This Mid Cap Auto Stock Likely To Surge 24%, Delivered 132.76% Return In 3 Years, Buy: Motilal Oswal

Motilal Oswal has recently published a report on Ashok Leyland limited, where it has given a buy rating to the stocks of the company for a target price of Rs 185 apiece. Considering the estimated target price and the current market price of the stock, the share price sees a potential upside of 24% in 12 months. Ashok Leyland reported Revenue/EBITDA/adjusted PAT grew 145%/LTP/LTP YoY to Rs 72.2b/ Rs 3.2b/ Rs583m in 1QFY23. It is a mid-cap auto company with a market capitalization of Rs 43,974.20 apiece.

Stock Outlook & Performance

Ashok Leyland today opened at Rs 154.45 apiece, currently trading at Rs 150 apiece after a decline of 2.765 from the previous close. Its Current Market Price is trading at Rs 57.8 above the 52-week low and Rs 8.25 below the 52 week high recorded yesterday.

The 52 week low of the stock is Rs 93.20 apiece and 52 week high is 158.25 apiece, respectively. The ROE of the stock is 12.53%. The PB ratio is 5.12. TTM EPS is negative Rs 0.06. The dividend yield is 0.67%. The face value is Rs 1.

Its share price gained 3.49% in the past 1 week, and in the past 1 month, its share gained 2.49%, respectively. Over the last 1 year, the shares gained 11.24% and 132.84% in the past 3 years, respectively. In 5 years, the share price gained 37.13%.

High RM cost plus operating deleverage hurts margin

Revenue/EBITDA/adjusted PAT grew 145%/LTP/LTP YoY to Rs 72.2b/Rs 3.2b/Rs 583m in 1QFY23 (est. Rs 68.3b/Rs 4.1b/ Rs 1.1b). Realizations improved by 11% YoY and 1.5% QoQ to Rs 1.82m (est. Rs 1.72m), led by price hikes. Gross margin contracted by 5.2pp YoY (1.1pp QoQ) to 20.7% (est. 21.2%), adversely impacted by an increase of ~2pp QoQ in the RM basket, but diluted by price hikes. Operating deleverage led to an EBITDA margin contraction of 440bp QoQ to 4.4% (v/s -4.7% in 1QFY22 and our estimate of 6%). EBITDA declined by 59% YoY to Rs 3.2b (v/s a loss of Rs 1.4b in 1QFY22 and our estimate of Rs 4.1b). PBT before EO stood at Rs 946m (est. Rs 1.5b). Adjusted PAT stood at Rs 583m (v/s a loss of Rs 2.8b in 1QFY22 and our estimate of Rs 1.1b). Net debt increased QoQ to Rs 22.8b (v/s Rs 7.2b as of Mar'22).

Highlights from the management commentary

Overall demand remains strong for M&HCVs. It is seeing some improvement in demand from small fleet operators. For LCVs, AL is yet to go pan-India in a big way due to capacity constraints. Commodity cost impacted by ~2pp QoQ, which is expected to more than reverse in 2QFY23. If the export duty on steel is removed, then there could be an increase in steel prices.

Switch Mobility: It is in discussion to raise funds in Switch Mobility (OEM) and Ohm Mobility (a MaaS company). It is looking to end this fund raise in coming weeks. Operating working capital increased by Rs 14b QoQ to -Rs 1.67b due to an increase in finished goods inventory. This led to an increase in net debt to Rs 22.8b (v/s Rs 7.2b as of Mar'22).

Motilal Oswal suggests Buy For A Target Price of Rs 185 apiece

According to the brokerage firm, "Ashok Leyland's 1QFY23 performance miss was due to higher than estimated cost inflation and operating deleverage. The recovery in market share is on track, driven by plugging of product gaps and recovery in Buses. Ashok Leyland is a good play on a CV cycle recovery, coupled with a recovery in market share and bet on expansion in revenue and profit pools."

"We upgrade our FY23 EPS estimate by 7% to reflect a strong volume recovery and price hikes, but maintain our FY24 estimate," the brokerage has said.

Valuations at 21.3x FY24E P/E and 11.9x EV/EBITDA are reflecting a mid-cycle recovery. However, this does not fully reflect Ashok Leyland's focus on adding new revenue streams and profit pools. Any fundraise in Switch Mobility (EV business) could serve as a re-rating catalyst. "We maintain our Buy rating with a Target Price of Rs 185 (~11x Sep'24E EV/EBITDA and Rs 16/share for the NBFC)," the brokerage said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.