes taken by the company owing to BS-VI
transition, partially offset by inferior product mix due to higher share of LCV business. The company reported
EBITDA margin contraction of 33 bps y-o-y at 5.3% for the Q3FY21, which was lower by 233 bps from our
expectations. The margin contraction was due to rise in raw material cost per vehicle by 13.3% y-o-y. The raw
material per vehicle jumped 3.2% on q-o-q in this quarter. As a result, EBITDA grew by 12.7% y-o-y to Rs 254
crore in Q3FY21. The adjusted PAT declined by 4% y-o-y to Rs 27 crore in Q3FY21, due to higher depreciation
and interest cost. During the quarter Q3FY21, the company had an exceptional item of Rs 46 crore, related to
obligation related to discontinued products of LCV division and VRS expenses.

Positive on CV recovery; Revise upwards ALL’s volumes and earnings estimates to capture demand: We
have revised ALL’s volume estimates upwards on expectation that the CV industry is ready for an upturn.
We expect ALL’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). Moreover, ALL is focusing on enhancing CV exports (by introducing new products and
network expansion) and increasing revenue from aftermarket (driven by increased digitisation and network
enhancement) and defence segment (through the government’s Atmanirbhar Bharat push). The government
has announced scrappage scheme for older vehicles. The details are awaited. An incentive-based scrappage
scheme (providing incentives on new truck purchase in lieu of scrapping old trucks) would boost demand and
would be positive, however it depends upon the incentive schemes.

Management optimism: The management remains optimistic about the growth prospects for commercial
vehicles. The sudden increase in economic activities related to infrastructure, mining and e-commerce has led
to strong sequential growth in vehicles. In the M&HCV space, the company has increased its market share to
28.1% in Q3FY21 from 24.8% in Q3FY20. ALL’s Bada Dost was launched in September’20 is receiving favourable
response from the markets. Further, the Government’s thrust on infrastructure, growth led investment schemes
and scrappage policy is expected to keep the demand scenario favourable.

Concerned with the ECU shortage and rise in commodity prices: The company is concerned with a shortage
of semi-conductors, which is now a global phenomenon, likely to affect vehicle production, if the supply
shortage persists for long period. However, ALL’s production in unlikely to get impacted in the current situation.
Also, the unprecedented rise in commodity prices have impacted the margins. The company took a price hike
in January’21 and expects to take another price hike.

Investments and subsidiaries: ALL continued to invest in its subsidiaries SWITCH and Hinduja Finance Limited.
The company sees SWITCH as a global arm for Ashok Leyland in the electrified vehicle space, having a huge
interest in Indian markets. The Hinduja Finance company is performing well with the collection efficiency
more than 90%. The moratorium accounts are doing well.

Strong position in medium and heavy commercial vehicles; Focusing to improve non- cyclical truck
business: ALL is the second largest medium and heavy commercial vehicle (MHCV) manufacturer with 32%
market share. In MHCV buses, ALL is the market leader commanding market share of 45%, while its market
share stands at 29% in MHCV trucks. ALL is focusing on reducing its dependence on the cyclical truck

February 12, 2021 2

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business, which constitutes about 65% of revenue currently. ALL 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. ALL 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 ALL.

Positive outlook going forward: The company expects industry demand to improve as the economy opens
up and business activities gain momentum. ALL expects the CV industry to report growth over the next few
quarters. The company is witnessing divergent trends for various segments in the CV industry. Tippers, multi-
axle vehicles, and light and intermediate commercial vehicles are performing better, while the bus segment
is yet to pick up. To ensure social distancing (people are avoiding public transport) and with schools not yet
reopening, the bus segment’s demand is lagging behind. ALL is expected to benefit from new launches in
intermediate commercial vehicles (ICV). The Bada Dost in LCV has been well received by the market. We
expect Bada Dost to contribute to ALL’s strong growth in FY2022E and FY2023E.

Results Rs cr
Particulars Q3FY21 Q3FY20 YoY% Q2FY21 QoQ%
Net sales 4,814 4,016 19.9 2,837 69.7
Operating profit 253.8 225.2 12.7 80.4 215.5
OPM (%) 5.3 5.6 (33 bps) 2.8 244 bps
Depreciation 194.4 157.5 23.5 171.2 13.6
Interest 65.6 33.7 94.9 87.2 (24.8)
Other Income 34.1 22.3 52.5 21.9 55.7
PBT 27.8 56.3 -50.7 (156.1) NA
Tax 1.1 26.4 -95.7 (11.1) NA
Reported PAT (19.4) 29.9 NA (145.0) NA
Adjusted PAT 26.7 27.8 -4.0 (146.7) NA
Recurring EPS 0.1 0.1 -4.0 (0.5) NA
Source: Company; Sharekhan Research

February 12, 2021 3

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Outlook and Valuation

n Sector View – CV sales improving; Expect strong recovery in FY2022

After eight consecutive quarters of de-growth, the M&HCV has registered a growth of 16% y-o-y in Q3FY21. While the
industry bus volumes continued to lag, these are expected to recover with the opening of restrictions. The rolling of
vaccines throughout the country will also ease fear of COVID. We expect strong double-digit growth for the CV segment
from FY2022. The expected normalisation of economic activities is likely to drive demand.

n Company Outlook – Beneficiary of recovery in the CV industry

We believe the CV industry is poised for an upturn in the market due to faster-than-expected recovery in economic activities.
There has been a continuous uptick in economic activities after the government announced unlock measures. There has
been substantial improvement in infrastructure, road construction, and mining activities. Channel check suggests fleet
operators are running over 60% capacity and expect it to improve sequentially. New demand for trucks typically happens
when fleet operators start operating above 80% utilization. Moreover, ALL will benefit from replacement demand, which is
likely to arise due to lower ownership costs for BS-VI vehicles as compared to BS-IV vehicles. Bus demand is also expected
to rise from Q4FY2021, as the public resumes to normal life.

n Valuation – Maintain Buy with a revised PT of Rs. 151

We have revised ALL’s volume estimates upwards on expectation that the CV industry is ready for an upturn. We expect
ALL’s EBIDTA margin will improve aided by benefits arising from operating leverage and cost-cutting initiatives taken up
by the company under ‘Project Reset’. The sudden increase in economic activities related to infrastructure, mining and
e-commerce has led to a strong sequential growth in vehicles. In the M&HCV space, the company has increased its market
share to 28.1% in Q3FY21 from 24.8% in Q3FY20. We remain positive on ALL and expects it to be beneficiary of upturn in CV
cycle. Despite the run up in the stock, the stock is available below its historical average multiples. The stock is trading at
P/E of 18.3x and EV/EBITDA of 10.2x its FY2023E estimates. We retain our Buy rating on the stock.

Price Target calculation

Particulars
FY23E EBITDA (Rs cr) 3,593
Target EV/EBITDA Multiple (x) 12
Equity Value (Rs cr) - Core business 41,566
Equity Value (Rs/share) - Core business 142
HFL's Value 9
Fair Value of ALL Entity 151
Upside (%) 18%
Source: Company; Sharekhan Research

One-year forward EV/EBIDTA (x) band

50.0

40.0

30.0

20.0

10.0

0.0
Feb-15

Feb-16

Feb-21
Feb-17

Feb-18

Feb-19

Feb-20
Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

Aug-20

Fwd EV/EBITDA (x) Peak EV/EBITDA (x) Avg EV/EBITDA (x) Trough EV/EBITDA (x)
Source: Sharekhan Research

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About company
ALL is the flagship company of Hinduja Group and is the second-largest domestic manufacturer of MHCVs. ALL derives
70% of its volumes from the MHCV segment, while LCVs form the balance 30%. ALL is the market leader for MHCV
buses with a market share of 41%, while it is the second-largest player in MHCV trucks, having a market share of 33%.
Domestic revenue contributes 87% to the revenue, while exports contribute the balance 13%.

Investment theme
We believe the CV industry is poised for an upturn in the market due to faster-than-expected recovery in economic
activities. There has been a continuous uptick in economic activities after the government announced unlock measures.
ALL is the second largest MHCV manufacturer with 32% market share. In MHCV buses, ALL is the market leader
commanding market share of 45%, while its market share stands at 29% in MHCV trucks. ALL is focusing on reducing
its dependence on the cyclical truck business, which constitutes about 65% of revenue currently. ALL is improving its
LCV business and is targeting market share gains with the launch of new products. We are positive on ALL due to faster-
than-expected recovery in economic activities, especially in infrastructure development, road construction, and mining,
which would likely spur demand for new trucks. Demand for CVs is expected to arise from replacement as well as new
demand. Moreover, ALL is focusing on enhancing CV exports (by introducing new products and network expansion)
and increasing revenue from replacement (driven by increased digitisation and network enhancement) and defence
segment (through the government’s Atmanirbhar Bharat push). The government is finalising a scrappage scheme for
the automotive sector. An incentive-based scrappage scheme (providing incentives on new truck purchase in lieu of
scrapping old trucks) would significantly boost demand and would be positive for the company. Hence, we retain our
Buy rating on the stock.

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

Additional Data
Key management personnel
Mr Dhiraj Hinduja Chairman
Vipin Sondhi Managing Director & CEO
Gopal Mahadevan Chief Financial Officer
Nitin Seth Chief Operating Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Hinduja Automotive Ltd 34.73
2 Hinduja Bank Switzerland 4.94
3 JP Morgan Chase & Co 4.4
4 Kuwait Investment Authority 1.72
5 Government Pension Fund Global 1.63
6 Norges Bank 1.63
7 ICICI Prudential Life Insurance Company 1.5
8 Vangaurd Group Inc 1.47
9 Blackrock Inc 1.43
10 Life Insurance Corp of India 1.36
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 12, 2021 5

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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