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Ashok Leyland sees weak Q1 but CV recovery in H2 FY22 may aid earnings

Ashok Leyland total sales in Q1 FY22 at 17,987 grew over 4 times year-on-year, given the low base, but were almost 60% lower sequentially. (Photo: Bloomberg)Premium
Ashok Leyland total sales in Q1 FY22 at 17,987 grew over 4 times year-on-year, given the low base, but were almost 60% lower sequentially. (Photo: Bloomberg)

  • Ashok Leyland undertook price hikes during Q1, which meant that realisations per vehicle improved slightly during the quarter, but not enough to support operating performance, with low volumes impacting operating leverage

Ashok Leyland Ltd saw lockdowns, in the wake of the second wave of the pandemic, impact its earnings recovery during the June ended quarter (Q1 FY22). Sales of commercial vehicles which had been picking up till Q4, hit a speed bump as coronavirus virus infections surged during March-April 2021.

While total sales at 17,987 grew over 4 times year-on-year (YoY), given the low base, they were almost 60% lower sequentially. Domestic light commercial vehicle (LCV) sales nearly halved to 8,690 in Q1 FY22 from 17,042 in the previous quarter, even as they jumped 224% on year. Exports of MHCVs and LCVs also fell to 1,437 units from 3,164 during January-March. MHCV stands for medium and heavy commercial vehicles

Analysts at Motilal Oswal Financial Services Ltd (MOFSL) said Ashok Leyland’s 1QFY22 performance was hit by adverse operating leverage. Its performance remains weaker than that of its peers, but it is too early to assess due to discontinuities in the market. The company remains a pure play on a CV cycle recovery, with a focus on the expansion of revenue pools.

While vehicle sales took a hit, rising input costs meant an impact on operating performance. Some positive though accrued from better product mix, helped by higher non-MHCV share in revenues (48% of revenues in 1QFY22 versus 35% in 4QFY21), said analysts. Price hikes taken during Q1 meant that realisations per vehicle improved slightly during the quarter, but not enough to support operating performance, with low volumes impacting operating leverage.

The company reported a net loss of Rs282 crore for Q1 FY’22 against Rs377 crore profit seen in the previous quarter. On a year-on-year basis, net loss narrowed from Rs389 in crore. Debt equity at 0.62 times was the same as Q1 of last year.

Earnings failed to impress investors and shares have traded in the last two trading sessions. 

All eyes are now on sales recovery with the opening up of the economy.

“Overall, we believe the CV cycle has bottomed out and we expect volumes to bounce back from 2HFY22E onwards," said analysts at Kotak Institutional Equities. This will be likely led by a revival in road freight demand supported by stable freight rates, strong replacement demand aided by favourable government policy and a lower base. However, because of the pandemic, recovery is expected to be gradual.

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