Ashok Leyland falls from peak but brokerages keep ‘buy’ rating with up to 45% upside

Domestic stock advisory and broking firms have maintained their ‘buy’ rating on truck and bus maker Ashok Leyland Ltd anticipating the company to be at the forefront of a recovery in domestic commercial vehicle sales.

Broking firm Sharekhan, which is owned by BNP Paribas, said the anticipated uptick in economic activities related to infrastructure, mining, and e-commerce would fuel demand for light CVs, and medium and heavy CVs.

“Ashok Leyland is well placed in the industry to benefit from the expected up-cycle in the CV industry, aided by its focus on increasing market share through increased penetration across all regions and new product launches,” Sharekhan said in a client note with a target price of Rs 180 per share.

This represents a 45% upside from the current market rate. Shares of Ashok Leyland were quoting at Rs 123.90 at noon on the BSE on Wednesday, up 1.1% from the previous close. The stock has fallen 19% from a high of Rs 153.40 on November 16 but is still up 42% from its 52-week low of Rs 87.30 apiece.

Ashok Leyland is the flagship company of Hinduja Group. It is the market leader for buses with a share of 41% and is the second-largest player in medium and heavy trucks, with a market share of 33%. India contributes 87% to its revenue while exports contribute the balance 13%. 

What brokerages say

Sharekhan expects Ashok Leyland’s profitability to improve significantly, with its EBITDA growing at a compound annual growth rate of 166% between fiscal 2021 and 2023. EBITDA margin is expected to improve because of operating leverage benefits, cost reduction, and stability in commodity prices.

The company’s earnings are expected to turnaround in FY2022 with net profit of Rs 890 crore as against a net loss of Rs 301.6 crore in FY2021.

“We believe the CV industry is poised for an upturn in the market due to faster-than-expected recovery in economic activities. There has been a continuous uptick in economic activities after the government announced unlock measures,” Sharekhan said.

Ashok Leyland is also improving its light commercial vehicle business and is targeting market share gains with the launch of new products.

Geojit said it believes the short-term headwinds have been factored in the stock price. It not expecting any meaningful decline as the volume numbers are currently at its low, and gradually recovering owing to improvement in core economic indicators. “We value Ashok Leyland at 15 times EV/EBITDA on FY23e and reiterate our buy rating with a target of Rs 137 per share,” it said.

The brokerage also said that the company has gained market share and has embarked on a modular platform strategy to reduce the parts per vehicle. This could result in better economies of scale, production planning and improved supply chain management to reduce cost of the vehicle.

In addition, the company’s move to consolidate the electric mobility business under the UK subsidiary ‘Switch’ will augur well, Geojit said.

Motilal Oswal said Ashok Leyland’s performance was comparable with that of peers despite 4.6 percentage points quarter on quarter decline in medium and heavy commercial vehicle market share. Ashok Leyland offers a pure-play on CV cycle recovery, with focus on expanding revenue pools, it said.

“We downgrade our FY22e and FY23e EPS estimates by 11% and 5%, respectively, due to a weaker mix. We increase the EV/EBITDA multiple from 11x to 12x as we value it on early-cycle earnings. We maintain buy with a target price of Rs 180 at 12x Sep’23e EV/EBITDA + Rs 14 per share for the NBFC business,” the broking firm said.