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Strong quarter, M&HCV to peak by FY24; maintaining a Buy

For Ashok Leyland, raw material cost reduction combined with price hikes and discounting were the highlights of the quarter. Gross margin expansion was arrested by weakness in the export markets, sequentially. Robust domestic volume off-take and a better product mix led to the strong top-line performance. We continue to believe that FY24 would be the peak year for M&HCV off-take, post which we expect the segment to slow down. It continues to build up its EV order book. Accordingly, we maintain a Buy at a revised TP of Rs175 (25x FY25e).

M&HCV to peak in FY24. We believe that the replacement demand would continue to grow in the next few quarters, subsequently, we expect that the domestic M&HCV to have peak sales by FY24 as we believe the supply tonnage in the system is increasing more than what the road-freight demand is. Accordingly, we expect FY25 growth to be lower than FY24. During the quarter, export markets turned weak on geo-political tensions. Volumes were down 8% y/y, to 2,936 units. On the EV side, it has an order book of ~2,600 electric buses and plans to launch the popular brand “Dost and Bada Dost” in electric option in the next six months. Accordingly, we expect 18% growth in FY24 and 12% in FY25.

Margins to improve in the next two years. The Q3 FY23 gross margin expanded 173bps sequentially to 22.3% due to 1) price hikes and 2) the greater mix of M&HCVs sold. While we expect Q4 growth to be strong, we believe raw material reduction would not be at the same level of Q3. We expect margins to improve in subsequent quarters driven by operating leverage and better offtake of high-tonnag

Valuation. We expect a 15% revenue CAGR over FY22-25, and 49% earnings growth, leading to an EPS of Rs6.5. We maintain a Buy rating, at a revised TP of Rs175 (25x FY25e), incl. Rs15 a share for HLFL

Risks. Delay in funding for Switch Mobility

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