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In 4QFY23, Ashok Leyland (AL) EBITDAM came in at 11% (+210bps YoY & QoQ), 60bps above JMFe. Sequential improvement in margin was led by softening RM cost and higher operating leverage. Management indicated that demand during 1Q is expected to remain muted owing to pre-buying during 4QFY23. However, outlook for CV demand remains healthy (FY24: c.10% YoY) led by govt. infra spends and strong replacement demand. AL expects its market share gain (+5 ppt) in MHCV to sustain owing to strong response for AVTR range of trucks. Retention of price hikes aided net realisation. Softening commodity cost, higher operating leverage and cost control initiatives are expected to support profitability. CV upcycle is expected to continue in FY24 on expanding economy. We estimate revenue CAGR of 10% and strong growth in profitability during FY23-25E. We maintain BUY with Mar’24 TP of INR 180 (20x fwd. earnings). Slowdown in economy and increase in competitive intensity are the key risks.

* Margin beats estimate: In 4QFY23, AL reported net sales of INR 116.3bn (+33% YoY, +29%QoQ) led by strong volume growth and higher realisation. Blended realisation increased c.9% YoY (+3% QoQ). Total volume increased by c.23% YoY (+26% QoQ). EBITDA margin stood at 11% (+210bps YoY & QoQ), 60bps above JMFe. Sequential improvement in margin was led by softening RM cost, higher operating leverage and cost control initiatives. EBITDA stood at INR 12.8bn (+64% YoY, +60% QoQ). Adj. PAT stood at INR 6.95bn (+96% QoQ).

* Demand outlook: AL indicated that demand pull during FY23 was led by large fleet operators. Pre-buying demand drove strong growth during 4QFY23. Demand during 1QFY24 is expected to remain soft owing to pre-buying in the previous quarter. However, management expects overall CV industry to grow between c.10% during FY24 led by govt. infra spends and strong replacement demand. LCV / Bus segment is expected to grow by c.7% / c.30% during FY24. AL gained MHCV market share by 5ppt to c.32% during FY23. Its market share in LCV segment declined by 70bps in FY23 owing to chip shortage issue during 1HFY23. However, the company expects its market share in LCV segment to rise in FY24 led plugging the product gaps and expanding the dealer network. In exports, volumes remained steady as the growth in Middle-East and African market was offset by muted demand in SAARC region. The company is hopeful of recovery in demand in international market in FY24.

* Profitability outlook: AL took a price hike of c.2% in Apr’23 to pass through cost-inflation and to improve profitability. The company indicated that net price realisation has started to improve for the industry owing to higher retention of price hikes. Softening of commodity price, cost control initiatives, better pricing (net of discount) and higher operating leverage is expected to support margins going ahead.

* Update on EV business: During the quarter, the company provided INR 2bn as debt to Switch Mobility. During FY24, AL plans to invest INR 12bn in Switch Mobility to fund the latter’s investment for new product development. Switch Mobility plans to introduce two new electric LCVs - Dost and Bada Dost; low floor 12-meter and 9-meter Bus in the Indian market and low floor 12-meter E1 bus for European market. Order book remains healthy with c.2.5k bookings to be delivered across India & Europe

* Other highlights: 1) HLFL remains well capitalised post recent fundraises of INR 9.1bn via QIP. 2) Capex for FY23 stood at INR 5bn. FY24 capex is expected to be INR 6-7.5bn largely towards new product development and supply-chain de-bottlenecking. 3) LT debt stands at INR 29bn and cash and cash equivalents stands at INR 31.5bn. 3) The company has fully passed through the cost increases on account of BS6 stage II transition.

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