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Home / Markets / Mark To Market /  Ashok Leyland’s Q4 was good, but near-term road is bumpy

Ashok Leyland Ltd’s shares rose 4% on Friday in response to its March quarter results, partly because the company beat estimates of analysts on earnings before interest, tax, depreciation and amortization (Ebitda) front.

Standalone Ebitda margin for the March quarter expanded by nearly 240 basis points vis-à-vis the December quarter to 7.6%, primarily helped by higher realizations and lower employee costs. One basis point is 0.01%. Ebitda margins increased despite gross margins contraction of around 250 basis points sequentially due to rising input cost pressures.

However, the near-term journey is not expected to be smooth. Volumes are expected to take a hit because of the second covid wave. Note that the pandemic had impacted Ashok Leyland’s volumes in the half year ended September 2020.

Pleasant road
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Pleasant road

In the near future, analysts also expect margins to remain under pressure because of higher commodity costs and discounts. Fortunately for investors, this phase is not expected to last much longer.

“We continue to believe that beyond near-term demand and Ebitda margin headwinds such as the second covid wave, chip shortages, and raw material surge, Ashok Leyland’s fundamentals will see sharp improvement from FY21 lows led by a cyclical revival in FY22-25E," said analysts from Ambit Capital Pvt. Ltd. The broking firm expects Ashok Leyland’s goods medium and heavy commercial vehicle volume to post about 29% compound annual growth rate (CAGR) in FY21-25E.

“With sharp improvement in Ebitda along with moderate capex spends, largely for debottlenecking, we expect about 3,500 crore of free cash flow generation in FY22-23E," Ambit’s analysts pointed out in a report on 25 June.

Investors will track the market share trajectory given the increasing competitiveness. Shares of Ashok Leyland have declined by 9% from their highs seen in February. As such, most analysts remain upbeat on the company’s prospects.

“Unlike the previous cycles, Ashok Leyland is on a strong footing (lean cost structure and reasonable debt) and is focused on adding new revenue/profit pools. Valuations at 19 times/10.1 times FY22E/FY23E EV/Ebitda are at an early recovery cycle," said a report by Motilal Oswal Financial Services Ltd on 25 June. EV stands for enterprise value.

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