Ashok Leyland reported strong revenue growth in FY2019 led by strong volume growth in the domestic M&HCV and LCV markets. However, Ebitda margin declined due to intense competition and high discounting. The company generated negative free cash flow due to high working capital requirements. However, we expect the MHCV industry to grow at a healthy pace in the medium term led by
(i) strong growth in infrastructure activities and (ii) pre-buying due to BS-VI emission norms. Maintain Buy with fair value of Rs 130 as valuations are attractive at 11X FY2021e EPS.
Ashok Leyland domestic volumes grew by 17% y-o-y led by (i) 13% y-o-y growth in the M&HCV segment and (ii) 26% y-o-y growth in the LCV segment in FY2019. Net revenues increased by 10% y-o-y in FY2019 aided by (i) 13% y-o-y increase in total volumes and (ii) 4-5% y-o-y decline in vehicle ASPs. Decline in ASPs was led by an inferior product mix, mainly due to lower mix of higher tonnage M&HCV trucks and higher mix of LCVs in FY2019.
Expenditure on R&D increased by 45% y-o-y in FY2019 and R&D as a percentage of sales increased to 2.3% in FY2019 from 1.7% in FY2018. R&D expense was mainly done with specific reference to emission conformance (BS-VI technology), fuel efficiency, vehicular performance and enhancement of safety aesthetics and ride comfort.
Ebitda margin declined by 40 bps y-o-y due to 130 bps decline in gross margins, which was led by increase in discounts and an inferior product mix. Deterioration in gross margin was also led by price increases of string steel, forgings, casting aluminum and rubber, which the company could not pass through due to intense competition and a high discounting scenario.
Working capital was a drag for operating cash flow in FY2019. Inventory levels increased by Rs 9.3 bn and debtor days by Rs 16 bn while trade payables increased by only Rs 1.3 bn due to weak retail demand and build-up of inventory in FY2019. Consolidated net debt has increased by Rs 31.2 bn due to increase in debt in Hinduja Leyland Finance while standalone net debt has decreased by Rs 2.1 bn in FY2019. Current maturities of long-term debt stood at Rs 37.7 bn in FY2019 (versus Rs 30.1 bn in FY2018) relating to financing activities on a consolidated basis.
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