Ashok Leyland: Road to recovery is steep, but the stock could still climb

Chennai | Updated on July 01, 2020 Published on July 01, 2020

The stock of Ashok Leyland has been under pressure over the last week, after it had announced a weak set of numbers for the fourth quarter. From a high of ₹54.85 on June 25, the stock crashed to a low of ₹46.75 on June 30. However, the stock on Wednesday gained 2.3 per cent to close at ₹48.20.

Negatives priced in

Most analysts still remain cautious on the stock and feel the FY21 outlook is unclear as the road of recovery still a long way. However, most of them see some headroom for the share price movement, due to better operational performance and most bad news having already been discounted.

Ashok Leyland on June 25 reported a 92.31 per cent decline in consolidated net profit at ₹57.78 crore in the fourth quarter ended March 31 as against ₹751.71 crore reported in the same quarter of previous fiscal. Revenue from operations stood at ₹5,088.04 crore (₹9,874.04 crore).

ICICI Securities though downgraded the stock from ‘Buy’ to ‘Add’, revised the price target upwards from ₹50 to ₹57. “We believe FY21 is likely to witness another volume decline (nearly 25-30 per cent) albeit smaller vis-à-vis FY20 (about 42 per cent). A well-incentivised scrappage policy remains an upside trigger, it said and added: “We value the core business at increased multiple of 11 (earlier: 8.5x) factoring in down cycle valuations”.

Jefferies has upgraded the stock from ‘underperformer’ to ‘buy’. However, it retained price target of ₹60, saying fourth quarter EBITDA margin is better than its estimates.

According to Nomura, with rising Covid-19 cases in India, there is a risk of the economy continuing to operate below potential. In such a scenario, there will be limited need for new trucks. “We expect the MHCV industry’s volumes to decline 25 per cent in FY21 before rising 30 per cent in 22F (close to replacement demand in FY22),” Nomura, which retained its ‘Neutral’ rating on the stock with a price target of ₹52, said.

While the FY21 outlook is unclear, expansion in LCVs would reduce the pain, said Motilal Oswal, which affixed the price target at ₹65.

Emkay Global, which expects recovery from Q4-FY21 led by the low base, replacement demand and gradual improvement in economic activity, retained buy rating with a price target of ₹74.

However, HDFC Securities reiterated its Reduce rating on the stock with a price target of ₹47. “We believe that the CV cycle will witness a delayed recovery, due to the Covid outbreak as well as the low utilisation levels (post the axle norm increase by 15 per cent). Further, the DFC remains an overhang and will impact the extent of recovery”.

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Published on July 01, 2020
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