This Automobile Stock Has Potential To Gain 25%, Revenue Grew Sharply 58% QoQ: Invest?

Reputed brokerage firm Yes Securities suggests investors on buying the stocks of Ashok Leyland (AL), a leading player in the Indian automobile sector. The company's revenue grew ~25% YoY/58% QoQ at Rs. 87.4b, led by ~11% YoY/43% QoQ growth in volumes.

Target Price, CMP, and company performance

The Current Market Price (CMP) of Ashok Leyland (AL) is Rs. 130. Yes Securities has estimated a Target Price for the stock at Rs. 163. Stock is anticipated to give a 25% return, in 1 year.

Stock Outlook
Current Market Price (CMP)	Rs. 130
Target Price	Rs. 163
1 year return	25.00%

Ashok Leyland (AL) reported strong results led by ~8% QoQ growth in realizations at Rs. 1.79b. This was driven by a higher MHCV volume mix at ~66% (v/s ~57% in 3QFY22) and price hikes (~2‐3% in 4Q). This coupled with op leverage and significant cost control led EBITDA margins ~11 quarters high at 8.9% (+480bp QoQ). ASP grew ~13% YoY/10.5% QoQ at Rs. 1.79m. Gross margins contracted ~30bp QoQ at 21.8% (‐30bp QoQ, in‐line). However, employee cost of Rs. 4.4b and other exp of Rs. 6.9b were lower led by cost control initiatives. This led EBITDA growth of 45% YoY/247% QoQ at Rs. 7.76b.

Benefits of the Stock: Yes Securities

According to Yes Securities, "Going forward, with strong volume recovery in MHCVs (~31% CAGR over FY22‐24), visible recovery in bus segment (AL being the market leader), improving product mix (growth in defense, exports and LCVs) should help AL's profitability in the near to mid term. This will be further aided by increased price retention (net pricing less of discounts) given positive fleet sentiments."

The company's fleet age all time high at 9.9 years indicating healthy replacement demand likely. Increasing fleet utilization is helping overall cash flows for transporters. Led by better op performance coupled with lower tax at Rs. 9.7%, Adj. PAT beat came in at Rs. 4.76b. Exceptional gains of Rs. 4.7b is an attributable largely towards‐impairment reversal of Rs. 5.4b of equity in subsidies and loss of fair value of the investment at Rs. 1.1b. Market share in 4QFY22 stood at 30.6% (v/s 28.9% in 4QFY21 and 25.3% in 3QFY22), while market share in April'22 stood at ~30% (v/s ~29% in April'21).

The firm added, "Discounts are at slightly elevated level. Retention of price increases in AL has been very good. If price hike is of 2% then AL is able to retain 1.7%."

About the company: Ashok Leyland (AL)

Ashok Leyland, flagship of the Hinduja group, is the 2nd largest manufacturer of commercial vehicles in India, and the 4th largest manufacturer of buses globally. A US $ 4.5 billion company, and a footprint that extends across 50 countries, Ashok Leyland is one of the most fully integrated manufacturing companies on this side of the globe. Ashok Leyland has a product range from 1T GVW (Gross Vehicle Weight) to 55T GTW (Gross Trailer Weight) in trucks. Customizing trucks to customer needs has now become a reality with the revolutionary industry's first truly modular trucks - AVTR.

 

Capex guidance of Rs5‐6b in FY23 (v/s ~4b in FY22). Focusing on expanding the LCV portfolio which might require additional investments. AL would be ready to invest further in Switch if required. On the financing front, deals are happening more for large fleet operators as FTBs are more prone to default. Believe consolidation to happen in fleet business which shall benefit AL.

Disclaimer

The above stock was picked from the brokerage report of Yes Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.