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Consistent recovery in volumes; margin pressures; maintaining a Buy

Ashok Leyland’s volumes continued to improve across segments, while higher steel prices continued to impact margins. Launches in the diesel segment aided market-share gains sequentially in M&HCVs, while growth in CNG off-take was strong. Semi-conductor shortages prevail and marginally impacted offtake. We continue to expect strong growth in M&HCVs and LCVs coupled with a growing order book for electric buses. Hence, we maintain a Buy at a revised TP of Rs 202 (29x FY24e).

Strong performance in a seasonally weak quarter.

Q1 revenues grew 144% y/y, but fell 17% q/q, to Rs72bn. M&HCV volumes grew 176% y/y, but fell 22% q/q to 24,987 units; LCV volumes grew 64% y/y, but fell 12% q/q to 14,664 units. We expect strong near-term M&HCV volume growth on strong revived industrial activity, with demand driven by the construction and cement sectors. Semiconductor shortages prevail and impacted overall offtake by 500- 1,000 units; expected to stabilise in the near term. For LCVs, we expect good demand as offices, colleges and schools have started to operate at full capacity. In EVs, it now has an order book of ~600 buses (300 in the last quarter) for domestic markets and intends to further increase this across regions as more service-providers adopt greener initiatives to move employees. Accordingly, we expect strong, 39% growth in FY23, and 29% in FY24.

Margin betterment in FY23 and FY24.

The Q1 FY23 EBITDA margin contracted 444bps q/q to 4.4% on high steel prices. The company raised prices ~1.7-2% in the quarter and will further raise them in the near term to recoup under-recoveries. Also, commodities have started to soften and the company expects to see the positive impact in subsequent quarters. We expect strong volume growth leading to operating-leverage-led margin expansion. Hence, we expect margins of 8.5% in FY23 and 10% in FY24.

Valuation.

We expect a 34% revenue CAGR over FY22-24, and 88% earnings growth, leading to an EPS of Rs6.5. We maintain a Buy rating, at a revised TP of Rs202 (29x FY24e), incl. Rs12 a share for HLFL.

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