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Double digit margin, persistent focus on market share gains to result in industry leading profitable growth…

About the stock: Ashok Leyland (ALL) is a pure-play CV manufacturer domestically, with FY23 market share pegged at 18.8% (up 240 bps YoY). The company is present in M&HCV trucks and buses as well as LCV goods segments. It also has a formidable presence in the e-mobility (electric buses) domain though Switch Mobility.

• FY23 product mix – LCV goods 35%, trucks 55%, buses 9%

Q4FY23 Results: ALL reported a healthy performance in Q4FY23.

• Standalone operating income for Q4FY23 was up 28.7% QoQ to | 11,626 crore, amid 25.5% sequential growth in volumes to 59,697 units

• EBITDA came in at | 1,276 crore with margins at 11%, up 214 bps QoQ

• Consequent PAT in Q4FY23 came in at | 751 crore aided by margin expansion as well as exceptional gains worth | 56.4 crore

• ALL guided for domestic CV space surpassing its past peak of FY19 in FY24E

What should investors do? ALL’s share price has been largely flat over the past five years (at ~| 150 levels), underperforming the broader Nifty Auto index.

• We retain BUY tracking industrywide pricing discipline aiding double digit margin trajectory and ALL’s midterm target of mid teen levels coupled with upswing in domestic CV space aided by greater infra spends by government

Target Price and Valuation: Revising our estimates, we value ALL at SOTP based target price of | 200 (10x core FY25E EV/EBITDA, 1.5x P/BV for investments).

Key triggers for future price performance:

• Tracking robust infra spends by government (~| 10 lakh crore, up 33% YoY in FY24E), uptick in core industrial activities, high fleet utilisation and market share gains, we build in 11.5% volume growth CAGR over FY23-25E

• Demonstrated impressive capabilities at the Auto Expo 2023 for all powertrains, including a double-decker electric bus with agreement in place to supply hydrogen powered vehicles on pilot basis to key industrial houses

• Building in regulatory led price hikes & limited discounts we build in 12.6% net sales CAGR over FY23-25E; margins seen rising to 11% levels by FY25E on the back of operating leverage benefits and normalised input cost

• Return ratios are seen further improving to ~30% levels by FY25E

Alternate Stock Idea: Besides ALL, in our auto ancillary coverage we like MCIE.

• Focused on growth capex in India & efficiencies in European operations

• BUY with target price of | 520

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