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Emkay Global upgrades Ashok Leyland, raises target price

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Emkay Global upgraded Ashok Leyland to ‘Buy’ from ‘Sell’ and also increased the Target Price to Rs 112 from Rs 63 earlier.

Emkay Global upgrades Ashok Leyland, raises target price
Ashok Leyland, the commercial vehicle manufacturer, received rating upgrade from brokerage house Emkay Global on expectations for an MHCV sales cycle recovery.
The brokerage upgraded the stock to ‘Buy’ from ‘Sell’ and also increased the Target Price to Rs 112 from Rs 63 earlier.
Emkay Global expects the MHCV industry to remain weak with a 30 percent fall in volumes in FY20E and sees a gradual recovery with a 7 percent CAGR over FY20-22E, driven by a low base, replacement demand, improving macros and likely implementation of a scrappage policy.
Ashok Leyland shares today rose 6 percent to Rs 84 per share intraday on the BSE.
A steep reduction in dealer inventories is also affecting wholesales. According to the Emkay Global report, dealer inventory days have reduced from 60-70 days in April 19 to 15-20 days in October 19.
The brokerage expects LCV industry volumes to decline 20 percent in FY20E, but recover to 6 percent CAGR over FY20-22E.
The brokerage house estimates that Ashok Leyland will sustain its domestic MHCV market share at around 34 percent while increasing domestic LCV share by 540 bps to 14 percent over FY19-22E.
The launch of the new LCV, Phoenix, is expected to support both volumes and market share, the brokerage said.
"Our 20-year analysis of Ashok Leyland’s stock price movement reveals that, hypothetically, investing in AL during cyclical troughs would have provided 2- 4x returns in the subsequent three years of cyclical recovery," said Raghunandan NL, analyst, automobile and ancillaries, Emkay Global.

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