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Ashok Leyland Ltd. (AL) is the second-largest Commercial Vehicle (CV) manufacturer in India. It has a strong presence in the truck segment, with a market share of 29% as of FY22. • Margin for the quarter came at 10% (above our estimate) owing to price hikes, easing metal prices, and lower vehicle discount. • Despite a weak quarter due to pre buying in March, volume grew by 5%, outperforming the industry growth of –5%. As a result, revenue grew by 13%YoY. • AL achieved a market share of 31% vs. 30% in Q1FY23 for the trucks segment. This is due to a strong presence in the higher tonnage category, with healthy double digit growth. • Despite normal volume growth, we expect earnings to grow by 41% CAGR over FY23-25E, factoring in margin expansion, superior product mix, and elevated government capital expenditure. • On a 1yr. fwd. basis, AL is trading at 12x (lower its historical avg. at 14.5x). We value AL at 13x FY25E EV/EBITDA and maintain our Buy rating with a target price of Rs.210/-.

Both heavy and light truck volume to gain attraction…

Q1FY24 revenue grew by 13% YoY (above our estimate), primarily driven by strong growth in the heavy truck & bus segments, supported by price hikes. The domestic volume for the quarter grew by 5% over the same period last year, outperforming the industry growth of –5%. As a result, AL achieved an overall market share of 31% vs. 30% compared to the same quarter last year. For Q1FY24, the Medium & Heavy truck segment (M&HCV) and LCV (Light commercial vehicle) volume grew by 7% and 3% YoY, respectively. However, Export volume declined by -16% for the same period. EBITDA margin expanded by 156bps YoY due to softening steel prices, cost control initiatives, and a lower discount due to optimal inventory at channel level. We expect the demand to improve going forward owing to a pick-up in construction activity, an improvement in retail sales, and e-commerce activity.

Medium to long term triggers to remain

The CV industry may experience normal growth for the fiscal year, and we expect the industry to grow by 10-12% in FY24 due to a revival in the bus segment, a recovery in replacement demand, and continued momentum in the MHCV segment driven by increasing infrastructure expenditure. The growth momentum is anticipated to accelerate in H2FY24 owing to positive economic indicators and easing inflationary pressure. As its products are well-received on the market with the Avtar range, the segment's recovery will fuel its performance in FY24. In addition, the company seeks to outperform the market by increasing market share in its weak territories (North and East markets), expanding its dealer network, and launching new products frequently. On account of the anticipated resurgence of a few of its export markets, it is projected that export volumes will pick up during the fiscal year 2024. Capital expenditures: Rs. 600-750cr. for FY24.

Expansion in the LCV & EV business

The company has been successful in gaining market share in the LCV segment with its modular platform strategy to reduce the number of parts per vehicle, which has resulted in better economies of scale, better production planning, and improved supply chain management to reduce the cost of the vehicle. AL is also optimistic about the growth prospects in the EV space and has lined up multiple products to launch in the EV space in the coming period. In the coming year, AL intends to invest Rs. 1,200cr. in Switch Mobility.

Valuations

To offset the inflated steel price, AL has taken a continuous price hike and is not expecting any further decline in the margin owing to a softening commodity price and inventory correction. Volume numbers are currently near pre-Covid levels and are gradually improving as core economic indicators improve. Given strong earnings growth, we value AL at 13x EV/EBITDA and have a target price of Rs.210, and continue our buy rating at CMP.

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