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Valuation and View – MHCV volume trajectory key to watch for

AL’s 1QFY25 operating performance was slightly weak led by one-off operating cost related to EV development (battery pack and software, advance engineering and setting up of center of excellence) while RM continues to be benign. 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 1QFY25 led by, 1) Aftermarket (+12.5% YoY), 2) Defence revenues grew >3x YoY with volumes crossed ~1k vehicles (vs 250 vehicles YoY) and 3) power solutions ~20% YoY decline led by pre buy last year.

We are building in ~5.3% MHCV volume CAGR over FY24-26E with growth 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 with not much of an impact of ongoing general elections with industry volumes expected to be flat in the worst case. We raise FY25/26 EPS by 8%/2% for positive impact of continued growth momentum in non-vehicle segments on revenue/profitability. We maintain ADD with TP of Rs271 (v/s Rs248 at ~13x of Mar’26 EV/EBITDA) and ~Rs25 for NBFC. External funding for EV business (Switch) and increase in replacement volumes are key catalyst ahead.

Result Highlights – Non-vehicle revenues continues to be healthy

* Revenues grew 5% YoY (-23.7% QoQ) at ~Rs86b (est ~Rs88.8b) as ASP declined ~1.1% YoY/-2.2% QoQ at ~Rs1.95m/unit (est Rs2.02m/unit), partially offset volumes decline of 6.2% YoY (-22% QoQ) at 43.9k units. Decline in ASP is led by unfavorable mix (within M&HCV), while LCVs increased to 36.5% (v/s 34% QoQ)

*Gross margins expanded 160bp YoY (-40bp QoQ) at 27.8% (est 28.5%). Co indicated benign RM for couple quarters with price disciplined expected to be maintained. Co indicated one-off expanse related to EV development part of P&L, which impacted EBITDA (though have not shared the quantum). Hence, EBITDA grew ~11% YoY (-42.8% QoQ) at Rs9.1b (est Rs10.2b) with margins expanded 60bp YoY (-350bp QoQ) to 10.6% (est 11.5%). Led by weak operating performance and lower other income at Rs223m (est Rs430m, -56% YoY), Adj.PAT declined by ~9% YoY (-44.4% QoQ) at Rs5.2b (est Rs5.8b).

* Non-vehicle performance - Defence revenues grew 3x YoY with volumes at >1k (vs 250 vehicles YoY). Spares revenues grew ~12.5% YoY. Power solution volumes fell ~20% YoY led by pre buy last year but still expect healthy growth in FY25E.

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