Ashok Leyland's (ALL) Q2FY22 results were below our estimates primarily due to sharper decline in EBITDA margins than our estimates. The management expects volume recovery to take place from H2FY22 onwards on account of a) revival in BUS market in India b) Recovery in Southern CV market which is currently lagging and c) demand in MHCV truck segment (Tippers) due to Govt. strong Infra push. We retain our estimates for FY22 and FY23 and introduce FY24 estimates.  We retain our Hold rating on the stock with price target of Rs 160 (18xFY24E earnings + Rs 49 Hinduja Leyland Finance and EV subsidiary value), stated IDBI Capital Equity Research.

Q2FY22 Results Highlights: During Q2FY22, ALL’s sales grew by 57% YoY to Rs 44.5 billion (our Estimates Rs 46.5 billion) primarily driven by 41.7% YoY volume growth. EBITDA margins during the quarter expanded nearly by 20bps YoY to 3% (our estimates 5.5%) on account of disproportionate increase in raw material cost compared to sales. The Company reported loss of Rs 0.8 billion (our estimates Rs 165 million).

Outlook and Earnings Revision: We retain our estimates for FY22 and FY23 and introduce FY24 estimates wherein the Company is expected to report EPS of Rs 6.2. The Company plans to raise funds in its UK based subsidiary, Optare PLC wherein ALL's all EV business are housed. We see this as a positive development for the company.

Outlook and Valuation: Currently Indian MHCV market is at multi-year lower (50% below FY19 peak) and likely to bounce back in the medium term. Even we assume ALL’s business volumes to rebound in FY24 to its FY19 peak, still stock is trading at PER of 16.7x FY24E earnings (Adjusted to Subsidiary valuations). Hence, we believe, the stock does not leave any scope for disappointment. We retain our Hold rating with price target of Rs 160. 

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