Analyst Corner: Retain ‘buy’ on Ashok Leyland, target price Rs 135

The EBITDA margin at 10.6% for Q2FY19 missed our/consensus estimates by 60 bps on lower realizations and higher commodity costs. The bigger surprise was resignation of Vinod Dasari with effect from March 31, 2019. Dheeraj Hinduja will take over as the executive Chairman till the Board finds a suitable replacement.We expect FY20 earnings to benefit from a confluence of factors (higher volumes, lower discounts, higher operating leverage) on BS6 pre-buy. However, Dasari’s resignation will weigh on investor sentiments in the near term heading into key disruptions such as BS6 and Electric Vehicles (EVs). Our numbers are unchanged, but given the management transition, we lower multiple a notch to 7x FY20E EV/EBITDA (from 8x previously). Our TP changes to Rs 135 from Rs 150 earlier. ‘Buy’ stays. Management expects volume growth to remain robust, as 40-45% of business is driven by construction segment. While demand was impacted over past few weeks due to NBFC credit crunch, the company expects the demand to catch up in coming months.

Management expects volume growth of at least 15-20% in FY19 (assuming flat volume growth in H2). FY20 industry volumes will benefit from BS6 pre-buy, while impact on FY21 industry volume growth will be offset by mandatory scrappage policy and continued demand from construction segment. Management also expects the company to benefit from higher export sales of BS6 products in FY21. AL’s financing subsidiary Hinduja Leyland Finance which finances ~10% of AL’s volumes has not seen any impact on liquidity.

AL limits exposure to any bank/NBFC to less than 15%. Q2 exports volume de-grew 38% YoY as some planned exports to Africa did not materialise.

Ashok Leyland Limited