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Key takeaways from Investor Meet 2023

We attended Ashok Leyland’s (AL) investor meet to understand the company’s future growth strategy. The management shared its medium-term aspiration, primarily centred around increasing domestic market share (in both MHCV and LCV segments) by addressing gaps in its product portfolio (incl. EV and other alternate fuels) and network expansion in North and East India. Expanding in international markets (through network and products) also remains key to its aspiration of being among top 10 CV players globally. Pricing environment has improved in the CV industry. And, AL is focusing on cost reduction initiatives to drive doubledigit margins in FY24. CV upcycle is expected to continue during FY24 with an expected MHCV growth of 10%. We maintain our estimates and BUY rating with unchanged Mar’24 TP of INR 180 (20x FY25e EPS). Increase in competitive intensity is the key risk.

* Targets further market share gain in MHCV segment: During FY23, AL gained market share by c.500bps to 31.8% in domestic MHCV segment. This was led by 1) new product launches (23 new products in FY23), 2) dealer network addition (from 730 to 809) and 3) strong customer response to AVTR range of trucks. Growth during FY23 was across segments and markets (within India). Going ahead, AL is targeting MHCV market share of 35% led by 1) penetrating deeper in North and East India (AL’s market share is 25%/24% in these markets) and 2) new product launches to cover white spaces. The company also indicated that within MHCV segment, demand is shifting towards long haulage and multi-axle trucks which is expected to benefit AL given its strong presence in these subsegments. Demand for MHCV trucks remains strong owing to higher than average fleet age (c.10yrs) and expected government spends on Infra over next 12-15 months (owing to election). Similarly, deeper penetration (in North and East India) and addressing product gaps is expected to be the growth driver for Bus segment. Overall, the company expects MHCV industry to grow by c.10% in FY24.

* Targets ~25% market share in 2T-3.5T segment; increase addressable market: Currently, AL addresses only 50%+ of the overall LCV market size (not present in sub-2T segment). By FY25, the company plans to increase its addressable market to 60%+ by addressing product gaps in its portfolio. Further, in the 2T-3.5T segment, AL’s market share currently stands at c.20%. The company is targeting ~25% market share in this segment by 1) network expansion in North and East India and 2) addressing gaps in product portfolio by launching new products (Dost and Bada Dost CNG and EV launch planned in FY24). Overall, LCV industry is expected to grow by c.5% during FY24.

* Aspires to be amongst top 10 CV players globally; plans doubling exports in the mediumterm: Currently, AL is among top 10 / 5 players in MHCV / Bus segment globally. However, in terms of overall CV industry, it stands at 25th position. The company’s focus is on growing LCV business, both in domestic and international market. Over the last two years, AL expanded into West and South Africa and is now present in SAARC and MiddleEast along with Africa with addressable market size of 80k units p.a. During FY23, the company launched 6 new platforms in international markets and further plans to introduce 7 new platforms over the next 2 years. It also plans to expand geographically to cover ASEAN region. This is expected to help AL increase addressable market to 140k units over next 2 years. The company has 9 assembly plants in international markets and plans to add 3 more plants to get competitive edge in these markets against Chinese and Japanese CV players.

* Focus on profitable growth; confident of double-digit EBITDA margin in FY24: The company indicated that AL’s price realisation in MHCV / Bus / LCV segment improved by 7% / 5% / 5% despite competitive pressure. It has guided for double-digit EBITDA margin in FY24 and aspires for mid-teen margins in the medium-term. Focus is on material cost reduction through VAVE, better operational efficiencies (modularity), and astute control on overhead costs. Management indicated that it expects pricing environment in the industry to remain stable. Softening commodity costs is also expected to support the margin expansion going ahead.

* Capex and Debt: Capex in FY23 stood at INR 5bn and is expected to be INR 6-7.5bn during FY24 largely towards new product development and maintenance. As on Mar’23, the Auto business is net cash and the company expects to remain net cash surplus in the medium-term.

* Update on subsidiaries: Hinduja Leyland Finance (HLFL) – AL invested INR 16bn till now in HLFL and its AUM currently stands at INR 302bn. Book remains well diversified with CV exposure at ~35%. Its fully owned subsidiary Hinduja Housing Finance has a book size of INR 66bn. Listing of HLFL is expected in 2HFY24. Hinduja Tech is a product engineering service company focused on EV segment with customer including – Daimler, Ford, Hyundai, Renault etc. Its FY23 revenue stood at INR 3.9bn and the company is expected to grow 2x over the next 2 years. AL indicated that Hinduja Tech is self-reliant and the investment needs are insignificant. Switch and OHM – Switch buses have been received well (650+ buses on road in India and UK) and has a strong order pipeline of 2000+ buses. Currently, Switch has 4 bus and 2 LCV platforms and future launch pipeline remains robust. Capex for Switch is expected to be INR 12bn (largely towards new product development) and AL is expected to continue its investment in Switch to nurture the growth.

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