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Positive MHCV outlook maintained for 2HFY25

Valuation and View – MHCV volume trajectory key to watch for

AL’s 2QFY25 operating performance was slightly better as EBITDA margins came in at 11.6% (vs est 11.2%, cons 11.1%, +40bp/+100bp YoY/QoQ). This was led by better-than-expected gross margins as RM continues to be benign (+50bp impact) and cost control initiatives (+50bp impact). We believe, despite volumes trajectory likely to be uncertain (flat to mid-single digit growth), margins would likely expand QoQ led by, 1) benign RM, 2) stable net pricing & favorable mix and 3) cost controls initiatives. Performance of non-auto business continues to be healthy in 2QFY25 led by, 1) Aftermarket (+13% YoY), 2) Defence revenues grew >2x YoY in 1HFY25 and 3) engines +17% YoY and exports growth despite macro challenges in key markets.

We are building in ~4% MHCV volume CAGR over FY24-27E with decline of ~8% in FY25E. However, we believe AL’s de-risking strategy to help as it reduces domestic MHCV exposure by adding new revenue pools such as LCVs (11-12%) and nonvehicle revenues. The management sounded positive on demand momentum to buildup in 2HFY25 led by likely pickup in fleet sentiments and improvement in infraactivities. We largely maintain FY26/27 EPS while cut FY25 EPS by ~4% to build for positive impact of continued growth momentum in non-vehicle segments on revenue/profitability partially offset by slight volume cuts. We maintain ADD with TP of Rs256 (v/s Rs260 at ~12x of Mar’27 EV/EBITDA) and ~Rs15 for NBFC. External funding for EV business (Switch) and trend in replacement volumes are key catalyst.

Result Highlights – Margins trajectory healthy given weak volumes

* Revenues grew 9% YoY (+2% QoQ) at ~Rs87.7b (est Rs89b) as ASP declined ~0.6% YoY/-1.9% QoQ at ~Rs1.92m/unit (est Rs1.94m/unit), while volumes declined by 8.5% YoY (+3.9% QoQ) at 45.6k units. Decline in ASP is led by unfavorable mix even within M&HCV, while LCVs increased to 38.2% (v/s 35.6% YoY/36.5% QoQ)

* Gross margins expanded 230bp YoY (+100bp QoQ) at 27.8% (est 27.4%) led by benign RM where steel prices declined by Rs2.5/kg lead (+50bp impact) and cost savings (+50bp impact). This has offset by higher employee cost at Rs6b (+9% QoQ, est Rs5.5b) and other expense at Rs9.1b (est Rs9b). EBITDA degrew ~5.8% YoY (+11.7% QoQ) at Rs10.1b (est Rs9.9b) with margins expanded 40bp YoY (+100bp QoQ) to 11.6% (est 11.2%). Steady operating performance was supported by higher other income at Rs973m (est Rs300m, +1x YoY), Adj.PAT grew ~19% YoY (+29.3% QoQ) at Rs6.8b (est Rs5.9b).

* Non-vehicle performance - Defence revenues double in 1HFY25 expect the same to continue in FY25/26. Spares revenues grew +13% YoY. Power solution volumes was slightly negative in 1HFY25 due to higher base due to pre-buy.

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