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Emkay Global
Ashok Leyland (Buy)
CMP: ₹80.35
Target: ₹112
Our interactions with Ashok Leyland’s channel partners in the Southern States indicate a continuation of subdued demand environment for MHCVs. Volumes are expected to decline 30-40 per cent in the near-term due to lower freight availability and the supply of re-possessed vehicles by financiers in the used vehicle market.
MHCV demand is expected to gradually recover from Q2FY21 on a low base, replacement demand, pick up in infra spending and the likely implementation of scrappage policy. Following the BS6 transition, AL is expected to gain market share on the adoption of mid-Nox strategy, which provides better cost of ownership.
Ashok Leyland’s LCV volumes are expected to receive a boost with the launch of new product Phoenix in 2.5-4.9T segments in diesel and CNG versions by March 2020. LCV volumes have the potential to grow 40-60 per cent in FY21, driven by an increase in the addressable market.
We believe that valuation metrics such as EV/sales and price/book have significantly corrected and factor in near-term demand concerns in MHCVs. Maintain ‘Overweight’ stance in EAP and ‘Buy’ rating with a target price of ₹112, applying 11x EV/EBITDA on December 2021 estimates.
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