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Volume growth, margin expansion to boost earnings

About the stock: Ashok Leyland (ALL) is a pure-play CV manufacturer domestically, with H1FY23 market share pegged at 17.5%. 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.

* FY22 product mix – LCV goods 42%, trucks 52%, buses 6%

Q2FY23 Results: ALL reported a steady performance in Q2FY23.

* Standalone operating income for Q2FY23 was up 14.4% QoQ to | 8,266 crore, amid 14.2% sequential growth in volumes to 45,295 units

* EBITDA came in at | 537 crore with margins at 6.5%, up 210 bps QoQ. Gross margin expanded ~131 bps QoQ and was further supported by other expense, which declined ~96 bps QoQ

* Consequent PAT for the quarter came in at | 199 crore

What should investors do? ALL’s share price has grown at ~5.4% CAGR in the past five years (from ~| 112 in November 2017), outperforming the Nifty Auto index

Target Price and Valuation: We value ALL at a revised SOTP based target price of | 185 (15x core FY24E EV/EBITDA, 2.0x P/BV for investments; earlier TP | 180)

Key triggers for future price performance:

* Healthy volume growth in the offering driven by government’s thrust on infrastructure spending and pickup in core industrial activity with buses segment to benefit from reopening of workplaces, schools and colleges

* Blended ASPs to rise amid exports push, improved product mix & intent to increase market share aided by new launches with superior tech offering

* We build 25% volume & 33% net sales CAGR over FY22-24E; margins seen rising to 8.5% levels by FY24E on the back of operating leverage benefits and normalised input cost. Return ration are seen ~20% levels by FY24E

* Focus on electrification & new mobility services with intent to launch E-LCV (i.e. Dost and Bada Dost) sometime in mid-2023 for B2B segment

Alternate Stock Idea: Besides ALL, in our auto OEM coverage we like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with target price of | 1,590

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